Amid the global pandemic, Covid-19 has accelerated e-commerce penetration globally thus fuelling demand for prime modern logistics space. In SA, retail and supply chain driven warehousing and logistics sectors will continue to boost demand for e-commerce.
Some South African national retailers have seen online sales increasing during lockdown. While e-commerce is yet to peak in South Africa, the pandemic is driving this trend, according to Equites Property Fund. The company revealed this in an investor presentation of its interim results released this week.
The JSE-listed specialised industrial Real Estate Investment Trust (REIT) says that UK retailers report robust growth in online sales. Between January and August 2020, online sales as a percentage of total sales averaged 26% from 19% in 2019.
Post-Covid-19, the logistics sector will see manufacturing companies focus on local production to mitigate supply side risks. Supply chains will also include inventory buffers to cater for disruptions such as Covid-19.
“These are the drivers contributing to the logistics sector outperforming other property assets in key global markets,” Laila Razack, Equites Property Fund CFO.
Logistics sector’s green shoots
Despite a delayed market correction, the industrial property market is quite defensive, says Michael Scott, JLL Sub-Saharan Africa research analyst. He notes that the heavy construction and manufacturing segments were hit hard by the national lockdown. However, there’s been growth in retail and supply chain driven warehousing and logistics spaces.
“Covid-19 has definitely accelerated demand for bespoke logistics and warehousing properties in South Africa due to growth in e-commerce.” Areas such as Johannesburg and Ethekwini offering these types of properties are experiencing sustained demand as a result.
The JLL Johannesburg Q2 2020 report shows that logistics remains a preferred asset class for listed REITs like Equites and Fortress. Property fundamentals within the sector are good. However, the impact of the pandemic will only be felt in the next 12- 18 months when big leases expire. Rentals will also start to correct within this period.
JLL expects rental contraction of 10-15% in the medium-term. Landlords will reduce lease terms from between 5-10 years, to about two years. Rental escalations currently in the 7.5%-8% are expected to be closer to CPI rates. Scott says landlords will over attractive packages to retain tenants. These will include increased tenant installation allowances, and rent-free periods of up to six months.
Meanwhile, Equites achieved on average 99% of total rent due in South Africa from March to August 2020. The UK portfolio achieved 100% rental collection during the same period.
Razack attributes this success to three things: tenant mix, quality of tenants, and constant engagement with tenants. “Of total tenants, 68% operate in transport and logistics, FMCG and food producers. These segments have proven to be highly resilient throughout the pandemic.”
She explains that over 94% of tenants occupy sought-after A-grade properties. Furthermore, Equites continue to engage with tenants to understand how to assist in order to ensure their sustainability in business. The company has granted short-term and longer-term cash flow relief to tenants in the form of rent deferrals.
Equites like-for-like net rentals in South Africa increased by 6.2% from 31 August 2019 to 31 August 2020. Weighted average lease expiry is 10 years from 9.3 years in the same period in 2019. Vacancies remained below 5% reaching 3.8% by 31 August 2020 from 3.4% in February.
The average value of Equites modern distribution centres in South Africa is R11,109/m², and this increases as the specification changes.
Growth-potential for e-commerce
Razack says they expect this trend to continue into the future as consumers become more comfortable with online shopping. However, e-commerce penetration in South Africa is still low reaching 1.4% in 2019, hence there is room for growth, particularly for the logistics sector.
A report by ResearchAndMarkets.com shows that South Africa’s e-commerce industry has long-term growth potential. Online retail sales grew by an estimated 40% during lockdown, with international forecasts suggesting that year-on-year growth may reach 100%.
Some retailers like Dischem have seen online retail sales increase by as much as 344% in the 24 weeks to end of August 2020. Woolworths fashion, beauty and home grew online sales by 41% in the second half of 2020. As of end of June, Massmart’s Game grew online sales by 100%, Builders (160%) and Makro (84%). Meanwhile, TFG Africa is targeting online sales growth of 10% by 2025.
Equites expects the strongest driver of occupier demand in the SA logistics sector to stem from supply chain optimisation. This as large retailers invest in digital transformation and online platforms, which in turn supports demand for warehousing space.
Future outlook for logistics sector
Scott says they are currently seeing supply chain diversification with developers looking to future-proof space. Those offering specialised logistics are well-placed to take advantage of these opportunities.
In addition, the industrial sector is also seeing a number of consolidations, and volumes of land for sell. However, there are no speculative developments, and this will help reduce vacancy rates.
“Correction is taking place in the industrial sector, and bespoke logistics spaces will remain an asset choice for savvy investors.”
Equites has a market capitalisation of R11 billion, and 63 properties located in key logistics node. By value, the portfolio comprises 55% of assets in SA and 45% in the UK. Equites reported Net Asset Value of R17.44 per share as of 31 August 2020 from R17.37 in 2019. Razack says they continue to distribute 100% of distributable profits, and have guided 2% – 4% distribution growth for FY21.
The company says as it grows its portfolio, in future, they will favour long-dated leases with low risk tenants. Equites has effectively reduced its exposure to C-grade tenants, and will focus on high quality logistics that has demonstrated resilience.