Covid-19 is not your everyday crisis where predictions could be made and policies crafted to deal with its effects. Commercial real estate sector, as one of the key players, will need to adjust to survive the next phase of growth. The after effects of Covid-19 pandemic on the real estate sector, have already started spilling over.
Early this month, Daily Monitor reported that the Trade Minister Amelia Kyambadde met with city landlords and tenants embroiled in a battle over rent arrears. The latter sought rent waivers. However, credit being a major driver in real estate development, landlords say they have loans to service hence the demand for rent.
According to Bank of Uganda’s State of the Economy Quarterly Report for March, the impact of Covid-19 on non-performing loans also referred to as a loan that is in default or close to being in default, in building, construction and real estate sector in general, rose to a double fold from 3 per cent in September 2019 to 6 per cent in March 2020.
The wave on commercial real estate is still unfolding in many ways. Last month, Tuskys supermarket, a big retail supermarket chain, closed shop at Ham Towers in Makerere, Kampala, signalling bad times. This is only one reported case; there are unreported cases of retailers and companies folding business.
According to a Knight Frank Kampala market performance report, which reviewed the performance of the office, residential, retail, valuations, and industrial property sectors from January to June, against the country’s economic performance over the same period, Covid-19 pandemic had a huge impact on the Kampala property market, as businesses emerge out of lockdown and re-occupy offices and shopping malls for trade again. Some of the highlights from the report indicate that office space registered a 4 per cent year on year decline in occupancy in the first quarter of 2020, however, retail rental remained stable.
Judy Rugasira, the managing director at Knight Frank, while expounding on the findings, notes that impact of Covid-19 created a low demand leading to decline in office occupancy rates in the real estate market.
A huge impact
During a recent webinar on the impact of Covid-19 on real estate and mortgage organised by Housing Finance, Rugasira says the real estate sector performed well last year with a tight demand side as more office space was occupied. She notes that the year began at a promising note with a lot of inquiries on the office sector, until the pandemic hit and everything came to a halt. “The retail sector was moving faster last year with more international retailers coming onto the market, who mainly dominated shopping malls, but has suffered a drop of 48 per cent,” she says.
Consumers who drive day-to–day cash flow for retailers in arcades and shopping malls were affected as well. This has left retailers with fewer options forcing some to shift to digital marketing to maintain their legion of customers. Rugasira says with no cash flow, retailers in the city centre are beginning to downsize operations and space, and property developers also stopped construction immediately.
She adds that with people working from home and offices going digital, there is increasing shrinkage in demand for office space, with some companies such as banks giving up space to other tenants. In the residential sector, Rugasira says viewings and purchases have come to a halt while promising occupants have pulled out.
Changes post Covid-19
That said, the industry will not come to a standstill. There are several changes the industry will experience as it recovers from the nose dive.
“With social distancing taking the lead hence no more hi-5s, and hugging, there will be several behavioral changes that are coming our way,” Rugasira shares. She adds that people will be very mindful of their personal space, something that was not common before seeing that employers had gone from partitioned offices to larger rooms to boost team spirit. As such, wider doorways and corridors will be adopted.
Banks are also going digital to cater for the needs of people who even pre-Covid-19 were less thrilled by the idea of long queues. “I just lost a bank client who downsized on occupancy space and more of this is coming as the shrinkage of space uptake continues.”
There will be fewer employees coming to offices. “Other work places will adopt the shift method. For example, at my office, we were 55 people coming to work everyday but today, there is no more than 15 as we now work in shifts.”
The shopping experience is also bound to change. “For several mothers, it also worked as therapy shopping as a family but that cannot be anymore with the various measures in place.” The Saturday routine visit to the market will be replaced by online shopping apps that are on the rise lately and people who have turned errands into business.
Even cinemas may not be used as was before. Netflix is indeed the new cinema.
On the side of the environment, Rugasira says air conditioning filters are getting upgraded in environments where air conditioning is a must for better air quality. “In other places, windows are going to be opened for more fresh air.”
In homes, we have seen they have become gyms, board rooms, and classes, among others. “Therefore, several adaptations and re-configurations are going to happen moving forward. For example, people are going to start looking for more spacious homes and ask for more greenery rather than concrete. More to that, with technology being a medium by which several things being done in homes, cabling is going to become a must-have in the future.”
Banks will also need to look for ways to make homes more affordable. “That is because many that are renting are in arrears, something they would never have had to worry about had they been home owners.”
In offices, rather than print sign-in, face recognition is the future. “Motion doors will also come in handy to minimise contact, not to mention paperless offices, and virtual meetings” Nonetheless, Rugasira maintains that office space, however small, will remain in place for mentorship and corroboration.
Investors are going to become more cautious while investing in real estate. “With the shift, key demand drivers are going to shape future investments, especially in hospitality, retail and commercial office space as they are going to narrow down how much they invest considering online shopping is taking over,” Moses Lutalo, the managing director of Broll Uganda Ltd, shares.
For those financiers that will sink their moneys in real estate, Lutalo says they will require more equity into the projects they are funding from a debt perspective just to manage risks, going forward.
Turnover rent system
Also, turnover rents is likely to be more acceptable to tenants than before so that the risk of non-optimal trading by the retailers is shared between landlords and tenants. One of the places where this trend is already working is at the Acacia Mall. “Rent payable is a function dependant on how much turnover a retail is realising the renter earns. That way, the risk is spread on both sides. This of course calls for sharing of books of accounts with the landlord which many tenants try to avoid but might be one of the ways to ensure sustainability of tenure and finance,” shares Lutalo, whose property company has a branch at Acacia Mall.
Lutalo also reminds us that the real estate industry is a cyclic business whose health is largely dependent on economic cycles. “With projected double digit reduction in property values post Covid-9, Bank of Uganda announced a cap on the loan-to-value ratio ratio at 85 per cent. This is in a bid to mitigate the inherent risks associated with nonperforming loan.”
Lutalo explains that with this change, the central bank regulator has sent a cautionary note to commercial banks. “Therefore, in the future, people looking for mortgages will have to go through a rigorous and stringent appraisal process before the loans are approved. This will in turn have a great impact on the effective demand of real estate projects, especially housing (demand side) but also new project pipeline (supply side).”
As such, real estate investment value chain players must be extra cautious as they advise both their investors and space user clients because the effects will be real and felt by all.
Adopting new survival strategy
With the future uncertain as government continues with restraints, business will likely move at a much slower pace than it was before.
Allan Mugisha, the managing partner at S-M Cathan Property Limited, offers key strategies for commercial real estate owners to keep afloat.
He says the first move by landlords in the sector is to try as much as possible and keep their tenants because there is a likelihood that fewer new tenants will be renting space in the next coming months.
To achieve this, landlords need to renegotiate rental agreements, defer arrears and where necessary, reduce on rental rates as well as give benefits to tenants that are taking up more space.
Another strategy is cutting costs. “Reduce on the costs of operation of your building by reviewing power and water consumption rates, review cleaning and security costs, and maintenance. Besides that, try to make sure tenants don’t break or vandalise fixtures in the building which may lead to repair cost,” Mugisha says.
In terms of size, he says some buildings had minimum size standards in terms of square metres they offered to tenants. This, however, may need re-adjustment to smaller sizes to accommodate more tenants.
What about payment? Mugisha advises: “Landlords should agree they don’t have that luxury of tenants paying many months ahead. They should consider smaller periods for advance payment, unlike in the past where tenants paid four or six months ahead.”