Real estate capital markets respond that retail centres which are primarily corporates consider their re-entry into to Covid-19 line shop weighted will suffer the most. the working environment. Social distancing measures will mean that Over the short term, investment The e-commerce “boom” will reduce current office spaces may not be able activity is expected to slow as foot traffic and trade densities in to accommodate employee head- valuation challenges, and broader conventional retail malls, as count volumes as done previously. uncertainty create barriers to consumers opt for online Where the business environment will investors’ ability to price risk purchases. This will have an adverse invariably experience a contraction appropriately. effect on larger entertainment and from an operational perspective, leisure based retail centres. the subsequent demand for office Defensive sectors such as healthcare space may not be influenced to the and logistics continue to garner In contrast, grocery anchored retail same degree. Whilst many staff may interest as active investors consider should be better suited to weather the be required to work from home, the income stability, operational ability storm. Specifically, we foresee smaller reduced headcount demand may be and occupational density to be critical convenience centres (7,000-8,000 sqm) partially offset by the increase in factors in mitigating asset-level risk. and rural-based retail centres (30,000- personal space requirements. 35,000 sqm) recovering the quickest, Despite some liquidity across debt as the market recovers. Accordingly, the flexible space sector is and equity, lenders and investors alike likely to undergo significant remain in a phase of ‘price discovery’ SA office outlook consolidation, although, in the long and asset management. In the short to medium term, it is run, it will remain a key feature of anticipated that office vacancies will office markets. Despite the current Regardless of fluctuations in continue to rise, whilst rentals will switch to remote mass working, the sentiment and activity, the overall decrease. In order to minimise risks physical office will maintain its trend has been for higher allocations associated with constrained cash- importance for facilitating interaction to real estate, and we see no reason flows, tenants will most likely and collaboration and, ultimately, for this trend to reverse over the advocate shorter lease lengths. for employee health, well-being and medium to long term given the productivity. advantages of real estate investments. As new developments come to market and attract tenants away from existing SA industrial outlook SA retail outlook stock, the risk of rising vacancies and reduced rentals remains imminent. The Industrial sector in Retail has been one of the most Rosebank, Waterfall and Sandton are has shown resilience, with segment adversely impacted sectors in the particularly at risk, with the highest leading year-on-year capital growth wake of the Covid-19 pandemic. Trade development activity. Subsequently, backed by low vacancy rates. The restrictions that compromise business it is expected that speculative office sector has been supported by a operations, has seen landlords collect development will dampen, whilst growing demand for warehouse and as little as 40%-50% of their rentals tenant-driven, pre-let developments distribution space due to the in April and May. This trend is set to will become more common. significant growth in online retail sales, continue until markets normalise. albeit from a relatively low base. Outlook Banks are starting to move away from Business shutdowns have caused Net expanding their office portfolios, E-commerce is expected to strengthen Operating Income (NOI) instability, opting to rather scale down and as consumer preference and compromising investment sentiment. consolidate. With the exception of behaviours change, with increased Without determinable NOI or discounted P-grade spaces with long- market penetration as a result of more Scope of Analysis substantial discounts, it is very lease deals and highly opportunistic accessible and affordable unlikely that any sales will take place deals, we anticipate that very few technologies. This report reviews investment activity in the South African commercial real estate market and analyses key trends for the next six months, if not longer. office transactions will take place observed from investment sales data. Data has been sourced from publicly available announced media reports, In line with this outlook, prime retail over the short term. B and sub-grade Although logistics is expected to research by Real Capital Analytics (RCA), and Lightstone Property Toolkit, among other sources. This report provides yields remain uncertain over the short office spaces are expected to suffer the perform well, we do not forsee the an update to the 2018 Investment Review report published by JLL and analysis of significant transactions in South term. most. sector side stepping the downturn Africa’s commercial property market over the period 2016 to 2020. Sectors of analysis include office, industrial and entirely. Smaller, speculative spaces retail. While the analysis is focused on shifts in transactional trends in 2019, deals concluded from 2020 to date (May) From an operator perspective, line Whilst the demand for office space is will see rises in vacancies, whilst larger have been included. shops have been the most expected to decline in response to boxes may seek to consolidate and vulnerable, with many being forced to business consolidations and a improve operational efficiency. The total transactions reported do not reflect all activity in the market, but present the majority of transactions in the close because of limited capital contracting economy, the use of listed and unlisted space over this period, with smaller sales excluded. resilience. As a result, it is anticipated traditional office space may vary as 2019 / 20 Market Overview

