Reits should risk-proof operations against geopolitical and social turmoil

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.

The risk of tenant default on rent payments thus looms large as retail and residential segments in SA experience pressures on revenue and disposable income, respectively.

With this backdrop, it is highly unlikely that SA real estate investment trusts (Reits), along with real estate and construction companies, have overlooked geopolitical and socioeconomic risks on their registers. These risks can be considered as opportunities when factoring in risk multipliers and mitigations.

SA celebrates 30 years of democracy in 2024 with its seventh democratic elections. Naiveté would tell us that this year’s elections will be like any other. Conversely, May 29 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 seen in the multiparty agreement between opposition parties seeking the decline of the ruling party’s representation in the provincial legislatures, and the recent ruling by the Constitutional Court to bar former president Jacob Zuma’s candidacy for parliament.

Disruption

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. 

The election period and its aftermath bring forth immediate risks for Reits in the following categories:

• Primary exposure: social unrest, negative currency fluctuations and potential policy shifts pose direct threats to Reits, affecting property values and revenue streams.
• Secondary exposure: disruptions in the supply chain (for example import delays) due to unrest can compound operational challenges and cost increases for Reits.
• Risk multiplier effects: geopolitical and socioeconomic risks can worsen existing operational vulnerabilities, necessitating a re-evaluation of business continuity plans and strategic partnerships. Due to the recent introduction of possible 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 affect retail tenants’ inability to honour lease payments and turnover rental levels?

The elections provide an opportunity for Reits to fortify their risk management frameworks and foster resilience among their workforce by creating awareness on the political landscape in SA, the spreading of fake news in the media (including social media) and effective social grievance remedy channels.

The growth and opportunities in Africa and Eastern Europe attract increased investment by SA Reits that aim to benefit from diversified portfolios and enhanced yields. This boom has required due diligence at the outset. However, in a constantly changing risk landscape, mere due diligence does not foolproof an investment and Reits need to constantly engage emerging risks to proactively protect their investments in these markets.

Sixty-four countries, including several in Africa and Eastern Europe such as 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:

• Security concerns: political unrest may threaten asset security and disrupt business continuity.
• Regulatory uncertainties: policy shifts by new governments can affect investment climates.
• 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. An inability to do so could cause negative financial performance due to increased costs of doing business in these foreign countries.

Risk mitigation insights 

These may result from 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 elections in 2024 have the opportunity to implement those strategies in their SA operations, and vice versa. In certain African countries particularly, inherent risks include overall political instability and the state of the country’s infrastructure and utilities, as well as technological risks.

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

• Hassim is director, Asmaljee senior manager, and Gabriels manager at BDO SA’s Risk Advisory Services.