SA CRE and Covid-19: the industry’s experts talk

These are stressful times for South Africa – where we are seeing the very best and worst of human behaviour. A panel of some of SA’s top commercial real estate (CRE) industry professionals gathered on Wednesday 15 April 20 to collaborate and plot a way forward through the weeks and months ahead. This is a summary of the 75 minute…
Covid and commercial real estate

“Adversity does not build character, it reveals it.”

James Lane Allen

Last week Wednesday 15 April, in response to the Covid-19 pandemic, an unprecedented event took place in South Africa’s commercial real estate industry.

A collection of arguably the top brokerages and advisors in SA, normally fierce collegial competitors, agreed to lay down their swords and collaborate. The objective for this industry first: to share knowledge, agree on common principles and work together for the best interests of the CRE industry during this period.

These industry leaders found common ground and spoke with one voice. The CRE professionals are passionate, deeply experienced, and honourable. Therefore, their message is one of reason and common sense.

By virtue of their role, broker and advisor CRE professionals operate at the coalface of the economy. These players are the first to know what is going on, and, advising 95% of businesses in SA on their office and industrial property decisions, their reach is wide.

This account makes compelling reading – if you are a tenant, a professional in the CRE industry, or an armchair economist. It tells a story of how everyday people and businesses are reacting to this challenge, reveals how business people rely on their moral compass to navigate through times of challenge, and talks to a deeper sense of community and civic purpose. It also explores the temptations behind short term thinking, and the perils of such.

Covid-19 data points from the coalface

This group’s feedback on the economic pulse is revealing. Caution among business operators, even in bullish industry sectors, appears to be the maxim.

Petrus Uys Gmaven

Petrus Uys

From Petrus Uys of PropCo, KwaZulu Natal’s top top industrial broker, advising major companies in South Africa’s largest distribution port, Durban:

The big logistics companies, our clients, are essential suppliers … on any expansions or move, they are not interested in talking. The executives are very focused on first understanding and dealing with what is going on right now

Kerry Millar

Kerry Millar

Kerry Millar managing director of Real FMG, a corporate real estate strategy and implementation firm, weighs in:

Some of our clients have gone to the landlords and said we need relief here … big companies. The need comes from cash flow pressure caused by a reduction in upstream payments. I think this situation is worse than many, many of us realise. I think the lack of cash flowing through the economy is going to be serious. And we’re only going to see the full extent next month.”

Steve Burnett Gmaven

Steve Burnett

Steve Burnett director at 5th Avenue, one of SA’s top brokerages, contributes the following data point:

…if you have a look at the trends of (a major online marketing platform). I get a weekly report of the leads we are getting. Every week it has dropped off more and more dramatically. I can see why (the online marketing platform) have given us a free month in April. Realistically it would not be worth our while to be on it

An overview of the discussion

What follows is a best effort at condensing this event. Relevant points here:

  • No property owners were present
  • While various meeting members had never met before, all were aligned and in consensus
  • Summarising 75-minutes of high-octane deal-maker dialogue is a Herculean task

Doing what is convenient, vs what is right

Reputation for these advisory-orientated professionals is critical. The sad reality: the behaviour of a minority taints the reputation and perception of the collective. Accordingly, the biggest talking point was around responsibilities and ethics over this time.

All parties have received high volumes of calls from their clients over this time seeking advice, and guidance. With our extended unfavourable business cycle as a base, for this window of time, property owners in the CRE ecosystem are particularly vulnerable and exposed.

Kyle Hyam NVP

Kyle Hyam

Kyle Hyam, MD of New Vantage Properties opened this topic by asking:

What do I say to client requests for guidance, where in certain instances, these tenants have interpreted the marketing received from social media and other channels as: “don’t pay rent”?

Pieter-Jozua Erasmus Capitol

Pieter-Jozua Erasmus

This challenge was echoed by Pieter-Jozua Erasmus co-owner of Capitol Commercial Properties, operating out of Cape Town’s northern suburbs:

I got forwarded an email by a client, where a broker sent an email to a client talking about having his lease reviewed and possibly terminated. A lot of unscrupulous guys are seeing this as a marketing opportunity … On that point, how do you handle the call – all of us have had a lot of calls by tenants phoning you asking for advice. How do you handle it?

The theme of the guidance: principles and civic duty. (South Africa’s c.R1.3T (by value) commercial real estate (CRE) industry is a major employer, and has been under severe pressure (more on that below) from a variety of fronts for at least the last five years. Most of the advice here comes from industry professionals who worked through the late 90s when interest rates were at 24.5% in South Africa. They have seen movies like this before)

According to Millar:

Kerry Millar

Kerry Millar

To be serious and get on a soapbox. This (don’t pay rent) advice is actually irresponsible. We are in a crisis that, probably, no one alive has seen before. It may be worse than we now think. And to try take advantage of it, is a certain way to make it worse. The only way that we might get through it, is if everybody is prepared to take a bit of a knock all the way round – only then might we be able to pull through it.

