Commercial landlords are being forced into being agile and innovative, not only to retain existing tenants, but also to attract new tenants for their buildings.
JSE-listed real estate investment trust, Redefine Properties, reveals that increasing competition for tenants in the commercial space keeps them awake at night.
In its pre-close presentation ahead of its February six months’ results, CEO Andrew Konig says: “We need to be relevant to space users’ evolving needs. We need to be agile, and alert to the changing operating environment, to ensure that we are constantly refining our asset portfolio to remain suitable.”
Konig says that their focus is on controlling factors which impact on space usage, to position themselves for when the cycle turns positive again.
Redefine reports that its balance sheet is in a stronger position than it was before the Covid-19 pandemic struck.
Additionally, the company says it should be well-positioned to take advantage of investment opportunities by the end of the financial year in August 2021.
The company says its priority will be tenant retention rate along with reducing vacancy rates across the portfolio.
As at January 2021, tenant retention by GLA (gross lettable area) reached 85.8% for the industrial portfolio, whereas offices and retail recorded 97% and 96.2%, respectively.
Leon Kok, Redefine Properties COO, says that while they’ve also ensured that their properties are suitable to users’ changing needs, in the short to medium-term, retaining tenants to fill space and deepening relationships is a priority.
The industrial portfolio vacancy rate is 7.3%, retail is 5.7% and offices are 14.7%. At 14.7%, this is the highest office vacancy rate in Redefine’s history, and takes into account the ‘ghost’ vacancies as a result of sub-letting of space by existing tenants, according to the company.
Office users turn to tenant representation
Kok says that the office market is currently characterised by consolidations, downsizing and flexible working hours, which continues to impact negatively on the demand for office space.
He notes that there has been a reduction in premium-grade vacancies, by 0.6%, as some tenants take advantage of the current market conditions to improve the quality of space at lower market rentals.
Furthermore, Redefine reveals that as a result of Covid-19, restructuring of lease agreements has become increasingly necessary. In some cases, this is driven by the fact that office users are turning to tenant representatives for assistance.
Companies that act as tenant representatives are expert advisors to office users, mostly large occupiers such as multinationals and corporates. They are the leasing industry’s equivalent to a buyer’s agent on the sale side. They represent the best interest of tenants, and will help tenants find appropriate space within their budgets.
Kok points out that from their experience, big occupiers are currently reluctant to return to the office. However, they are not cancelling their lease agreements, they are looking to downsize instead.
“Tenant representatives have always been around. However, we certainly have seen that more occupiers are making use of their services. We need to be more flexible in our approach in accommodating the changing needs of our different tenants,” says Kok.
According to Kok, this may mean that as landlords, they need to agree to different escalation rates for rental and operating costs, different terms of lease agreements, and options to review space requirements, as well as rental levels at more regular intervals, for example.
Bad debts and tenant failures
Redefine points to soaring bad debts and tenant failures as a result of Covid-19 impact on businesses.
To this end, for the financial year ended August 2020, Redefine’s total rental relief reached R319m, with growth in bad debts at approximately R310m.
“We expect similar levels during the 2021 financial year, although this will depend largely on how the pandemic evolves, and if any further lockdown regulations will be imposed,” says Kok.
He says that predicting the future in terms of bad debts and tenant failures in 2021 is challenging, given the broad impact across the economy to which all sectors are exposed.
Kok notes that the lockdown that followed the first and second waves in South Africa had the biggest and direct impact on the retail sector. Restaurants and liquor retailers were severely affected by the ban of liquor sales and curfew restrictions during the recent level 3 lockdown.
Similarly, during level 5 lockdown regulations in 2020, all non-essential retail was effectively closed, resulting in zero trade for most tenants.
“The future depends on how the pandemic unfolds, the success of the Covid-19 vaccine rollout, and government’s response in terms of future lockdown regulations,” adds Kok.
Edited by Gudrun Kaiser