Water scarcity and commercial landlords’ evolving strategies

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SIMON BROWN: I am chatting with Keillen Ndlovu, an independent property analyst. Keillen, I always appreciate the time. Water is perhaps our new crisis. Dams are full, but the pipes are leaking. Property owners have water as a new challenge. In many ways it’s going to be harder perhaps than the Eskom electricity challenge, but it is a real and present danger for landlords.

KEILLEN NDLOVU: Yes, it’s been tough, but landlords are trying hard to adapt, given these challenges. As you mentioned, power was the main issue, it overshadowed the water challenges, but now there’s more focus on water.

As I speak, in my area we haven’t had water for two days, and all of my colleagues have had to be sent back home as there is no water in the office because of a pipe burst as well.

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SIMON BROWN: That’s just it. When the power goes I can carry on my laptop. When the water goes – I remember when I was at Standard Bank we all just got sent home. The entire Simmonds [Street] and Waterfall City, lost water what, 25 Jan to 5 Feb. But Attacq, the landlord there, their tenants weren’t affected. They’ve basically built capacity for that centre.

KEILLEN NDLOVU: Yes, it’s amazing what they have done. Looking at their portfolio, they’ve built over 80% of their portfolio. It has five-plus days of backup water. So it was quite beneficial, given that time that hotels were operating; offices operated as well as shopping centres.

SIMON BROWN: What does it cost for something like that? It can’t be cheap. That must be a huge cost for Attacq.

KEILLEN NDLOVU: Yes, it is. It is for all the landlords as well. I guess you have to invest in different kinds of cost structures, but you have to invest in JoJo tanks or Roto tanks.

Look at Attacq’s portfolio, which is even more advanced.

They have sectional steel water tanks that need pumps as well to pump the water – and you’re doing that on your own.

It’s not getting any rebates from the City Council, even if rates and taxes are rising.

Read: Attacq’s 1.3m-litre backup buffers impact of Joburg water crisis

SIMON BROWN: And it is just the case. I mean, the person wandering through the mall is unaware of the benefit.

But landlords are taking different routes. For example, Vukile is getting almost a quarter from boreholes, Growthpoint going with boreholes, Fortress doing low water. There are a lot of different ways where they can try to tackle the challenge.

KEILLEN NDLOVU: Yes, that’s right. So it’s basically rainwater harvesting as well. They get water coming from their rainfall, as well as groundwater, as mentioned, in our boreholes. So landlords are being more efficient and smarter. Not only that, but they’re also investing in systems where you can detect leaks quite early, and some of the systems where you use much less water.

So that is helping to make our buildings greener, despite the challenge that we face.

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SIMON BROWN: That’s just it. This is not a passing fad. If you think back to Eskom, we started with the solar panels because we needed the power. Then it becomes like hang on, this is actually green, this is actually in many ways cheaper.

In South Africa, it’s not infrastructure; we’re also a drought country. This actually becomes operationally important.

KEILLEN NDLOVU: Yes, that’s right, that’s right. Look at the Western Cape, for example. It’s a region performing well, but prone to droughts. You’ve seen Hyprop. Even though the Western Cape has lower water losses or leakages, Hyprop is looking to invest in backup water for three to five days in their Western Cape portfolio – which is probably more in line with what landlords are doing in Gauteng and other provinces, where they’re aiming for at least a minimum two-day backup water supply to as much as five days with Attacq, as I mentioned.

SIMON BROWN: It’s office, it’s also going to be retail. Is it as important with logistics? Or perhaps with logistics it’s maybe a smaller scale, perhaps, that’s needed?

KEILLEN NDLOVU: For logistics probably less so. Storage another sector as well, depending on the tenant, but some tenants will have their own backup water facilities, and backup power as well as part of their operations.

But where it counts most is that where you have got foot traffic, you’ve got employees in the buildings as well – and places like your government offices, licensing departments.

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Talking about that, you find that if the system is down or there’s no water, that delays things. That’s where you want water when you’re providing services to people; they need to have coffee, they need to have water, and use of the bathrooms as well. If there’s no water they have to close down the bathrooms.

