The top executives at South Africa’s largest listed real estate group, Growthpoint Properties, on Monday gave an ominous warning that commercial property valuations in the country could plunge by between 10% and 20% over the next two years in the wake of the Covid-19 fallout.
Responding to questions during an investor conference call, Growthpoint’s group CEO said that SA’s economic contraction is being exacerbated by Covid-19, which will have an impact on commercial property values.
“Clearly valuations are coming under even more pressure … [Commercial property] values are likely to drop by between 10% to 20% over the next 12 to 24 months. Driving valuations down is the lower income [from rentals],” he said.
In an interview with Moneyweb ahead of the investor call, Estienne de Klerk, CEO of Growthpoint’s South African operations, shared similar sentiments.
Asked about the impact of the Covid-19 economic fallout on Growthpoint’s property valuations, he said valuations were generally “commented on” and included in the group’s year-end results, which are published in September. He could not give exact figures, but said devaluations were likely.
“Intuitively, if you are getting negative rent reversions and have to offer rental relief considering Covid-19, property devaluations are to be expected. I would say the [commercial] property industry can anticipate reductions in valuations of up to 20%,” he told Moneyweb.
Most listed property companies have been coy about commenting on the expected decline in commercial property valuations, due to “the fluid situation” and “unprecedented uncertainty” around Covid-19. Growthpoint did not mention SA valuations in its investor update presentation document, however, several analysts and investors questioned the executives about possible declines in valuations during the conference call.
A JSE Top40 Index company, Growthpoint is regarded as a bellwether in the industry, not just in terms of size, but in terms of transparency. It has a local and international portfolio of office, retail, industrial, logistics, hotel and hospital properties and investments worth more than R150 billion.
Its South African portfolio, including a 50% stake in Cape Town’s iconic V&A Waterfront, is valued at almost R89 billion.
Responding to further questions from analysts on the issue, Sasse, however, noted that the expected drop in local commercial property valuations for Growthpoint specifically is likely to be less severe, due to the group’s strong balance sheet and conservative valuations.
“For Growthpoint, we expect valuations to drop by between 10% to 15% … [Our] valuations will need to drop by more than 30% to affect our debt covenant levels. We don’t expect this,” he said.
Reacting to Growthpoint’s comments, Craig Smith, head of research and property at Anchor Stockbrokers, said the group’s outlook is a cautious one.
“This is not surprising given the weakness in the economy, which has been substantially accentuated as a result of the pandemic and containment measures. We know that there is a lag between [the impact] on the economy and on the property market, therefore we think it is reasonable to expect that property values are likely to decline between 10% and 20% over the next 18 to 24 months,” he said.
“Worth highlighting is that this range is an average and therefore certain properties and property portfolios may experience declines lower or higher than this range… In this environment we expect lower quality assets to come under increasing pressure [more sensitive to economy] and for higher quality assets with strong covenants to outperform,” he added.
John Jack, CEO of Galetti Corporate Real Estate, said while he agreed with Growthpoint’s commercial property valuations forecast, he believes that a significant reversion should have been priced in pre-Covid19.
“All that’s happening now is that property investors are having to face up to a protracted low growth environment with large rental reversions, whereas prior to the pandemic they could take an optimistic view that they could ride out any rental declines,” he said.
“We are now seeing rental escalation being signed far closer to Consumer Price Index [CPI] levels, if not actually tracking CPI… If landlords have long-term rentals in place, they could hope that the rental demand could recover during the term of the lease agreement, effectively allowing the investor to bridge the poor market,” noted Jack.
“However, Covid-19 has come at the wort possible time, the tail end of an already declining South African market… This means very few leases will bridge the gap, forcing landlords to face the fact that the properties will devalue. The upside is that this provides opportunity for new investors to enter the market at the end of this correction,” he added.