Logistics will be a part of the rebuild of the economic recovery Written by Steven Brown, CEO of Fortress REIT Limited.
Covid-19 has rapidly accelerated the huge growth potential of South Africa’s logistics real estate sector. The shift to ecommerce driven by the lockdown has allowed both existing retailers as well as smaller ecommerce players to gear up the scale of operations that had previously eluded the sector.
Ecommerce is bucking the trend in a lacklustre economy and the logistics property sector offers investors a lifeline in an otherwise challenged market and points to the growth opportunities inherent in meeting change with innovation.
The rapid coming of age of ecommerce in South Africa has increased focus on supply chain while, Covid-19 has highlighted the importance of warehousing and the strategic imperative of having enough stock on hand. Even after lockdown, trade wars and other mounting global tensions are likely to sustain the importance of storage and supply infrastructure, if building trends in Eastern Europe are anything to go by.
By referencing our experience, logistics is the best growth opportunity – here’s why:
1. Despite a subdued economy, Fortress is sustaining a low single digit vacancy rate across our R10 billion logistics portfolio.
2. Our signature logistics boxes are being built at the same cost as four years ago, which means we can provide our tenants with competitive rentals, similar to what we were offering a few years ago.
3. We currently have a pipeline of over one million square meters of logistics real estate in our secure parks which are zoned, serviced and ready to go.
4. Logistics assets currently accounts for a third of our R30 billion real estate portfolio. We will continue to invest R1 billion a year in new logistics assets for the next five years. We forecast that by 2025, logistics will account for two thirds of our portfolio at close to R20bn.
All of this points to the fact that demand for warehousing space will enable us to continue to develop our logistics pipeline, even though our other portfolios have seen a downturn.
We’ve implemented commercial innovations that include build-to-own constructions where our operational development teams develop logistics assets for clients at a lower price than customers can build it themselves. Alternately, rent-to-own leases allow our tenants to own 50% of the asset for the first few years, either continuing the relationship indefinitely or buying the rest of the asset as they require. Not being emotionally attached to assets means that innovation and change is informed and guided by client need. Shared lease-ownership arrangements have, for example, proved extremely resilient from an affordability and retention perspective amongst tenants with incomes disrupted by lock down.
We have not lost a single shared ownership tenant since lockdown - most have approached us to buy the other half of the building, given the demand for these assets and historically low interest rates. We’ve seen that tenants are prepared to pay more for quality developments that don’t require much maintenance, include good security and have flexibility that can be adapted to support their business. Our tenants are happy to pay a premium for leases including maintenance, insurance, new fire suppression systems and other onsite services and utilities, freeing them to concentrate on their core business activities.
Building this kind of quality logistics infrastructure requires capital. Fortress has the risk capital and access to funding to optimise the right land with the right infrastructure, developing innovative and sought-after boxes at the cutting edge of ecommerce and supply chain competitiveness.
As South Africa’s leading developer of logistics and warehouse infrastructure with a defensive rural retail portfolio, Fortress is seeing the kind of innovative growth in response to disruption that is likely to continue after lockdown as industries adapt to the broad range of opportunities that this new world reality presents.