Archives for June 2024

South Africa’s office sector recovering with increasing demand for space in some nodes

June 20, 2024 by Denise

As the return to the office continues to gain momentum, demand for office space is increasing, and vacancies are declining with an improvement in property fundamentals.

Real estate investment trusts (Reits) who recently published their results point to the recovery of the sector with demand for space exceeding limited supply especially in certain Cape Town nodes, with rental growth reported in some instances.

SA REIT Association CEO, Joanne Solomon commented: “Some of our members with exposure to offices are cautiously optimistic about the sector. Vacancies are falling though negative reversions still persist within certain portfolios.”

“In many global markets [South Africa included], many workers continue to return to the office. Amenity-rich and quality buildings in key locations continue to see improved property fundamentals, demand for space and slight growth in rentals.”

“Flight to quality is driving demand for prime offices as tenants see value and opportunities to upgrade from secondary buildings or locations,” said Solomon.

According to the Sapoa Office Vacancy Report for the first quarter of 2024, national vacancies reduced slightly from 16.7% in 2022 to 14.7%, but rentals declined 6.2% year-on-year after accounting for inflation.

Cape Town offices recorded the lowest office vacancies of 6.8% – the lowest rate recorded since 2009. Nationwide, nearly 60% of prime office buildings were fully let compared to 42% recorded at the beginning of the Covid-19 pandemic.

“The reduction in office vacancies indicates an improvement in demand for offices – assuming the decrease is not attributed to disposals or conversions of office space to residential for example,” said Liliane Barnard, CEO & Portfolio Manager at Metope Investment Managers.

Barnard said the decline in rentals reflects ongoing pressure on rental income from the office sector, adding that property valuations remain under pressure.

“The outlook for the office sector is cautiously positive, and a recovery in the South African economy will result in declining rentals turning positive. Though reversions have been negative – this rate of decline is slowing which suggests a potential levelling out as demand picks up – in the Western Cape, this is already happening with rental growth experienced in some locations,” said Barnard.

Growthpoint Properties said across its portfolio, vacancies are reducing, and though rentals have been stagnant over the past few years, growth in rentals is now evident in the coastal regions.

“Vacancies seem to have peaked – arrears are back under control, and we are seeing more demand from tenants inland, while our coastal properties are relatively well let,” said Paul Kollenberg, Growthpoint Properties Head of Asset Management: Office.

Delta Property Fund, the specialist sovereign-underpinned property fund renewed 55 leases and signed 69 new leases for the financial year ended 29 February. Of the 55 renewals, 24 related to sovereign tenants with the balance being to the private sector with average lease terms of 28 months. On new leases, only two related to sovereign tenants with the rest being the private sector.

“Various interventions such as having a dedicated team of leasing specialists, discounted rentals, intensified marketing campaigns and broker engagements with attractive incentives have resulted in vacancy reductions and tenant retention while minimising operating expenses,” said Tumelo Applegreen, Senior Asset Manager at Delta Property Fund.

Applegreen said due to these interventions, post year-end, Delta conclude 15 new leases to date for the 2025 financial year.

Growthpoint Properties offers incentives on certain buildings, with deals tailored to suit individual tenant requirements. The group’s strategy is to reduce office exposure to smaller buildings in nodes that are not seeing demand, as well as sell non-core assets for conversion to residential or other uses.

Delta which continues to sell non-core assets, transferred three properties during the 2024 financial year, with a further three transferred post year-end, and another four in the process of being transferred.

“We are still finding buyers with appetite for our assets – our mandate is to sell at market value or higher which implies a prolonged and difficult negotiation process to close a deal,” said Applegreen.

Barnard said taking a long-term view and believing the economic fortunes will improve bodes well for the recovery of the office sector. Location will be key – meaning offices close to transport hubs as well as prime buildings or offices with green features such as back-up power and water, electric vehicle charging stations and bicycle racks for example, will experience high demand.

“The sector may be worth investing in for long-term gains if economic conditions improve and rental declines stabilise. However, in the short-term, the sector may continue to face challenges due to economic uncertainties and shifts in work patterns,” said Barnard.

Stor-Age delivers robust operating and financial performance for FY24

June 18, 2024 by BLKRSTR

JSE REIT Stor-Age, South Africa’s leading and largest self storage property fund, continued its track record of consistent earnings growth delivering an excellent set of trading results for the year ended 31 March 2024. During the period the company continued executing its strategic growth strategy, adding a further 12 properties to the portfolio. The Group’s performance continues to demonstrate the strength of its market-leading platform and its specialist sector skills and experience across both South Africa and the UK.

