The Great Rebuild – Fortress confident in accelerated logistics sector

CEO of listed property fund, Fortress REIT Limited, Steven Brown, believes that Covid -19 has rapidly accelerated the huge growth potential of South Africa’s logistics real estate sector.

The shift to eCommerce driven by the lockdown has allowed both existing retailers as well as smaller eCommerce players to gear up the scale of operations that had previously eluded the sector” he says.

According to Brown, eCommerce is bucking the trend in a lacklustre economy and the logistics property sector offers investors a lifeline in an otherwise challenged market, pointing to growth opportunities inherent in meeting change with innovation.

South Africa’s coming of age in eCommerce has increased the focus on supply chain while Covid-19 has highlighted the importance of warehousing and the strategic imperative of having enough stock on hand. Even after lockdown, trade wars and other mounting global tensions are likely to sustain the importance of storage and supply infrastructure, if building trends in Eastern Europe are anything to go by.

By referencing our experience, logistics is the best growth
” says Brown.

Despite a subdued economy, Fortress is sustaining a low
single digit vacancy rate across the company’s R10 billion logistics portfolio.
Our signature logistics boxes are being built at the same cost as four
years ago, which means we can provide our tenants with competitive rentals
similar to what we were offering a few years ago

Brown says Fortress has a pipeline of over one million
square meters of logistics real estate in their secure parks which are zoned,
serviced and ready to go. The fund’s logistics assets currently account for a
third of its R30 billion real estate portfolio and the company plans to
continue to invest R1 billion a year in new logistics assets for the next five
years. “I predict that by 2025, logistics will account for two thirds of our
portfolio at close to R20 billion
” he says.

All of this points to the demand for warehousing space which
will enable Fortress to continue to develop their logistics pipeline, even
though the company’s other portfolios have seen a downturn.

We have implemented commercial innovations that include
build-to-own constructions where our operational development teams develop
logistics assets for clients at a lower price than customers can build it
” says Brown.

Alternately, rent-to-own leases allow our tenants to own 50%
of the asset for the first few years, either continuing the relationship
indefinitely or buying the rest of the asset as they require. Not being
emotionally attached to assets means that innovation and change is informed and
guided by client need. Shared lease-ownership arrangements have, for example,
proved extremely resilient from an affordability and retention perspective
amongst tenants with incomes disrupted by lockdown

Brown says that Fortress has not lost a single shared
ownership tenant since lockdown. Most of their tenants have approached them to
buy the other half of the building, given the demand for these assets and
historically low interest rates.

We have seen that tenants are prepared
to pay more for quality developments that don’t require much maintenance,
include good security and have flexibility that can be adapted to support their
business. Our tenants are happy to pay a premium for leases including
maintenance, insurance, pressured water supply and other onsite services and
utilities, freeing them to concentrate on their core business activities

Building this kind of quality logistics infrastructure
requires capital. Fortress has the risk capital and access to funding to
optimise the right land with the right infrastructure, developing innovative
and sought-after boxes at the cutting edge of ecommerce and supply chain

Fortress is seeing the kind of innovative growth in
response to disruption that is likely to continue after lockdown as industries adapt
to the broad range of opportunities that this new world reality presents

he concludes.

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