OBG talks to Louis van der Watt, CEO, Atterbury Group

Louis van der Watt, CEO, Atterbury Group

Interview: Louis van der Watt

How sensitive is the property market to volatility in interest and exchange rates?

LOUIS VAN DER WATT: The listed property sector will come under pressure as interest rates rise over the next couple of years. The value of properties is indirectly correlated to interest rates, so as they rise, premiums will start coming down. The real estate market is generally saturated in South Africa, whether for retail or office space, and at the moment there is an oversupply that will contribute to the downward pressure. There are generally one or two pockets, like Waterfall in Midrand, where opportunities still exist.

Relative to the rest of the continent, South Africa is on the mature side of the real estate cycle. There is thus likely to be a measure of consolidation for some of the smaller funds. These funds will either consolidate with other smaller funds or become absorbed by larger funds. Funds with better-quality stock may survive the downward cycle – whereas those with more B-grade assets may struggle. Listed property funds as an asset class over the past few years were attractive and benefited from lots of inflows, as developers had a lot of capital to work with. However, higher rates as well as saturation mean that this period is coming to an end.

What challenges do developers face in terms of ensuring infrastructure for mixed-use projects?

VAN DER WATT: The growth of mixed-use developments has been facilitated by the presence of a strong demand from tenants. Tenants have been demanding the integration of more services and amenities rather than merely a simple office park. While mixed-use developments are usually situated around transport infrastructure, developers have to upgrade the other services in the area. This is usually required of the developer so as to gain the rights required for development. As a result, an area’s infrastructure is always upgraded. Over time, mixed-use developments end up becoming business hubs that can command a premium. A side effect that we have noticed, however, is that tenants are now keen to migrate from the central business district to more decentralised areas.

To what extent can the commercial office space segment evolve successfully under current conditions?

VAN DER WATT: The commercial office space segment is expected to come under greater pressure in the medium term. Most notably, tenants are struggling to cope with rising costs of occupancy. This is not with regard to rental costs, but rather the total cost of occupancy, especially taking in to account utilities and taxation. Those variables may increase by about 25-30% per year whereas the rental rate will only rise by 6-7%.

Many tenants are under strain and so there is more available office space. Such conditions have also led to a trend towards more cost-effective and energy-saving designs to mitigate against rising costs. Other than multinational corporations that are obliged to adhere to green building standards, local firms will be averse to the 10-15% premium that goes with such accreditation, but they still insist on cost-saving measures.

What kind of dynamics do you see emerging in the retail property segment over the coming years?

VAN DER WATT: Urban areas have become saturated in terms of shopping centres, whereas there is more demand in rural areas. The availability of capital led to a lot of property development to the point where too many malls were built. In rural areas there is currently less supply of shopping centres. There are also risks to developing where the economy is primarily sustained by government grants. If there is an absence of real economic activity in rural areas, any retail growth driven by grants is unsustainable and is likely to dry up. And as people continue to rise in to the middle class, they urbanise and move in to the cities rather than remain in a rural area. These challenges notwithstanding, there will be continued growth in retail development in townships around cities where there is still some shortage. The rest of Africa also provides potential in this regard.

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The Report: South Africa 2014

Construction & Real Estate chapter from The Report: South Africa 2014

Cover of The Report: South Africa 2014

The Report

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