In 2020, property experts observed that there was a decrease in the number of residential sales owing to lockdowns imposed by the government. But demand for residential properties (low to medium) is expected to remain very high with existing supply outpaced by demand.
According to Tumisang Loeto, the Property Analyst at Vantage Properties, demand pressures are mainly coming from growth in the population, migration to urban areas, especially Gaborone while tightening of the economy triggered most occupiers to reduce their expenditures due to a decrease in household income.
Loeto views that the “work from home” trend, which has been growing since the onset of COVID-19, may trigger migrations to surrounding areas of the economic focal point that may ultimately just lead to re-distribution demand for housing. While that may be a good thing, the same cannot be said about commercial property in the form of office space.
The office sector has not been performing to its full potential over the last few years in Botswana. It has been characterised by oversupply of the floor space, particularity in CBDs. According to a report by Letlole La Rona, the office segment in Gaborone has experienced a flatline in rentals due to new office stock coming into the market, mainly in the new CBD.
Letlole found that one of the main drivers behind most developments within that node is purely due to a fulfilment of development covenants and not necessarily market forces. “This influx of space into the market has triggered market reversions upon lease renewals of most of the secondary stock, which in some instances has led to drastic rent reductions,” the property outfit said, adding that prime rentals continue to stagnate in the P105/m2 mark with yields hovering in the 7.5 percent region. The next tier in this segment continues to exhibit rentals ranging between P65/m2 and P75/m2.
Loeto points out that the current vacancy is about 5.2 percent and it is expected to increase going forward. She says the asking prices for office space reduced by 1.5 percent in 2019 and that the trend is likely to continue throughout 2021. “The current economic dynamic will put more strain on the office space,” says Loeto.
The increasing agenda of remote working has been adopted by various blue chip tenants and it is feared that they may be rethinking their office positions in the operating structure. This will further dampen the office space segment. “We expect the office space or the office market to be tenant-led in the short to medium term with growing pressure on the overall occupancy and rental levels as newly completed buildings with no significant committed tenants compete with existing stock,” Loeto says. “With more supply coming on stream and no immediate catalyst to boost the demand, the outlook remains cloudy.”
She feels that there is a need for investment activity in the office and other commercial related sectors which would ultimately drive demand. Essentially 2021 is expected to be a period of rental deflation and slowing escalation rates. “The expectation of national rising vacancy rates implies a period of further deflation and we expect rearrangement in the way office space lease agreements are structured, with tenants asking for shorter leases and more flexibility inspite of them being hopeful the market will recover,” Loeto explains.
As corporates will need far less office space, rentals per square metre may come down. Hence it is feared that this will affect both actual income (cash flow) and the valuation of the properties themselves – a hit to the income statement/balance sheet as the property values are written down.
“It depends,” Kwabena Antwi, analyst at Kgori Capital, explains to this publication. “A key determinant of the value of property is how much rental income it earns. If indeed there is a permanent shift to working from home resulting in current tenants requiring less office space and landlords can re-rent vacated space, then there will be minimal impact on the property value as well as on actual cash flows.”
Antwi argues that commercial property owners may also repurpose vacant space, e.g. converting vacant office space into a retail or an industrial offering.
The retail sector has experienced its fair share of turbulence due to measures enforced to curb the spread of the COVID-19, according to Letlole. The company says the economic effects of the disease have seen the sector take a knock as some retailers who were already ailing had to face the hammer. Furthermore, Letlole notes that rental income from the sector was hard hit as most retailers negotiated discounted rentals from landlords for the lockdown period.
Given this situation, Letlole has warned that there could be a significant change in the negotiating power of landlords if the economic effects of COVID-19 continue to subdue consumer spending. The sector continues to exhibit strong rentals with the anchors still ranging between P85/m2 and P95/m2 and yields hovering around 7.5 percent to 8 percent.
According to Letlole, the industrial sector, which is largely underpinned by the manufacturing and logistics operations, has proved to be resilient in the face of the current challenging economic environment. “Due to restricted cross-border movement, industrial properties experienced an increase in demand as warehousing and logistics were required for stockpiling and local distribution of products,” notes the company. Industrial prime rentals continue to be within a range of P30/m2 – P55/m2, achieving prime yields of around 8.5 percent. The vacancy rates in the sector have held steady within the range of 1 percent to 2.5 percent.
Antwi says the phenomenon of working from home may actually create new industries to service people working from home. “These industries would require office space, resulting in the tenant mix changing from more traditional to nascent industries,” he observes.
For those companies which are close to their borrowing ‘limits,’ there is concern that the write-downs mean that they may breach or be close to breaching their loan covenants and have less cash flows to service their debt. The other side of the story is that it will favour those companies which have cash or access to cash or headroom to borrow because the prices they can offer on commercial properties can be lower.
Antwi says write-downs are non-monetary in nature, meaning there are no real cash flows involved and that it is only an accounting adjustment. In his view, the real concern for landlords is whether they can generate enough cash flow from rentals to cover debt repayments. “Therefore, if property values come down but rentals are maintained at historic levels, then the risk of default has actually not changed as the landlords are still generating enough cash flows to meet debt repayments,” says Antwi.