Asset classes slide into downturn 2019, the average capital value per in South Africa, driving the demand for phase sqm across asset classes, declined warehousing and distribution sharply. This is congruent with the facililties. The economic shock caused by fact that 2019 saw a significant rise Covid-19 will invariably place down- in transaction GLA, while investment Additionally, movement restrictions ward pressure on rental levels and value fell across the board. and new social distancing norms capital values across all market implemented in response to the segments. This trend is expected to Gauteng remains top investment Covid-19 pandemic, will see more persist over the short to medium term, destination for 2020 people persuing online shopping as markets remain in a downturn alternatives. Accordingly, we phase. The Industrial sector however, Gauteng remained the top investment anticipate retail driven warehousing is expected to show some resilience, destination for 2020, albeit at and distribution space demand to with e-commerce driving demand for substantially lower (56%) expand over the short-to-medium warehousing and distribution space. transactional values than the previous term. From a nodal perspective, 2019 equivelant period. To date, the Johannesburg is expected to province holds 62% of transactional Prime yields expected to move outperform due to strong supply and value and takes up 74% of GLA sold. outwards in reponse to market demand fundamentals. conditions Although the Western Cape Investment slows across all dominated retail transactional In reponse to prolonged economic commercial real estate sectors activity (63%), Gauteng was home to contraction and perceptions of the majority of industrial (74%) and increased risk, prime yields are South Africa’s total transaction values office (100%) transactions. This trend anticipated to move outwards over decreased by 20.5% year-on-year, is likely to persist over the medium the short to medium term. reaching R16.7 billion by the end of term, as Gauteng continues to attract 2019. Investment value into the office, interest as the largest investment hub Constrained business cash-flows will industrial and retail sectors all of South Africa. continue to place pressure on the experienced the same trend, tenant’s ability to meet their rental contracting by 23%, 15% and 21% Whilst businesses scale down and obligations, whilst landlords will face respectively. consolidate to preserve cash reserves, new challenges in restructuring lease strategically locating operations will renewals and filling vacancies. Whilst While the value of transactions in become pertinent as businesses interest rate cuts provide temporary 2020 has slowed considerably when gradually return to previous trading relief to the borrower, general compared to the equivalent 2019 levels. market conditions driving these January-to-April period, investment changes often overshadow the benefit sentiment in the industrial space has Industrials edge ahead in 2020 of lower lending rates. shown the most resilience, constituting 46% of 2020’s R1.8 billion While office remained the best These factors all place increased risk spend to date. performing asset class in terms of premium on commercial real estate as transactional value, GLA and volumes an investment option. Accordingly, it is It is important to note that although during 2019, industrial space leads the anticipated that yields will rise. there was marginal increase (2%) in pack in 2020. This comes off the back transaction volumes from 2018 to of an emerging e-commerce “boom” Total transaction value by asset class, 2016-2020, rand billion