Simon Black, MD of Black Pepper Properties affirmed the urgency and focused minds by posing the following question:

Simon Black property

Simon Black

Imagine what would happen to jobs, families, industry service providers, if everyone stopped paying rent for 3 months?

Burnett expanded on this:

Steve Burnett Gmaven

Steve Burnett

Best advice: if you (as tenant) can honestly afford to pay the rent, you should. If we all stop paying the debts we owe, there is going to be a snowball effect. So there are companies that are genuinely going to get hammered as a result of this. So, there are companies who firstly have the cash reserves to be able to do it, and there are companies whose businesses have only been marginally affected. Especially the tech companies out there. It’s our responsibility (as brokers) to tell people that if you can afford to, pay it, and if it has had a limited effect on your business, you should try pay the rental. Don’t just try take advantage of a situation because a lot of people have their backs against the wall and it looks like you can get away with doing something that is underhanded.

Angus Alexander property

Angus Alexander

Angus Alexander of CBRE Excellerate, probably South Africa’s most successful leasing broker over the past three years, weighed in:

I think that we have got to educate the wider public. The landlords may sometimes be positioned as thugs. At the end of the day they have genuine costs. And they have bonds. Despite what many think, they are not just rolling in cash. It is up to us to educate the public as to what goes on behind the scenes.

That is what I have seen from the calls I have taken. Let’s go through it. Let’s think about what expenses the landlords do have, before we start talking about what we are reducing by.

At the end of the day, business people are rational and reasonable, and they understand financial principles. As Alexander closed out:

The tenants come across with a very different attitude from the end of a call.

However he cautioned,

From a retail point of view it is difficult for the guys who are not trading. It is a very different ballgame.

Erasmus and Burnett expanded on the issue facing landlords, saying:

Steve Burnett Gmaven

Steve Burnett

“If we are going to talk to tenants it has to be on the basis that the landlords are hurting in a lot of cases just as much, sometimes even more – because they could be handing their properties back to the banks at some stage”


Pieter-Jozua Erasmus Capitol

Pieter-Jozua Erasmus

A client phoned this morning and said he didn’t want to pay his rental. I said: “Look, while we are in this lockdown, the landlord is still paying his operational costs and the security guards, to protect the premises that house your furniture, equipment and stock. So to just say you are not going to pay him anything, is that a reasonable request? The landlord still needs to pay all the property costs like rates and taxes. And the landlord is storing your assets while we are sitting at home.”

The advice

To focus collective energies during this uncertain and testing period, Millar framed these questions:

What is it that we as an industry / section of industry have to offer an executive sitting in crisis in his boardroom?

What can we do, what can we really offer to help?

Frank Simonetti

Frank Simonetti

Frank Simonetti of McCreedy Friedlander, one of Johannesburg’s top office specialists:

You can’t put the boot into the landlords at a time like this


Shaun Watters

Shaun Watters director at 5th Avenue, summarised the group’s pragmatic approach, with the following:

Advice and support given to both landlord and tenant must be done on a case by case basis. The historical relationship between the landlord and tenant needs to be looked at to provide a win-win solution for all parties concerned

Chantal CBRE

Chantal Williams

Chantal Williams of CBRE Excellerate, probably SA’s highest volume deal maker (by count), provided the detailed measures she is advising on from her side:

Certain private landlords, where tenants have more than 12 months left on their lease, have offered to their tenants a deferral of net rental for between 1 and 3 months. The unpaid amount is to be amortised over a one year lease period,  while the current lease period is extended by 3 months. (During this time tenants must still pay “operating costs” and utilities)

In other instances, on a case by case basis, certain office sector landlords are giving their tenants one month’s net rental grace for May 2020

Simon Black property

Simon Black

Don’t breach your lease – keep up to date and in good standing to avoid eviction proceedings

Kerry Millar

Kerry Millar

Advise the tenant to communicate. Ask, don’t tell

Pieter-Jozua Erasmus Capitol

Pieter-Jozua Erasmus

Consider your relationship with your landlord until the termination of the lease. It could still have many years to run

In summary, the best guidance is to reach out to a competent and respected CRE professional. Sadly, there are no silver bullets or magic bunnies. The right CRE professionals can advise you what is reasonable and not reasonable in the circumstances, and assist you in plotting a way forward that is both fair for both parties, and good for your business.

So where is the wrong advice coming from?

The view is that specific schemes or approaches “doing the rounds” have been devised from a combination of inexperience and desperation/greed.

Angus Alexander unpacks it more clearly: “Where these guys (brokers) are representing tenants, they (the brokers) are looking to the tenants to pay them something”. People can’t work for free, and someone will have to pay for the time and effort involved in a transaction.

Kyle Hyam: “Yeah, they will get a percentage of savings”

Angus Alexander property

Angus Alexander

 Correct, so they will either try get a percentage of savings, or something else. But, realistically, there is not actually going to be a saving. Landlords will need to claw it back somewhere. So it might be a short term win. But it’s not going to be a saving. Financially, you as the tenant, will pay for it.