Highlights

Dividend and returns: Final dividend of 56.81 cents declared, with a total return of 13.3% (distribution and net tangible asset value growth per share)
Financial performance: Rental income up 14.8%, occupancy up 10 700m² and net investment property value up 8.8% to R11.3 billion
Portfolio growth: Added 12 properties, representing 72 500m² GLA, with the total portfolio, including developments, now exceeding 650 000m² GLA
Strategic partnerships: Entered third-party management agreement with Hines post year end, expanding managed properties to 23
Balance sheet management: Successful debt auction raised R500 million below price guidance post year end, with a loan-to-value ratio of 31.4% and 85% of net debt subject to interest rate hedging at year end
Environmental sustainability: Expanded solar PV roll-out, investing R42 million during the year and reducing carbon footprint by 19%
Future outlook: Confident in business model’s resilience, forecasting distributable income per share of 122 to 126 cents for FY25

Stor-Age CEO Gavin Lucas comments, “We are pleased with our robust performance in FY24, driven by gains in occupancy, rental rates and strategic expansions. While SA demonstrated exceptional growth, the UK performance was steady and resilient, after three incredibly strong years. Our excellent strategic, financial and operational position in both markets remains intact. Looking ahead, we continue to focus on growth opportunities while maintaining a conservative capital structure.”

Since Stor-Age listed on the JSE in 2015, the property portfolio has grown from 24 properties to 103, and the value of the portfolio, including properties managed in JV partnerships, has increased from R1.3 billion to R17.3 billion2.

The company has continued its focus on driving an increase in both rental income and occupancy across the portfolio. Total occupancy across both markets increased by 10 700m2 during the year, while rental income grew by 14.8%.

In South Africa, building on the strong performance in FY23, same-store rental income increased by 12.7% year-on-year and occupancy in the portfolio grew by 8 700m2 compared to the prior year.

In the UK, despite a transitioning macro environment with high interest rates and inflationary pressures, the company’s trading performance remained resilient. Average rental rates increased by 4.7% and while the average occupancy over the period was 1.6% lower, occupancy at year end was up 2 000m2.

Stor-Age made excellent strategic progress opening or acquiring 12 trading properties (SA 4; UK 8), adding 72 500m2 GLA on full fit-out. In South Africa this includes properties in Bryanston and Morningside in Johannesburg, and in Paarden Eiland and Pinelands in Cape Town. In the UK, the company concluded the acquisition of the four-store Easistore portfolio in the south east of England, and completed the developments of properties in Bath, Heathrow, West Bromwich and Canterbury. Each of these properties were acquired or developed in joint venture (JV) partnerships with leading institutional and private equity partners.

Comments Lucas, “We continue to work with our existing JV partners, and engage with new partners, to consider opportunities for future acquisition, development and redevelopment. This allows us to allocate capital across a number of opportunities, and to mitigate the financial impact of the lease-up. We remain confident that the long-term return profile on invested capital through our JV partnerships will be value-accretive as new developments lease up to mature occupancy levels.”

Another key focus has been the growth of the company’s third-party management offering. Currently a total of 23 properties are operating on this platform, 17 of which are in the UK. This includes a three-property portfolio in Kent, in the southeast of England, which was acquired post year end by Hines, a privately owned global real estate investment, development and management firm with a presence in 30 countries and $94.6 billion of assets under management. Comments Lucas, “The management contract concluded with Hines in May this year further supports the high regard with which Storage King is regarded in the UK self storage market, reaffirming the high quality and sophistication of our operating platform.” This third-party offering allows the company to generate additional revenue with minimal capital investment by leveraging its operating infrastructure.

Stor-Age has continued its focus on environmental sustainability, further expanding its solar PV roll-out strategy across the South African and UK portfolios. To date, the company has invested R63.5 million into renewable energy, generating over 6.0 million kWh of solar power. Currently, 58% of the portfolio has solar capacity, helping it achieve a 19% reduction in its total scope 1, 2 and 3 carbon footprint during the year.

Stor-Age is forecasting its distributable income per share to be approximately 122 to 126 cents for FY25.

The share closed on Friday at R13.50.