Source: RCA, JLL

Total transaction GLA by asset class, 2016-2020, sqm thousand

Source: RCA, JLL

Total transaction GLA & value distribution split by market 2016 - 2020, percent

Source: RCA, JLL

Total transactions volumes by asset class, 2016-2020, number

Source: RCA, JLL RetailNation-wide retail investment Alberton Mall (Ekurhuleni). These two Three notable retail portfolio transactions for 2019 amounted to deals collectively sold for R624.8 million. transactions were recorded in 2019, Retail transaction values by province, 2016-2020, rand billion R5.3 billion, a 20.5% decrease from detailed as follows: 2018’s R6.7 billion spend. This negative Moving into 2020, however, the majority 1 One Property Holdings and Emira slide continues into 2020, with share of retail transactions shifts to the Property Fund. Purchased a portion R557.9 million spent to date. This Western Cape (63%). This share is of Redefine REITs R441.6 million equates to a 68.4% decline in retail supported by the sale of the Fairbridge portfolio, with a transaction value of transactions when comparing and Nonkqubela malls, valued R260.3 million; accumulated investment for the collectively at R384.6 million. 2 Fairvest Buyer Property Holdings. equivalent period in 2019 (i.e. January- Purchased a portfolio from Investec to-April 2019). The Western Cape has recorded the Property Fund, valued at highest volume of retail transactions for R169.2 million; and The 2018/19 decline in total retail both 2019 and 2020 to date. During 2019, 3 The third portfolio sale included the transactional value coincides with a the Western Cape experienced more Khula Sizwe Retail Portfolio. Valued Source: RCA, JLL 27.3% increase in the total number of than double the volume of transactions at R1.7 billion, the sale was part of a transactions. This suggests that 2019’s from 2018, reaching 11 deals by the end larger R2.7 billion deal between transaction values were considerably of the year. In 2020 so far, the Western Khula Sizwe Property Holdings Retail transaction GLA by province, 2016-2020, sqm thousand lower than those recorded in 2018. Cape accounts for 50% (2 of 4) of all (buyer) and Barloworld Limited retail transactions, inclusive of ’s (seller), comprised of 68 properties This downward trend is also reflected by Shoprite Centre (R161.5 million) and falling into both commercial, retail, a 34.6% decline in average capital value ’s Tokai Junction industrial and residential sectors. per square metre, sliding from R20,392 in (R190 million). The retail portion of the portfolio sale 2018 to R13,340 in 2019. While the amounted to 128,913 sqm of GLA, number and total value of transactions Gauteng and the Western Cape have the with an average capital value per in 2020 have declined when compared to highest capital values per square metre. sqm of R13,032. The retail portfolio the equivalent 2019 period, the average In 2019, these averaged R16,049 and achieved a blended acquisition yield capital value per square metre has R14,514, respectively. There is a of 8.8%. increased by 19.6% to R15,960. significant swing moving into 2020, however, with the Western Cape topping The largest individual retail transaction Source: RCA, JLL At a provincial level, 2019 data reveals the charts, at R20,614 per square metre. by value was the Mdantsane City Mall, that Gauteng accounted for the Gauteng experienced a 29.6% decline, valued at R511.4 million. The Eastern majority share of total transactions by averaging R11,307 per square metre by Cape based deal involved Rebosis (seller) value (36.2%), boosted by the sale of April 2020. and Vukile Property Fund (buyer), with a 1 Portfolio has not been disaggregated by province. Data has been aggregated by sector only, with locations undisclosed. The portfolio has therefore Hobart Grove Mall (Johannesburg) and reported transactional yield of 9.0%. not been disaggregated into the provincial analysis. This must be kept in mind when reading this document, as discrepencies in totals will occur. Nation-wide retail investment Retail average value /sqm, rand thousand “transactions for 2019 amounted to R5.3 billion, a 20.5% decrease from 2018’s R6.7 billion spend.”

Source: RCA, JLL

Average retail value per sqm by province, 2016-2020, rand thousand

Source: RCA, JLL

Retail transaction volume by province, 2016-2020, Number

Source: RCA, JLL

Top five retail transactions by value

Property Market Price (R) Size (sqm) Buyer Seller R/sqm Khula Sizwe Khula Sizwe Property Non-disclosed 1,680,000,000 128,913 Barloworld Ltd 13,032 Retail Portfolio Holdings (RF) Ltd

Mdantsane City Mdantsane (EC) 511,372,000 35,999 Vukile Property Fund Rebosis REIT 14,205

Hobart Grove Johannesburg 364,500,000 11,556 SIFOROX (Pty) Ltd Sable Holdings 31,543

Fairbridge Mall Fairbridge Mall Cape Town 260,360,000 23,924 Shoprite Ltd 10,883 (Pty) Ltd One Property Alberton Mall Ekurhuleni 260,317,606 17,006 Holdings, Emira Redefine REIT 15,308 Property Fund

