Octodec Investments has a history dating back more than 60 years and has long invested in the CBDs of Pretoria and Johannesburg. It joined the bourse in 1990, making it one of the oldest property companies to be listed on the JSE.
The Wapnick family, which has majority control over Octodec, also owns notable commercial properties like the Killarney Mall in Houghton, Sharon’s Place, and Waverley Plaza in the nation’s capital. The group’s portfolio, which is concentrated in Gauteng and includes residential blocks along with office, retail, industrial, and “specialized” properties, has a market cap of just over R2 billion.
In the most recent episode of The Property Pod, Jeffrey Wapnick, managing director of Octodec, speaks with us about the company’s recent activities and the health of the Gauteng CBDs in Pretoria and Joburg.
Here are some of his interview’s highlights. You can download the podcast from iono, Spotify, or Apple Podcasts, or you can listen to the entire episode above.
Highlights
“At a current estimated value of about R11 billion, Octodec has 250 buildings totaling about 1.5 billion square meters. Together, they produce a gross rental of roughly R1.4/1.5 billion per year, excluding any recoveries.
In terms of the [property] sectors we participate in, we diversify. Residential, which is probably our biggest sector in comparison to the others, accounts for about 30% of the sectors that we do play in. About 23 percent of our portfolio is in the retail sector; these are typically high-street stores. There are many shopping centers here; most of them are convenience stores rather than the traditional malls, which make up about 12% of the total.
“Offices make up 16 percent of the population, and of that, 8 percent are occupied by the government. The remainder is more commercial office space rather than traditional offices. There, we would concentrate on tenants like small business owners, driving schools, hairdressers, tailors, and dressmakers who, surprisingly, have survived the hard times quite well, despite having had their rents reset.
It’s important to note that we don’t have the typical offices, which [sector] is currently well publicized, where we see corporates leaving office buildings entirely or partially and a dramatic rental reduction brought about, I believe, [and] primarily started by the introduction of Covid.
“And then we have 7 percent industrial, which is probably one of our standout sectors or is on the verge of becoming one.”
And finally, specialized properties… smaller properties that didn’t fit into any of the aforementioned categories, as well as structures like places of worship and schools. There are some auto sales outlets. And the hotels are located in this market (the specialized property segment). This provides a very basic summary of Octodec.
“But that was a listing date; we were probably one of the first [real estate investment trusts, or Reits] to be listed on the stock exchange. A large portion of those portfolios were in private syndicates prior to this date, or prior to 1990.
“The reason I’m telling you this is because I believe it offers people a crucial perspective. These characteristics are ones we are familiar with. Since many of these properties still have their original locations, we believe in the adage “location, location, location.”
“From a management standpoint, we are aware of what is happening with these properties, we are aware of their potential, and they are all close to our buildings or offices. Therefore, the management team I work with is very knowledgeable about these buildings’ inner workings and various dynamics.
With just under 40%, the Wapnick family is in the lead. We started putting this portfolio together sometime in the middle of the 1960s, I’m guessing.
I have worked in the industry full-time since 1985.
Tell us how this market sector is doing since CBD residential makes up the majority of Octodec’s portfolio, especially now that Covid restrictions and protocols have been eliminated.
“We all believed that residential was impregnable. Well, Covid spared no one, and the number of vacant homes rose sharply. Students have been one of the major influencing factors there. The universities closed, the students were all sent home, and for the universities that could, the tuition was paid online, as we all know.
We know that roughly one-third of the residential properties that make up our 30% share are occupied by students. So 30% of the residents in our residential portfolio left right away. In addition, there were times of strict lockdown, a new work-from-home option emerged, and many people discovered that leaving their apartments and working from home (outside of cities) was simpler and undoubtedly more affordable.
Buy-to-let landlords are suffering greatly as a result of the tenant lockdown.
“We experienced a vacancy level of just under 80% in Octodec’s largest asset, The Fields in Pretoria, at the height of Covid, meaning that 20% of it was occupied and 80% of it was unoccupied.”
I’m happy to report that after much deliberation and the addition of some initiatives inside that building, the vacancy rate has dropped to between 5 and 6 percent.
The number of students moving back into other, more conventional types of flats has decreased the vacancy rate in our residential sector, which is now trending at 8 to 9 percent.
