Globally, property assets in major cities have generally held their value over decades. Curiously, this is not the case in SA, as property owners often prefer to divest from aged assets and migrate their portfolios to greenfield developments in fashionable new districts. In this note, we consider the impact of this short-term opportunistic behaviour.
The value of CBD properties in Johannesburg and Pretoria has declined by as much as 30% over the past five years. Growthpoint has written down the FV of its SA office portfolio (primarily JHB) by 53% over the past five years. The social impact is, arguably, even more severe. Without protecting the value of land, we believe 67% of wealth is lost for shareholders and society. This is besides the impact on municipal revenue and employment in SA.
Corporates and property developers are acting in a way that suggests property is a ‘disposable asset’. Because of ESG, however, new builds are the leading cause of global emissions. The preference for abandoning old sites in favour of new builds makes property as an asset class in SA a less appealing investment, and in our view has caused many of SA’s biggest REITs like RDF, GRT and VKE to offshore more assets. In some cases, REITs dispose of SA property at high yields and invest in countries with worse property rights than SA.
Land values need to be protected, in our view, with more stringent regulations on zoning and minimum property specifications. Other measures include PPPs with tax incentives for property owners and REITs reporting on SDGs 11 and 9.
Measures to preserve legacy property values would benefit investors with higher returns and lower risk. Broader societal benefits include increased investment, higher economic growth, higher tax revenue, less crime, better infrastructure, improved business confidence and higher employment. It will create a more sustainable investment environment for REITs and encourage more long-term thinking from REIT management and more investment into South Africa.