Source: RCA, JLL Office Office transaction values by province, 2016-2020, rand billion Source: RCA, JLL Office transaction activity in 2019 volumes perspective, the Western R692.9 million, with an average capital experienced a notable decline in total Cape leads the charts when it comes value per sqm of R33,375. This is office investment value and volumes, to average capital value per sqm, almost triple the average sqm value with year-on-year contractions of 23% albeit marginally, due to a 30.2% year- for Gauteng, indicating higher building Office transaction GLA by province, 2016-2020, sqm thousand and 12.3% respectively. Total value in on-year decline in Gauteng’s capital quality finishes within prime locations office transactions was recorded at value per square metre. For 2019, the longer term leases and strong R7.6 billion for 2019, with 50 deals Western Cape has an average office covenants. having taken place (nine fewer than capital value per sqm of R13,040. 2018). The largest recorded individual office The same downward trend continues transaction for 2019 was Identity This is in part due to multiple new into 2020, with dampened transaction Property’s purchase of The Campus developments coming to market values and fewer concluded deals from Dimension Data. The deal was Source: RCA, JLL simultaneously, placing pressure when compared to the equivalent valued at R1.3 billion, while the on an already over-supplied office 2019 January-to-April period. During average capital value per square metre market. This is supported by the GLA the first four months of 2020, four for the asset amounted to R20,745. Average office value per sqm by province, 2016-2020, rand thousand growth results, showing increases office transactions collectively valued from 425.3 thousand sqm in 2018 to at R441.6 million took place. Other notable transactions for the 631.1 thousand sqm in 2019. 2019 FY included Cape Town’s Grand This indicates that although the It is worth noting that 2019 saw fewer Central, Liberty Centre and Metlife average transaction involved larger portfolio sales than in 2018. With that Centre. Spear REIT’s purchase of properties, deal values were notably said, one notable portfolio sale Liberty Centre from Liberty Properties lower. This can be seen in the occurred in 2019, involving Inani Ltd and Liberty Two Degree REIT, sold depression of average office capital Property Holdings (buyer) and Emira for R370 million, with an average value per sqm, which declined by Property Fund (seller). The portfolio capital value per sqm of R20,281 and 10.2% in 2019, averaging R10,988. included two office assets, Lincoln a quoted yield of 9.30%. The top five Wood Office Park (Johannesburg) and office transactions by asset value are While Gauteng continues to dominate Menlyn Square Office Park (Pretoria). highlighted in the adjacent table. the office sector from a value and The portfolio was sold for Source: RCA, JLL Office average value /sqm, rand thousand

2019 experienced a notable “decline in total office investment value and volumes, with Source: RCA, JLL year-on-year contractions of Office transaction volumes by province, 2016-2020, number 23% and 12.3% respectively.”

Source: RCA, JLL

Top five office transactions by value

Property Market Price (R) Size (sqm) Buyer Seller R/sqm Identity Property Dimension Data The Campus Johannesburg 1,300,000,000 62,665 20,745 Fund Facilities (Pty) Ltd Lincoln Wood Office Park & Johannesburg Inani Property Emira Property 692,949,502 20,762 33,375 Menlyn Square & Pretoria Holdings Fund Office Park

Dalopix Grand Central Cape Town 510,000,000 33,615 Pty Ltd (Mark Rebosis REIT 15,172 Stillerman)

Liberty Centre Liberty Two Degree Cape Town 370,000,000 18,244 Spear REIT 20,281 Cape Town REIT

Sandton Treeway Metlife Centre Cape Town 315,200,000 28,710 MMI Holdings Ltd 10,979 Centre (Pty) Ltd

