SIMON BROWN: I’m chatting now with Steven Brown, CEO of Fortress Real Estate Investment Trust (Reit). Results for the six months ending December [2021 show]: vacancies 6.5% down from 7.4%, loan to value 38.8% – we’ll dig into that a bit. Steven, morning, I appreciate the early morning time. First, the war in Ukraine. I imagine for you it’s close to home. Truthfully Europe is tiny, so much is close to home for your European assets. But for you it’s not a direct issue, certainly not at this point.
STEVEN BROWN: … Morning, Simon. It’s not. It’s obviously a concern, and we’ve got our MD from Fortress Europe who lives in Warsaw out here at the moment, and he was just telling us about the humanitarian crisis. But we do feel a lot of comfort that 99% of our assets are both direct and indirect via EU and Nato member countries, and if the mayhem is going to spill into eastern Poland, which is a Nato member, I think we may all have very, very different problems to deal with and some dips in share prices.
SIMON BROWN: I take your point on that. If the war goes into Poland I think you’re a hundred percent right, our portfolio is going to be the least of our concerns.
Let’s delve into some of the areas. Logistics [real estate] is your core focus these days. Occupancy levels are at all-time highs. It really has been a very, very strong space – I wouldn’t say during the pandemic, maybe not in the first six months but in sort of mid-2020 – and that strength is continuing. This hasn’t been a flash in the pan. The logistics really is a booming space.
STEVEN BROWN: Yeah, absolutely. We’ve been focused on it for a number of years and I think [there] is definitely a cyclical shift in terms of both online e-commerce-related demand from tenants as well as just enhanced supply chains, and I think with the global disruption suddenly a lot of our tenants, which are mostly the big retailers, are suddenly looking to buffer their supply chains and looking at bigger distribution centres and maybe a just-in-case model rather than a just-in-time.
SIMON BROWN: [With] almost every CEO I chat to in retail, even in manufacturing, the one trend I’m seeing is a pickup in inventories. That’s partly the supply-chain constraints; when you can get, you do get. But truthfully there does seem to be … that idea that I can order it from somewhere and it’ll arrive in 72 hours. It is a mind shift that’s leading the market, and it is [that] folks want that inventory and they want it close to hand.
STEVEN BROWN: Absolutely. I think a lot of the rhetoric [is] around e-commerce. Yes, it’s there in South Africa, and we are seeing a little bit of marginal demand from that. But exactly, as you say, the big demand is still coming from the retailers who want to do that, who want to offer their customers that more immediate delivery solution, and I think waiting two or three weeks to order something from a catalogue is a bygone era.
People want to push that app button and track it immediately, and see when it’s getting delivered, and I think we can see that in all of the big retailers needing a lot more space.
Also then that last-mile segment (last stage of a supply chain) I think is starting to burgeon in South Africa; it’s not quite there as a significant asset class just yet, but I think it’ll come. I think it’ll come in some classic last mile as we see in Europe, but then also some last mile which uses the retail infrastructure to do that delivery.
SIMON BROWN: Yeah. Ordering from catalogues – you flash me back to my youth, the back of the magazine, where I could buy those comic books. Retail sales [are] really strong…up 8.2%. You’re not the traditional, you don’t have these sort of mega-malls which we see in some of the cities. You are [in] CBDs, you are suburban, rural, township. Township [is] under a bit of pressure, but the others are doing really well in the suburban malls, I know from my personal shopping habits [which] have changed to that. It’s been a process of saying you don’t want to be [in] the Sandton City, for want of a mall out there, and that niche is strong.
STEVEN BROWN: It is strong. Again, with the pandemic I think we saw convenience retail really come to the fore. That’s not our model: the big-format retail and the mega malls is not [something] we look at. I think, just on the township retail, what we’ve done is we haven’t normalised anything, so that was impacted by the July riots. If we draw lines with that, that was also sitting at about an 8% increase. So I think it’s been a pleasing performance across the board. Obviously the comparable period – which was July to December 2020 – was a little impacted still by Covid, so we’ve seen a nice recovery and,
…we have actually seen a recovery even on pre-pandemic 2019 levels, which I think has been fantastic.
You can see it in our tenant numbers, the likes of Shoprite and Pepkor and those brands that are targeted at the lower LSMs, the bulk of our tenants. You’ve seen their numbers also be really, really positive and performing well.
SIMON BROWN: Last question. Office is very small in your life – what, 6.8% of direct property assets. So very, very small, but still a tough space, a sector which has still got the pandemic hangover for want of a phrase.
STEVEN BROWN: Yeah. I think the highlight is that it is small for us. It’s just structurally oversupplied and it’s been a really, really tough market. We noted in our results presentation it’s almost coming to an inflection point.
Our warehouses now are almost worth, on an average rate per square metre, what our offices are worth, which is just crazy, considering the replacement cost is double.
But we’ve been quite conservative with the valuations and I think are looking at it actually in a slightly more positive light, because our B-grade suburban offices – which was not the place to be a few years ago, everybody wanted to be prime in Sandton and things like that – have actually performed relatively well because I think people prefer that ‘drive up to the front door of your office, and rent your own small office in a suburb’, as opposed to on the 20th floor in a CBD.
SIMON BROWN: Yeah. The 20th floor of a CBD with more traffic than we can shake a stick at, which is often the case here.
Steven Brown, CEO of Fortress, I appreciate the time this morning.