Covid-19 Reveals The Cracks And Strengths In East Africa’s Property Market

East Africa's Property Market

By Gerhard Zeelie; Divisional Executive: Property Finance Africa: Nedbank CIB

As is to be expected, the arrival of Covid-19 in East Africa has had significant impacts on all economic sectors and industries, and property has certainly not been immune. However, while the negative economic consequences have been felt across all property sectors, some have been more immediately impacted than others, and while Covid-19 has revealed some of the cracks in a few of the sub-sectors, for others it could serve as an indicator of the way forward after the virus. 

Not unexpectedly, the region’s retail and hospitality property sub-sectors have been hit the hardest, and the most immediately, by Covid-19. More specifically by the responses in many countries, which have included various levels of social isolation, total residential and business lockdowns in some countries, the grounding of flights in and out of most regions, and the resulting collapse of tourism. Of course, the high costs related to running many property assets continue, particularly in the hotels and hospitality industries. But for most operators there is now a complete lack of income, so the impact on tenants, landlords and property owners is understandably severe. As with much of the rest of the world, the only areas where this impact has been less severely felt are businesses involved in the provision of essential services and products.  

Adding to the financial difficulties being experienced by the retail sector is the fact that online shopping is still not a significant component of the overall East African retail industry. There are two factors that contribute to this. The first is that the digital and logistics infrastructures required for effective online trading are either not in place, or are still very immature and largely inefficient. The second factor is that the large majority of people from East African countries still view visits to retail centres  and malls as far more than merely shopping. They are typically social and entertainment outings, often involving the whole family, and enabling widespread interaction with neighbours and friends. 

But while this social aspect of retail activity has meant that the Covid-19 lockdowns have bitten hard on shops and communities, it also points to the potential for a healthy, and relatively speedy recovery for the East African retail sector once Coronavirus fears are a thing of the past. 

Unfortunately, the same can’t necessarily be said for the commercial and industrial property sub-sectors in the region where, in many cases, the Covid-19 damage has been just as severe, but the post-Covid-19 recovery may take longer to materialise. That said, even in this sector, the negative impacts of the virus have been somewhat offset by the highly cooperative spirit that it has revealed amongst stakeholders in the sectors. While most commercial and industrial property lease agreements include exit clauses for these types of situations, there has been little obvious lease cancellation activity. Instead landlords and tenants are demonstrating an understanding that they are in this situation together and need to ‘share the short-term pain’ by finding mutually beneficial commercial solutions that will enable all parties to remain viable through the crisis, and regain commercial viability faster once it has passed. 

At a commercial level, the lockdowns in many countries have revealed to employers and employees just how effective remote working arrangements can be. Apart from the massive time savings of not having most of your workforce stuck in traffic for a few hours every day, the productivity levels of most staff are higher due to fewer in-office distractions. That said, many employees are also coming to realise how much they value the social interaction opportunities that the workplace creates. And so, it would appear that the nature and format of the office space may very well be transformed in the months and years following Covid-19. For some businesses, that may involve the downscaling of physical office space due to fewer full-time in-office employees. For others, the transformation may be more at an internal level, where existing spaces are transformed to create output-focused workspace hubs to accommodate far more fluid workforce needs. Either way, it is very likely that one of the significant impacts of Covid-19 will be a change in the way office space is utilised, and landlords would be well advised to prepare themselves to capitalise on this evolution or, at the very least, prevent it from negatively impacting their rental income in the years to come. 

From an investor perspective, while the strength of certain sectors in the face of Covid-19 may make them appear like attractive investment opportunities, the most prudent action that any prospective property investor can take right now is to wait. The crisis will end, but nobody knows when. Until then, and even for some time after it is over, accurate valuations, risk assessments and feasibility studies are near impossible. In fact, any property investment decision made at this time is tantamount to an equity investor attempting to time the markets. And we all know how dangerous that can be. 

In time, the strengths and weaknesses of the various property sectors in East Africa will be made abundantly clear. And as the collaborative efforts of stakeholders in these sectors begin to drive their sustainable recovery, the investment opportunities will become increasingly apparent. Until then, the best opportunity created by Covid-19 is that it is forcing potential investors to hold, so nobody is missing out. And the best investment response to that opportunity right now, is simply to wait. 

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