The PIC is on the commercial property acquisition trail

The Public Investment Corporation (PIC) – reputedly the biggest single investor in SA’s commercial property industry – is continuing to make major investments in the sector despite the significant negative impact of the Covid-19 pandemic on most segments of the property market.

In July, it obtained Competition Tribunal approval to acquire the Central Square development within the Menlyn Maine precinct in Pretoria for an undisclosed amount from Menlyn Maine Investment Holdings.

The PIC, which is the manager of the Government Employees Pension Fund (GEPF), was a joint investor in the R1.8 billion Central Square development that opened in 2016.

Menlyn Maine Investment Holdings shareholders include African Spirit Trading 306, Kgwara Investments, architect Henk Boogertman, the GEPF and African Spirit Trading 309.

Central Square, which is regarded as a single building consisting of retail and office space, anchors the Menlyn Maine precinct.

This latest acquisition by the PIC to get approval from the competition authorities follows the PIC in May this year acquiring 100% of the leasehold rights of the Deloitte head office building in Waterfall City for R1.7 billion.

Property development and investment group Atterbury, through Dale Creek Investments, was a 50/50 co-investor in the Deloitte building leasehold and letting concern with JSE-listed real estate investment trust (Reit) Attacq.

While the Covid-19 pandemic has created uncertainty about the future prospects of the office property sector due to the work-from-home phenomenon, the PIC seems to be scouting for good acquisition opportunities.

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PIC spokesperson Sekgoela Sekgoela said the PIC is a long-term investor and will not change its strategy just because of Covid-19 in the short term.

He noted that the organisation would monitor the long-term impact of the pandemic and respond accordingly “in line with client mandates”.

“The pandemic has not affected all properties in the same way. The prices that have come down substantially are of properties that are underperforming,” he said.

Sekgoela said the two recent acquisitions are of properties that are fully-tenanted, with long term leases.

He declined to comment on the value of the Central Square transaction, adding that the financial terms of the transaction will be published as part of the PIC’s annual financial reporting.

“The PIC is a tenant at Central Square, occupying a building that the GEPF will own 100% of after this transaction,” he said.

‘This is the time to buy’

Erwin Rode, CEO of property services firm Rode & Associates, said for anybody who has confidence in South Africa’s medium term future, “this is the time to buy without a doubt”.

“When everybody else is selling, that is the time to buy.”

“I’m not surprised at all that the PIC is buying. The implication is that they [the PIC] are probably more confident about the economic future of South Africa than your average property investor,” added Rode.

He believes the value of commercial properties in South Africa have declined by 10% over the past two years but admits in some cases this decline could be much more.

Rode said it is difficult to determine the decline in value of the property sector because the market is still trying “to find a price level” and very few sales have been taking place.

“We know it has declined, it’s just a question of how much. The reason for saying so is because we all know the vacancies have increased for office buildings, especially the old Grade B and Grade C offices, and we also know that rentals are under huge pressure, including at shopping centres,” he pointed out.

Rode added that when a lease comes up for renewal, landlords face one of two things: chances are good that the tenant will take less space, or the tenant will negotiate hard for a lower rental.

Working from home in perspective

Rode said there are reports that some big US corporations will force their employees to come back to their offices but believes the impact on the commercial property sector of employees working from home is probably being overestimated.

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“It’s not as if 50% of people are going to work from home in the future. My guess is that not more than 20% people who previously worked in the office will still work from home after the pandemic.

“But smaller companies especially will be more inclined to allow employees to work from home,” he said.

Rode questioned the sustainability of companies allowing their employees to work from home.

“It’s all very well to work from home while you know your staff and they know you and your company culture but as people resign and you appoint new people and they start working from home, it’s more difficult to create a company culture and train people,” he said.

Oversupply

Rode believes the retail property sector will be the worst-hit in the commercial property sector over the next few years because there was already an oversupply of retail space in 2019 that “is going to last for quite a while”.

He said the anticipated poor performance of the economy over the next few years will mean that retail property vacancies will be higher than they otherwise would have been and turnover per square metre of retailers will decline, putting market rentals under pressure.

Rode said typical average vacancy rates in good office nodes, such as Sandton, are now more than 20%.

“If 20% of workers are going to be working from home in the future, imagine what that is going to do to vacancies,” he said.

Rode anticipates office tenants will reduce the amount of space they lease.

“The office market is going to be in serious trouble for a long time to come, as a generalisation, unless you have a AAA tenant on a long lease.

“But even they [AAA tenants] will put pressure on their landlords,” he said.