Analysing REITs: Evaluating geopolitical, SA Elections, and Socioeconomic Risks

As late rentals increasingly plague South African property managers due to rising geopolitical and socioeconomic disruption, it is unlikely that South African Real Estate Investment Trusts (REITs) and companies in the Real Estate and Construction industries are not grappling with these risks.

Here, Farhana Hassim (Director), Sumaiyah Asmaljee (Senior Manager), and Gershwin Gabriels (Manager) from BDO South Africa’s Risk Advisory Services team delve into how REITs are addressing these risks and whether they view them as opportunities.

In the tumultuous landscape of 2024, escalating international conflicts and global economic instability have significantly contributed to the ongoing uncertainty in interest rate levels as central banks continue to battle inflation. Consequently, the risk of tenant default on rent payments looms large as retail and residential segments in South Africa experience pressures on revenue and disposable income respectively.

With this backdrop, it is highly unlikely that South African REITs, along with Real Estate and Construction companies have overlooked geopolitical and socioeconomic risks on their risk registers. These risks can however be considered as opportunities when factoring in risk multipliers and mitigations.

National Elections in South Africa

South Africa celebrates 30 years of democracy in 2024 with its seventh National Democratic Election. Naivety would tell us that this year’s elections will be like any other. Conversely, 29 May 2024 promises to be a historic day in which the 400 seats in the National Assembly will be contested at an unprecedented level. Beyond the record number of political parties and candidates contesting the elections, we have seen an innovative and vigorous use of political prowess to achieve their ambitions. This has been evidenced in the multi-party agreement between opposition parties seeking the decline of the ruling party’s representation in the Provincial Legislature, and the recent ruling by the Constitutional Court to bar former president Jacob Zuma’s candidacy for parliament.

As we approach election day, we can be reasonably sure that political tactics, emotions, and points of debate will manifest in public demonstrations of intimidation, disagreement, or disdain. Longer term, the possibility of a coalition government means increased risk of poor or protracted regulatory decision-making and policy implementation, particularly in areas of land reform, zoning and development. This in turn adversely affects property market dynamics and investor sentiment.

Immediate Risks for REITs During and After the Election Period

1. Primary exposure: Social unrest, negative currency fluctuations, and potential policy shifts pose direct threats to REITs, impacting property values and revenue streams.

2. Secondary exposure: Disruptions in the supply chain (e.g. import delays) due to unrest can compound operational challenges and cost increases for REITs

3. Risk multiplier effects: Geopolitical and socioeconomic risks can exacerbate existing operational vulnerabilities, necessitating a re-evaluation of business continuity plans and strategic partnerships.

For example, with the recent introduction of load shedding stages up to stage 16, what would be the disruption to safety and continuity security should riots and severe load shedding schedules occur concurrently? How would this impact retail tenants’ inability to honour lease payments and turnover rental levels?

The pending election provides an opportunity for South African REITs to fortify their risk management frameworks and importantly, foster resilience among their workforce by creating awareness on the political landscape in South Africa, the spreading of fake news in the media (including social media), and effective social grievance remedy channels.

Global Electoral Landscape

We have seen the growth and opportunities in Africa and Eastern Europe attract increased investment by South African REITs who are looking to benefit from diversified portfolios and enhanced yields. This boom has required a need for due diligence at the outset against these lucrative investment opportunities. However, in a constantly changing risk landscape, mere due diligence does not fool-proof an investment and REITs need to constantly engage emerging risks in order to proactively protect their investments in these markets.

64 countries, including several in Africa and Eastern Europe like Namibia, Botswana, Rwanda, Ghana, Algeria, Poland and Russia, are slated for National Elections in 2024. REITs investing in these regions must navigate diverse risks including:

1. Security concerns: Political unrest may threaten asset security and disrupt business continuity.

2. Regulatory uncertainties: Policy shifts by new governments can impact investment climates.

3. Investor sentiment: Economic volatility may deter investment, affecting financial performance and yields.

Proactive risk mitigation strategies are essential for REITs operating in these markets to safeguard their investments and sustain growth. Inability to do so could result in negative financial performance as a result of increased costs of doing business in these foreign countries. These may come about as a result of compliance costs due to changing regulations, difficulty in accessing capital due to investor concerns, and cost of mitigating property damage and general business disruption.

REITs with insight into the risk mitigation strategies of their operations in other countries holding National Elections in 2024 have the opportunity to implement those strategies in their South African operations, and vice versa. In certain African countries particularly, inherent risks include overall political instability, the state of the country’s infrastructure and utilities, and technological risks.

Final Considerations

The adage "nothing changes by staying the same" rings true for the countries holding elections in 2024. Change brings risks, but, if managed effectively, presents opportunities. REITs must embrace this juncture to reassess their risk mitigation strategies and capitalize on emerging opportunities for growth.

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