With a history going back more than 60 years Octodec Investments has been an investor in the Pretoria and Joburg CBDs for a long time. It is one of the JSE’s longest listed property companies, having joined the bourse back in 1990.
Octodec is majority controlled and headed by the Wapnick family, and the group owns other notable commercial properties such as Killarney Mall in Houghton, as well as Sharon’s Place and Waverley Plaza in the capital city. The group has a market cap of just over R2 billion and a Gauteng-focused portfolio of residential blocks as well as office, retail, industrial and ‘specialised’ properties.
On this latest episode of The Property Pod, we chat to Octodec’s managing director Jeffrey Wapnick, who gives us insight on what the group has been up to and how the Gauteng CBDs of Joburg and Pretoria are performing.
Highlights of his interview appear below. You can also listen to the full podcast above or download it from iono, Spotify or Apple Podcasts.
“[Octodec has] 250 buildings measuring about 1.5 billion square metres at a current valuation of about R11 billion. Together these generate a gross rental – excluding any recoveries – of about R1.4/1.5 billion annually.”
“We diversify in terms of the [property] sectors that we play in. So the sectors that we do play in [include] the residential – which is probably our biggest sector relative to the others – of about 30%. We have a retail [portfolio], and these are generally what I call high-street shops, of about 23%. We have our shopping centres, and there are a number of them, mainly convenience centres as opposed to the traditional malls, of about 12%.
“Offices comprise 16% and that 16% can be roughly split into where we have 8% occupied by government. The rest is not traditional offices; it’s more commercial offices. There, we would focus on people like small entrepreneurs, driving schools, hairdressers, tailors, dressmakers, those kinds of tenants, which surprisingly in the tough times –I’m sure we’ll get into to this later – have survived quite well, although rentals have been reset.”
“It’s important to note that we don’t have the typical offices, which [sector] is well publicised now, whereby we see corporates moving out of the office blocks either partially or wholly, as well as a dramatic rental reduction brought about, I think, [and] primarily started by the advent of Covid.”
“And then we have 7% industrial – probably one of our standouts – or becoming a standout sector.”
“And then [there is] specialised properties… Smaller properties that didn’t fit into any of the above, buildings such as places of worship, places of education. There are some motor dealerships. And this [the specialised property segment] is where the hotels are sitting. This gives a very rough synopsis of Octodec.”
“We were probably one of the first [real-estate investment trusts, or Reits] to be listed on the stock exchange; but that was a listing date. Prior to this date, prior to 1990, a lot of those portfolios were in private syndicates.”
“Why I’m telling you this is because I think it gives people an important insight. We know these properties, we know them well. We believe in ‘location, location, location’, and for many of these properties that location hasn’t changed…”
“From a management perspective, we know what’s happening with these properties, we know how they can perform – and they’re all close to our buildings or close to our offices. So the management team that I work with really understands the ins and outs of these buildings and the various dynamics.”
“The Wapnick family has just under 40%. We put this portfolio together starting in, probably – I’m guessing now – in the mid-sixties.”
“[Since] 1985, I’ve been full-time in the business.”
With CBD residential being the biggest component of the Octodec portfolio, tell us how is this sector of the market doing, especially with Covid restrictions and protocols now being done away with?
“We all thought that residential was bulletproof. Well, Covid spared nobody and residential vacancies increased dramatically. One of the big influencing factors there [has been] students. We all know that the universities closed and these students were all sent home and, for those universities that could do it, the method of tuition was online.”
“And so of our 30% [residential properties] we know roughly one third of them are occupied by students. So our residential portfolio immediately lost 30% of its occupants. In addition to that, there were periods of hard lockdown and this new work-from-home came about, and a lot of people found it easier, certainly cheaper, to leave their flats and go and work from home [outside urban areas].
“[During the peak of Covid] in Octodec’s biggest asset, The Fields in Pretoria, we experienced a vacancy level of just under 80% – so 20% of it was occupied and 80% of it was unoccupied.”
“I’m pleased to report that we racked our brains [and] we added some initiatives within that building and we’re now down to a 5% to 6% vacancy level…”
“The return of a lot of students into the other more traditional type of flats has reduced our [residential sector] vacancy [which is] currently trending at about 8% to 9%.”