Source: RCA, JLL Industrial The Industrial sector space remains to 462.6 thousand sqm by the end of with relatively low average capital Industrial transaction values by province, 2016-2020, rand billion strong, with sector-leading year-on- 2019. value per sqm of R6,483. The industrial year capital growth backed by low portfolio achieved an acquisition yield vacancy rates. There is now a growing This is mainly attributed to growth in of 9.30%. demand for warehouse and the number of deals (9.7%) that took distribution space due to the place during 2019, as well as the The second sale included a Gauteng significant growth in online retail sales discount benefits associated with Industrial Portfolio sold to Mbako from a relatively low base in South larger transactions. Average capital Property Fund by Vukile Property Fund Africa. values per sqm for 2019 weakened by for R621.4 million. The total portfolio 10.8% to R8,736. GLA amounted to 80,658 sqm, with an Source: RCA, JLL E-commerce is expected to strengthen average capital value of R7,705 per sqm. as consumer preferences and Over the first four months of 2020, 4 The portfolio comprised of seven behaviours change, with increased industrial transactions, collectively industrial properties located in market penetration as a result of more valued R557.9 million have taken Johannesburg and Pretoria³. Industrial transaction GLA by province, 2016-2020, sqm thousand accessible and affordable place. Equivalent comparisons (i.e. technologies. January to April) reveal that The largest deal for 2020 is still pending transaction values for 2020 to date and is therefore not included in the Additionally, movement restrictions fall short of those recorded in 2019 by table and charts. Equites Property and new social distancing norms 68%. Fund is set to invest R2.1bn for 50.1% implemented in response to the stake in a JV with Shoprite Checkers. Covid-19 pandemic, will see more Similar to 2019, Gauteng remains the As part of the arrangement Shoprite people persuing online shopping dominant destination for industrial will transfer the Shoprite Centurion alternatives. Accordingly, we anticipate transactions, holding 74% of the Campus (170,000 sqm), retail driven warehousing and R841.9 million sold to date. Two Distribution Centre (102,000 sqm) and Source: RCA, JLL distribution space demand to expand mentionable portfolio sales took place development bulk of 40,000 sqm in over the short-to-medium term. over the 2019/20 period. The first sale Brackenfell to the JV for a 49.9% sake included the Khula Sizwe Industrial in the JV. The JV will then acquire the This is supported by the investment Portfolio, valued at R914 million². Cilmor Distribution Centre (130,000 Average industrial value per sqm, 2016-2020, rand thousand trends recorded over the 2019/20 The transaction was part of a larger sqm) in Brackenfell for R1.2bn. All the period. Total transactional value for R2.7 billion deal between Khula Sizwe deals are subject to Shoprite Checkers industrial asset classes during 2019 Property Holdings (buyer) and leases of 20 years (with three 10-year amounted to R3.8 billion, R0.7 billion Barloworld Limited (seller). The renewal options). The initial yield for down from 2018. Total transaction industrial portion of the portfolio sale the leased transactions is 7.5% and the GLA more than doubled (year-on-year) amounted to a GLA of 140,995 sqm, leases will escalate at 5% p.a.

2 Portfolio has not been disaggregated by province. Data has been aggregated by sector only, with locations undisclosed. The portfolio has therefore not been disaggregated into the provincial analysis. This must be kept in mind when reading this document, as discrepencies in totals will occur. 3 Centurion Samrand ; Houghton 1 West Street; Kempton Park Spartan Warehouse; Midrand Allandale Industrial Park; Midrand Ulwazi Building; Pretoria Rosslyn Warehouse; Sandton Linbro 7 on Mastiff Business Park Source: RCA, JLL Average value /sqm, rand thousand

Source: RCA, JLL

Industrial transaction volume by province, 2016-2020, number

Source: RCA, JLL

Top 5 Industrial transactions by value

Property Market Price (R) Size (sqm) Buyer Seller R/sqm

Khula Sizwe Khula Sizwe Industrial Non-disclosed 914,000,000 140,995 Property Barloworld Ltd 6,482 Portfolio Holdings (RF) Ltd Gauteng Johannesburg Mbako Property Vukile Property The Industrial sector Industrial 621,445,805 80,658 7,705 & Pretoria Fund Fund Portfolio “space remains strong, 20 Pendoring St Brits 267,040,933 17,780 Bayer Property Monsanto Co 15,019 with sector-leading Firewings Prop Johannesburg Fire Wings Prop Synergy Prop Inv 21 Industrial 207,000,000 11,154 18,558 (Wynberg) 21 (Pty) Ltd (Pty) Ltd year-on-year capital Portfolio Diageo Shree Property United National growth backed by Khangela Durban 153,000,000 14,000 Holdings (Pty) 10,929 Breweries (Pty) Ltd Brewery Ltd low vacancy rates. Source: RCA, JLL ” Contact us

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