COVID-19 had a major impact on the office property sector in South Africa, as many businesses were forced to shut down operations and keep employees working remotely. Since a month ago, the number of infections in the country surpassed 500k, but the good news is that the spread looks to be weakening. I’m your host Ofir Bar and our today’s topic will be the office property sectors and what should be expected for the next few months.
Alt-text: office property sector
Work-from-home acts as a headwind
The emergence of the work-from-home trend put a strain on the South African office property sector, as it has been acknowledged by Kobus Lamprecht, head of research at Rode & Associates. Based on one of the company’s reports, “as more employees work from home on a permanent basis, it leads to a prolonged oversupplied market”. This practice had become the new normal especially for the tech sector predominantly, or other companies that could assign and perform operations online.
Even though the spread of the virus is slowing in South Africa, companies will be reluctant from getting their people back to the office, fearful that a second wave of the pandemic could emerge at any point. Epidemiologists are warning risks could be high during the fall, so in the meantime, work-from-home is unchangeable.
Is social distancing positive for office properties?
Not all companies are able to keep employees working at home and at the same time, they need to take extra measures, to comply with social distancing rules. As a result, they need to increase office space, which is good news for investors. This isn’t enough to outpace the negative effects of work from home, but it definitely has a significant positive impact.
Looking ahead, real estate investors from the office property sector will be on a race to find companies that need more space. Because the competition is fierce and the number of companies conservative with spending on the rise, they will need to act fast and design effective methods to reach, provide an attractive offer, and convince these companies into becoming their clients. This means profit margins will need to be sacrificed in some cases, but it would be the only way to get out of the economic downturn with limited damages.
Uncertainties to consider in H2 of 2020
Economic sentiment will be the main indicator to watch in the months ahead. This might not be the deadliest virus, but it is very contagious, so people won’t be able to return to normal too soon. Companies and retail individuals will be reluctant to spend, keeping economic activity suppressed.
The most important uncertainties in the months ahead are a second wave of the pandemic (as strong or stronger than the first one) and negative news regarding a cure (low effectiveness of a vaccine, no new medicines developed, etc.). Disciplined countries had already shown it is possible to keep the pandemic under control while keeping the economy operating close to full capacity. I, Ofir Eyal Bar, have real estate investments in Germany and The Netherlands, and based on my knowledge, people there are following the new rules. There are new clusters found, but for now, the number of new infections is low as well as the death rate.
South Africa is the 5th country in the world by the number of infections found, which means it did not manage to cope with the pandemic effectively. However, the spread of the virus seems to be weakening for the past two weeks, showing that restrictions, wearing masks, and social distancing measures are effective.