Local property companies should use tough economic times to strengthen themselves for the future, says research and advisory group, Grant Thornton.
Real estate firms are no strangers to cyclical disruption, especially the likes of which the local market is experiencing at the moment; but to prosper in the future, the industry must enhance its capabilities to manage new types of disruptions.
Lee-Anne Bac, leader of real estate and construction at Grant Thornton, believes South African property companies cannot rest on their laurels in difficult conditions.
“The property sector has seen exceptional growth and expansion over the past ten years, but in keeping with the more recent deterioration of general economic circumstances, it is operating at rather more depressed levels at the moment.”
Bac said that property companies cannot afford to just wait for the cycle to turn. “There are various new types of disruptions in the sector – and these are not limited to companies operating beyond South Africa’s borders. The question is whether local companies are ready for these,” she said.
According to Grant Thornton’s recently published report entitled “The future of growth and the real estate industry: Great opportunities require strong foundations”, one of the biggest factors weighing on the long-term viability of property companies is the changing profile of investors.
The report said that real estate investors today are increasingly global, sophisticated and interested in a quicker return on investment (ROI).
“These international investors are currently looking to selected developed market property investments as a safe harbour, while there is volatility in emerging markets. However, this will not always be the case and companies need to ensure they are ready to take advantage of changes in global sentiment,” said Bac.
oOpportunity and opportunism go hand in hand with risk, calling for real estate organisations to evaluate where they are on the risk (and opportunity) curve.
“What happens, if due to acceleration in urbanisation, the global market switches its focus to emerging markets?”
Technology is named as another major factor in the making of strong property companies: ‘The tradition-bound culture of real estate is becoming more flexible, adaptive and technology-savvy.
“Organisations must drive innovation and partner with technology experts to create smart building infrastructures and connected systems to manage their properties better,” Grant Thornton said.
“Boosting ROI means managing properties effectively, efficiently and with greater insights into how to improve value. Today’s leading real estate companies are driving better returns through technology that improves their buildings’ energy use and captures valuable data such as foot traffic.”
Bac said this is an area where South African companies have been particularly poor to date: “The local sector has been very slow in embracing technology, and it needs to drastically improve on this if our companies want to ensure they can compete effectively with their global peers.”
The impact of technology is also reflected in the changing nature of investors, the report stated.
‘There is a growing interest from private equity funds and real estate investment trusts (REITs), which comprise investors with an expectation that technology is – or will be – leveraged for maximum ROI. As the profile of the real estate owner shifts, new owners are more technologically savvy and creative on deal structure.’
Bac said only the companies who are most bold in addressing their challenges will perform optimally.
“These technological changes often require significant investment and a break from traditional structures, but the long-term benefits to the business far outweighs the short- to medium-term cost.”
‘The future of real estate companies is intertwined with technological advances. In particular, data will determine how to manage key priorities – from how real estate companies handle their portfolios to predicting tenant demand,’ stated the report.
According to Bac technology can also help to unlock value by addressing the structure of the current property market.
The report cites: ‘The real estate market is opaque and fragmented. Transactions are costly, with multiple intermediaries.’
“Here is a clear opportunity for a market disruptor to remove some of the many intermediaries and improve efficiency and transparency,” said Bac.