SIMON BROWN: Yes, that’s it. It’s a health issue. When I lose power at home, it’s an inconvenience. When I lose water at home, it’s way more than just that. Some are different.

Fairvest, which is very much rural and township retail landlord, now produces around 15% of its of its own water. Are tenants in smaller towns, perhaps, even more exposed because of smaller municipalities and more risks of failure in those municipalities?

KEILLEN NDLOVU: Yes, that’s a trend that’s picking up. What you’re seeing is that with most of the landlords using grey water – and now we’re hearing talks of water recycling as well – you have to recycle your own water in order to keep your malls and operations open. So that’s the trend that we’re seeing in the sector, especially water recycling.

SIMON BROWN: That’s a great point. You alluded to it a moment ago. We mentioned Fortress – it’s low-water toilets. I know we’ve got them at the mall next to me here in Rosebank as well. That saves.

There are different ways they can do it. It can be boreholes, it can be recycling, it can be low-water toilets, it can be JoJo tanks. There are many different ways that a landlord can tackle the challenge.

Read:
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KEILLEN NDLOVU: Yes, that’s right, that’s right. But remember also it depends – you just need the water to come through at some point.

There was an interesting step done by Zodidi Meyiswa from Salga, which is if you look at the amount of water losses across most municipalities, almost half of the purified water gets lost through the system through leakages, water-pipe bursts, theft, as well as non-payment. That’s revenue to help fix these problems that is supposed to go to the municipalities and is being lost.

SIMON BROWN: And Simon, you’ve mentioned already the Western Cape, Hyprop and Spear – which is exclusively in the Western Cape – are still spending on supply, and there one would imagine that the infrastructure is probably in a better state. But there as mentioned, it’s the drought that’s the challenge, and also just being proactive.

KEILLEN NDLOVU: Yes, that’s right. If you look at water losses, the Western Cape has got the least amount; they lose about 27% of the water. And then you’ve got provinces like the Free State, where almost 61% of the water gets lost.

So the Western Cape still does well, but people are still investing in backup water – not just because of these water losses, but for drought and other unexpected events.

Read:
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SIMON BROWN: Who ultimately pays for this? Is this going to be higher operating costs? Does it go through to tenants? Does it maybe lower distributions for Reit investors?

KEILLEN NDLOVU: Mostly the landlord will pay for it, and then they’ll pass some of that on to the tenant. If you don’t do that, you may lose out on tenants because of your marketing. Before now you’d say, ‘I’ve got backup power’, and now you say, ‘I’ve got backup power and I’ve got backup water as well’. So that’s how you bring in tenants relative to your competitors.

SIMON BROWN: So it becomes a sales point to say, ‘I’ve got backup, I’ve got backup water’. It becomes more important.

Interestingly, this money is being spent, and for you and I and the listener, it’s big numbers.

But then I look at distributions that have been coming through from the Reit sector generally over the last year. We are seeing strong distributions.

The sector is in a healthy space. You cover it, you look at it, you have been doing this for what, a decade or more, two decades? I didn’t want to quite give your age away, Keillen.

KEILLEN NDLOVU: [Chuckles] Okay.

SIMON BROWN: But the sector’s looking strongly.

KEILLEN NDLOVU: Yes, it is. There are a number of factors. One, they’ve been able to raise –the equity market has been strong, as well as the debt capital markets; they’ve been able to raise cheaper debt.

It helps in an environment where rates have been going up, and we’ve seen in the office market as well vacancies coming down. It helps to boost the sector. Retail is probably now starting to slow down, but there has actually been a good performance from most of the shopping centres.

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And the listed sector owns some of the premium shopping centres, so they’re able to command better rents.

And then the industrial sector, which is mainly logistics, has done quite well. Vacancies are less than 2% in the industrial sector, for example. So there are a number of factors helping that, despite the challenges and a slower economy. If you look at the growth, it’s 6-7% for the sector in this environment.

SIMON BROWN: Yes, it’s been great for investors for a couple of years.

We’ll leave it there. Keillen Ndlovu, independent property analyst, always appreciate the time.

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