SIMON BROWN: I’m chatting now with Mike Flax, property director at Visio Fund Management. Mike, I appreciate the early morning. Listed property, our Reits – we’ve had a Sens announcements from them giving updates of damage and the like. Your sense in terms of the extent of damage obviously located in KZN predominantly, Gauteng to a degree as well – how bad has it been for those listed Reits?
MIKE FLAX: The damage has been huge to certain Reits. Those mainly with KZN exposure, companies like Vukile, have had up to 15% of their gross (rentable) area affected by the riots to a certain extent – some of it totally destroyed and some of it able to be repaired in a short period of time. But it goes all the way through to your majors like Growthpoint, which reported yesterday that about 3% of its property has been destroyed. This is going to have a huge impact going forward in that it could take years to get things up and running again, and there could be some large rental losses in the interim.
SIMON BROWN: That’s the big issue. Most are going to be insured, they’re going to have the right insurance and that will cover them forward. But it’s that timeline – you say years. Depending on the damage, some of it’s going to be quicker, but for some…it could be a year or two before that centre is fully up and running again.
MIKE FLAX: Correct. There’s a massive shortage at the moment of glass, of steel, of shopfronts, and of artisans to do the repair work. It’s just not a usual situation. In a normal situation this could take a year or two in certain shopping centres, but if there’s such a backlog of work to be done, you can add an extra year.
But going back to the insurance issue, one of my biggest concerns right now is that maybe Sasria can’t deliver. It may well have underestimated the kind of damages and the losses to those insured. Sasria, we know, has got about R8 billion in net assets on its balance sheet, and it has obviously got some reinsurance, but it hasn’t been able to disclose to us exactly what level of reinsurance it has.
We think damages could be way over the R30 billion mark, given that there are stock losses, there are rental losses and there’s actual damage to property.
So the big question is whether Sasria can cover these losses and, if they do, how long are they going to take to pay? We know Richard’s Bay [Minerals] is owed R300 million from a 2017 claim that hasn’t yet been settled by Sasria. I suppose your big players can wait awhile to get the money and they can possibly finance the repairs in the interim, but your smaller property players are telling tenants, listen, we don’t have the cash, repair at your own cost and set off against rent.
We know that small mom-and-pops won’t be able to last a year without getting some kind of cashflow from an insurance policy – and they’ll close. That’s my biggest concern as well. And in some of these centres, your line shops will not reopen. It’s going to leave gaping holes into the future for those landlords to fill. That’s a concern.
And then, looking forward, every single player in the country is going to now start worrying will I be able to get Sasria cover in the future? Will Sasria be there and, if not, where do I get that kind of riot insurance from? The only answer is it probably will be available, who knows, maybe through Lloyd’s of London, but it may be at triple the cost.
So we’re going to see landlords being squeezed on the overheads. Insurance is costing you, say, 1.5% of turnover; that could be sitting at 4% of turnover by the time this is finished, and that just squeezes dividends.
SIMON BROWN: And even increased security perchance, and as you mentioned, those gaping holes. Shoprite will come back, but mom-and-pops maybe not. For our listed property space, even if this had happened two years ago, before the pandemic, it would have been a horror. But of course, after the pandemic where they’re already being squeezed, this just puts a major knock onto a sector that has been absolutely hurting.
MIKE FLAX: There’s no doubt that this kind of action’s going to affect our GDP growth going forward. There are already estimates from Deutsche that it’s going to knock about a percent off our GDP. I can only imagine what it’s going to knock off KZN’s GDP, but there are going to be beneficiaries as well.
There will be rebuilding and there will be, ironically, those companies that benefit from having to reconstruct. And then there are going to be Reits in South Africa that aren’t exposed to KZN that will outperform – those that are purely, let’s say, Western Cape-centric. Spear Reit may be a big beneficiary.
I’m already really getting information from Cape Town brokers that there are a lot of calls out for new space requirements, mainly from KZN operators who are either looking for warehouses or offices to relocate their businesses. So there are going to be some beneficiaries of the current violence in KZN. But I think overall it’s a big negative for the market prices. Stock prices are probably down over 10% on average of your Reits in South Africa. And it’s probably going to pare back most of the gains we’ve achieved this year already.
SIMON BROWN: And looking at the chart, it was sort of running but, as you say, pulled back. Mike Flax, property director, Visio Fund Management, I appreciate the early morning time.
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