“It must also be mentioned that in Economics 101, I think, rental is determined by supply and demand, and the demand returned because there were vacancies, there was virtually an unlimited supply. And so our rentals were reset.
“They [rentals] did take a knock. We haven’t had a rental increase for the last almost three years. But our vacancies are coming back and – I think this is a trend when I talk to a lot of my colleagues who are also playing in this space, flat rentals – [there’s] quite a dramatic improvement in occupancies.”
In Octodec’s latest results media statement from May, the group comments about ‘renewed interest and energy in the CBDs’. When you talk of renewed interest and energy what do you mean? Where is interest coming from client-wise, and why?
“Well, I think South Africa has many problems. But let’s not forget about the need for accommodation. I think that the provision of reasonable quality accommodation is something that Octodec provides.”
“Yes, the Joburg CBD has got its problems. Currently crime and grime are quite severe there, but still a big number of people require accommodation. I think it’s as simple as that.”
“I just want to go back to the rental, if I may, the rates per unit. I think that one of the problems that we have over there is that, while we are improving our vacancies – I did mention to you rentals haven’t increased – we don’t anticipate an immediate increase in rentals because [the thinking is] affordability will start playing an important part here.
“People don’t have that much spare cash available to finance additional rentals. We have petrol prices where they are, interest rates where they are, or interest rates on the rise. So that does put a bit of a damper on the total recovery.”
Following the retailers…
“But moving towards something else, which I think you touched on, I don’t think property people are really the smart people; the smart people are the retailers. So if a retailer says to you [it’s] happy to do a decent deal with you in a particular location, I think as property people we need to listen to that very carefully, because that retailer will have to put a big investment down.”
“If a retailer is putting a big investment down, well, then [it] probably wants a long-term lease. And so, when you find one of the bigger retailers doing exactly that, you must know that there is still hope; they have all their cash tills very closely being monitored, and they know where they do trade and where they don’t.”
“And the nature of this relationship, unfortunately, is if they’re not doing great then they’re brutal. They will just close the store. But if they stay you must know that they appear to be making money there.”
“In that respect, I can tell you this just about the Pretoria CBD. We’ve now commenced the building of a 4 000 square metre renewal of a Shoprite/Checkers. We were very happy with the deal and that gives me comfort that there is still plenty of trade within the CBD.”
“The bulk of our properties are in Pretoria. There is a difference between Johannesburg and Pretoria. I think certainly in the residential space the competition is far more fierce.”
“We’ve just come out of a period where one of our competitors put I think it’s about 2 500 units into the market. When that happens, obviously that must have an enormous impact, compounded by Covid. [We] discussed the impact of Covid. That was tough for us, but [we] didn’t panic because we’ve lived with this before.”
“Previously there was a [residential] portfolio that was eventually owned by AFHCO. AFHCO was then bought by SA Corporate [Real Estate Fund] and the bulk of those properties were built at a frenetic pace… Once they started unloading these big numbers we felt the pain.”
“But I think that the demand [is] for residential accommodation close to work, and I think that’s important, the close-to-work story.”
“With the cost of transport it’s going to escalate, I think. But I don’t have a crystal ball. It’s putting pressure on a lot of people, the price… The point I want to make is I think our competitors are getting close, anyway, to getting rid of this excess demand. So market equilibrium is coming closer.”
Are Octodec’s investments in the Pretoria CBD paying off best for the company at the moment?
“Well, I think the recovery there has been fantastic. It must be remembered that Pretoria is an academic city. You have places like Tuks, you’ve Unisa, a number of technical [institutions], so a big student population in Pretoria.
“That’s one of the advantages that Pretoria has over Johannesburg, and that’s why I’m very grateful the bulk of our residential sits in Pretoria as opposed to Johannesburg.”
“Octodec is very fortunate in that [most of the] shops [in our portfolio are not] in malls. We also don’t have lifts within these shopping centres, so our power requirement, I think, is on average a lot less than may be the case elsewhere.
“But, having said that, I think we are installing our last generator in Woodmead Value Mart, another high-performing asset of Octodec. It should happen within the next month or so. But it’s a problem when a tenant can’t trade – just another lashing that some of our retailers are currently feeling.”