Making industrial space more flexible
Q&A with Rael Levitt: Making industrial space more flexible
Rael Levitt first worked in commercial real estate when he was 17 in 1988. In the early 1990s his Levee Group sold distressed assets, including Freddie Steenkamp and politician Allan Boesak's Foundation of Peace and Justice.
After the delisting of Seeff Holdings in 1998, Levitt completed a management buy out, renamed the company Auction Alliance and became its CEO. The company opened in several cities, including Pretoria, Johannesburg, Port Elizabeth, Durban, Nelspruit, Windhoek and Dubai.
In 2006 Auction Alliance sold a 25.1% stake to Amabubesi Investments and in 2010 a 31% stake to Transaction Capital.
Levitt's life was thrown into turmoil in 2012 when he had a dispute with Wendy Appelbaum over an auction he ran in 2011. He was accused of using ghost bidders.
Levitt stepped down as CEO of Auction Alliance, which folded, and as a board member of the national auction association. He returned to property in 2017, when he launched lnospace, with former Investec banker Nicholas van Eeden.
lnospace converts buildings, often located outside Johannesburg and Cape Town's premier business nodes, into flexible office business parks designed to appeal to small and medium-sized enterprises. Its parks include studios, storage and traditional warehouse space.
Why did you return to commercial property after the fall of Auction Alliance?
My father was a Jewish lawyer working in the northern suburbs of Cape Town when it was a real backwater. He did very well and helped me get into auctioneering when I was very young. I actually used my bar mitzvah money to start my first business. My first auction was in 1992 in the Cape Flats. I found I really liked working with property.
The demise of Auction Alliance was a horrible experience for me. I lost my business which I had grown to be the biggest of its kind in SA employing more than 300 people. People think I was bankrupted but I wasn't. The business had actually been running very well so it's unfortunate that the dispute with Wendy Appelbaum led to its end. I was subsequently vindicated and never paid any penalties.
What's nice is that about 30 businesses were opened by former Auction Alliance staff, in the fallout.
I had a lot of therapy and admit I handled the media fallout badly. I got off the dance floor. I went and got an MBA from UCLA and a master's degree in Singapore. I then wanted to come back and start a new business in real estate. lnospace is that business and I believe it will disrupt industrial property, the most resilient property class in SA right now.
Have you been surprised by the fast growth of lnospace?
It has been a rapid climb. We started with one park in Epping lndustria in Cape Town and shortly there after launched the Powder Mill in Ndabeni further north. We now own 25 parks and have assets under value of Rl.5bn. We also own a park in Glasgow, Scotland, and while our focus is in SA, we do see expansion opportunities in the UK. I believe that lnospace could easily treble in size in the next five years.
Are there any SA property companies which are competing with you directly in industrial parks?
There are private players who rent industrial space but none of them are replicating our model. I was inspired by Sirius Real Estate, a JSE-listed owner of German business parks. I'd say Stenprop in the UK does something slightly similar.
There is definitely demand right now from small to medium enterprises (SMEs) and smaller businesses which need our space. In the wake of Covid-19 some retailers have also closed certain stores and now they need toput their stock somewhere. We can offer that to them.
We also have tenants such as Veldskoen Shoes at our building called Island Works in Paarden Eiland. Interestingly, Veldskoen started with using 2018 and tripled their space usage over the past three years.
Several of our tenants have grown their space requirements including Cape Bio Farms, an indoor farm, grew by five times and Cool Bananas, an online fruit delivery business, grew by a similar amount.
Is your leasing strategy unusual compared with other SA property companies?
One would think it's hard to get large companies to sign five and 10-year leases while the economy battles and with many people preferring to work from home.
While the demand for short-term leasing has been growing for a while, the coronavirus pandemic prompted us to incorporate our flexible rental model of small spaces into bigger and bigger commercial leases.
Our leases typically include generous lease breaks including a month-to-month option.
Going forward, I think we will see landlords offering greater lease flexibility and free services at their buildings. The monthly rental option has been a big hit at lnospace. We literally signed more leases in June and July than we have in the year preceding that.
Have your tenants battled through the pandemic and passed that pain on to you? Have you had many tenant failures in 2020?
Yes. We've had a few liquidations, business rescues and closures. That said, we have filled up these spaces quickly and prefer to churn these out. So the pain has been passed to us but our internal sales and marketing channels have alleviated the unexpected vacancy. Our vacancy levels thus remain extremely low at less than 5% of the portfolio.
lnospace has shrugged off the rise in rental arrears that many property companies have experienced after the Covid-19 lockdowns. We've learnt that tenants will reward the extra services. And more importantly, flexible lease terms are something that many companies will now pay a premium for.