I know that one or two of our brokers want to charge on an hourly rate. I have not been involved. But how do you go and base it on savings, when you as the tenant are going to pay it back in 3 years’ time, and probably pay more than what you are saving now”

Pieter-Jozua Erasmus: The brokers are probably banking on trying to move the tenant somewhere else. I fail to understand the motivation behind it”

Angus Alexander: I think they are desperate, banking on making some quick and desperate money. And I think they haven’t even thought about it in 3 months’ time.”

Kerry Millar: “I suspect no second- or third-order thinking. They are thinking about today, and not tomorrow or the week after”

Good news commercial property

What! There is good news right now?

And there is good news:

Pieter-Jozua Erasmus Capitol

Pieter-Jozua Erasmus

… you can buy listed (or direct) property at a higher yield than interest rates at the bank.

High-quality property stocks are currently trading at discounts to their net asset value, and, at current low interest rates, are attractively priced to buy.

As the saying goes “be greedy when others are fearful”. This time of crisis and fear talks to circumstances in the late 1990s and early 2000s, when many fortunes were made in a few years. High-risk investors capitalised on a window in time when properties with high-quality covenants could be purchased, predominantly via sale and leaseback. The discounted value of the leases was very near to the purchase price of the properties, and, in some cases, exceeded purchase price. Whether the circumstances are the same, it is impossible to predict. However, positively geared, high quality listed property assets is a rare phenomenon.

What are the banks doing?

Just as tenants are being squeezed, so are property funds. The South African economy has, in hard currency terms, gone backwards the last couple years. While admittedly the cost of debt has come down recently, rental revenues are being squeezed on one side by higher electricity, and on the other side by direct greater public sector costs like rates and taxes and infrastructure contributions, and indirect public sector costs such security, community improvement districts etc.

How are the landlords dealing with their biggest expense – the banks?

Chantal CBRE

Chantal Williams weighed in on her feedback from private property owners in KwaZulu Natal:

The banks are open to engaging with landlords regarding cash flow issues, and are happy to assist businesses based primarily on a case to case scenario

Simon Black: “in terms of the landlords, the banks are not getting any relief from them. The landlords are still on the line for their instalments.”

Frank Simonetti: “Certain banks are allowing interest-only facilities”

Pieter-Jozua Erasmus: “I have heard that they will help you, but in return will cancel your access facility. Effectively they are forcing the landlord to dip into their piggy bank before coming to them.”

Frank Simonetti

Frank Simonetti

… the banks essentially have to work with the property owners. Or else the banks are going to become property companies 

In summary

Business is seasonal, and right now it feels like winter for the economy. To survive through to summer we, as a company, require cool heads, sage advice from those operating from a position of trust, and principled action.

Property owners or landlords are vital contributors to the economy, and key pivots in the commercial real estate ecosystem. If property owners fail, they will take many other businesses down with them – from service providers to banks. Further, property funds are required to deliver quality accommodation that businesses need to operate.

So it’s up to us to embrace the genius of the “and”, and reject the tyranny of “or”. Both property funds and tenants can make it through this tough time together. This journey will require all parties to honour their commitments to the fullest extent possible. There is much talk of values and culture, but it’s only in bad times that true organisational character is revealed.

So do the right thing.

As the Sage from Omaha says:


The following larger Gmaven clients were invited to participate, but could not make the session. Their feedback is as follows:

Craig Hean

We have been finding that many of the landlords we have approached on behalf of our clients have been extremely understanding of the situation and have been willing to consider solutions that are fair to both parties in their respective set of circumstances.

We have been able to structure a number of deals in a very short space of time – but it is important to point out that it is a not a one-size-fits all solution. The encouraging thing is that we have found that landlords are happy to talk as long as the approach of the real estate professional (on behalf of their client) is fair.

Experience in the real estate service profession has never been more important than now

Sean Berowsky

Firstly, I would like to offer my sincere sympathies to anyone that has had to deal with the consequences of COVID-19. There will be new levels of services required from both occcupiers and landlords for all types of buildings; and we are engaging at that level to maintain safe and effective working environments. Transactions will naturally follow as the world of commerce will continue albeit at a different setting; and we will continue to strive to offer our clients best in class advice.

JLL Gmaven

Grant Kirchmann

It is important to stay up to date with the Covid-19 pandemic but equally important not to have a knee jerk reaction to widespread news.  We need to act with a clear head, and in some cases with empathy, when advising clients.  We cannot find ourselves in a position where we over promise and under deliver, so be clear on the clients needs and the impact of Covid-19 on their operations and cash flow, because landlords are willing to assist those industries impacted and not opportunistic companies looking to cash in.  Each negotiation is based on its merits so if all parties are well informed, Landlords are prepared to assist on a fair and equitable basis.

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