It should be noted that according to Economics 101, supply and demand determine rental rates, and since there were vacancies and a practically limitless supply, demand increased. Our rentals were then reset.
They (rentals) did suffer a setback. For the past nearly three years, there hasn’t been a rental increase. However, there has been a noticeable improvement in occupancy, and our vacancies are returning. In fact, I believe this is a trend when I speak to many of my colleagues who are also active in the flat rental market.
Octodec mentions “renewed interest and energy in the CBDs” in its most recent results media statement from May. What do you mean when you mention a resurgence of interest and vigor? Where and why are clients showing interest?
“Well, I believe South Africa has a lot of issues. Don’t ignore the requirement for accommodations, though. I believe that one service that Octodec offers is the provision of accommodations of a reasonable caliber.
“Yes, there are issues with the CBD in Johannesburg. There is currently a lot of crime and squalor there, but many people still need housing. That’s how simple I believe it to be.
“Permit me to return to the rental and specifically to the rates per unit. One of the issues we have over there, in my opinion, is that even though we are reducing our vacancies — as I mentioned earlier, rental rates haven’t gone up — we don’t expect a sudden rise in rent because we believe affordability will start to matter more in this area.
“People don’t have that much extra money to pay for extra rentals. We have current gasoline costs, current interest rates, or rising interest rates. Therefore, that somewhat dampens the overall recovery.
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Keeping up with the retailers
“However, moving on to something else, which I believe you touched on, I don’t think real estate agents are really the smart people; I believe retailers are. Therefore, as property professionals, I believe we need to listen very carefully if a retailer says to you that it is “happy to do a decent deal with you in a particular location,” as that retailer will have to make a significant investment.
“Well, if a retailer makes a significant investment, [it] probably wants a long-term lease. Because they closely monitor all of their cash registers and are aware of where they trade and where they don’t, you can still have hope when you see one of the larger retailers doing just that.
“Unfortunately, the nature of this relationship is that if things aren’t going well, they become brutal. They’ll simply close the business. However, if they remain, you should be aware that they seem to be profitable there.
“In that regard, I can only share what I know about the CBD of Pretoria. We have now started construction on a new Shoprite/Checkers that will be 4,000 square meters. We were delighted with the transaction, and this reassures me that trade in the CBD is still thriving.
a fierce rivalry
“Pretoria is where the majority of our properties are. Pretoria and Johannesburg differ from one another. I believe there is much more competition in the residential market.
“We recently came out of a period where one of our rivals released, I believe, 2,500 units onto the market. When that occurs, it must undoubtedly have a significant effect, which Covid will amplify. [We] talked about Covid’s effects. Although it was difficult for us, we were able to handle it before, so we didn’t panic.
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“In the past, a [residential] portfolio existed, and AFHCO eventually acquired it. The majority of those properties were constructed quickly after SA Corporate [Real Estate Fund] acquired AFHCO. We felt the pain as soon as they began dumping these large numbers.
But I believe there is a demand for housing close to places of employment, and I believe the close-to-work story is significant.
“I believe that the cost of transportation will cause it to rise. I don’t, however, have a crystal ball. Many people are under pressure because of the price… I want to emphasize that I believe our competitors are already on the verge of eliminating this excess demand. As a result, market equilibrium is approaching.
Are Octodec’s investments in the Pretoria CBD currently yielding the best returns for the business?
Well, I must say that I am very impressed with the recovery there. Pretoria must be considered an academic city. There is a sizable student population in Pretoria thanks to institutions like Tuks, Unisa, and several technical [institutions].
That’s one of the advantages Pretoria has over Johannesburg, and I’m thankful that Pretoria has the majority of our residential sits rather than Johannesburg.
shedding loads
Octodec is extremely lucky in that the majority of the stores in our portfolio are not found in shopping centers. We also don’t have elevators in these shopping centers, so I believe that overall, we use a lot less power than we might elsewhere.
“Having said that, I believe we are installing our final generator at Woodmead Value Mart, another Octodec asset with a high performance level. Within the upcoming month or so, it ought to occur. But it’s a problem when a tenant is unable to conduct business; it’s just another blow to some of our retailers right now.
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