¹ As at 31 May 2024. Includes properties held in JVs and managed by the group
² As at 31 March 2024

Monthly Chart Book May 2024

June 10, 2024 by BLKRSTR

Vukile outperforms, delivering robust results and growth opportunities

June 7, 2024 by BLKRSTR

Vukile Property Fund (JSE: VKE), the consumer-focused retail real estate investment trust (REIT), outperformed its upper-end full-year market guidance, delivering a remarkable 10.5% increase in dividend per share (DPS) to 124.2cps for the year to 30 March 2024 and 6.7% growth in its funds from operations (FFO) to 154.2cps.

Laurence Rapp, CEO of Vukile Property Fund, comments, “This year of outperformance is a testament to our clear strategic direction and unwavering focus on execution which positions us exceptionally well to capitalise on opportunities. This sterling set of results is underscored by Vukile’s astute asset selection, sustained strong operational results, and balance sheet strength supported by robust credit metrics and deep liquidity. Our South African portfolio is delivering positive numbers, and our Spanish assets are achieving market-leading performance. Vukile is a resoundingly strong, sustainable business.”

Coming off the back of an exceptionally strong year, Vukile confirmed it is on track to deliver further growth for shareholders for the year ending 31 March 2025, with expected FFO per share growth between 2% and 4% and DPS growth between 4% and 6%.

Vukile’s portfolio of retail property assets valued at R40.2 billion is strategically diversified across South Africa and Spain through its 99.5% held Madrid-listed subsidiary Castellana Properties Socimi. A significant 61% of Vukile’s assets are in Spain, and 50% of its earnings are generated in Euros.

Primarily located in townships and rural areas, Vukile’s defensive domestic portfolio of high-quality shopping centres achieved like-for-like retail net operating income growth of 5.4%. Retail property valuations increased by 5.8% on a like-for-like basis. The demand for space in Vukile’s shopping centres remains exceptionally strong. Active leasing reduced already low retail portfolio vacancies to a mere 1.9%.

Rental growth continued its rebound with positive reversions of 2.9%, with 87.0% of leases signed producing stable or growing rentals. Tenant retention increased to 94% of gross lettable area. The portfolio achieved trading density growth of 2.4%, led by township and rural shopping centres and those in the Gauteng, Western Cape and North West provinces.

Rapp notes, “Amid a persistently challenging market in South Africa, Vukile’s portfolio, categorised by nodal dominance and needs-based retail, has truly come into its own. Our sharp focus on resilient, community-anchored assets has proven to be a winning formula and yielded excellent results, even in a sluggish local economy.”

Environmental, social and governance (ESG) priorities are imperative for Vukile. In South Africa, Vukile made significant strides in executing its environmental commitment through its solar power programme. It began the financial year with an installed rooftop PV capacity of 14.9 MWp and expanded that capacity to 21.6 MWp, and a further 11MWp is under construction for completion in FY25.

The Castellana portfolio, which is 95% let to top-tier international and national retail tenants, achieved a 1.4% increase in portfolio value and a fantastic 11% normalised net operating income growth, with record footfalls and sales. Visitors were up 5.5% and tenant sales grew by 6.4%. With a mere 1.1% vacancy, the portfolio has the highest occupancy rate in its market. It achieved a very impressive 9.7% rental growth on leases signed.

In Spain, Castellana received EPRA gold awards for its sustainability and ﬁnancial indicator reporting for the second and third consecutive year, respectively. It achieved 4 out of 5 stars on the Global Real Estate Sustainability Benchmark (GRESB) rating, and 100% of its properties are currently BREEAM-certified and aligned with the EU taxonomy for sustainable activities.

During the year, Castellana acquired a further 3% shareholding in Lar España, increasing its stake to 28.7% to take advantage of the significant discount to net tangible assets reflected in the share price. Lar España reported strong results, with performance measures surpassing industry standards. The significant appreciation in Lar España’s share price confirms it is an exceptional and highly profitable investment for Castellana. At current levels, the shares have gained over €40 million in value relative to the entry purchase price, which translates to a gain of some 30%, while the Lar España share price still reflects a considerable discount.

Vukile has a demonstrable record of identifying mispriced assets, capitalising on opportunities, and building thriving businesses, and is consistently exploring deals in line with its capital allocation and growth strategy. Post year-end, Vukile exited its full stake in Fairvest, which has been an excellent investment for the company. It also successfully took transfer of a 50% share in Mall of Mthatha (formerly BT Ngebs City shopping centre), for R400 million, which Vukile will upgrade with its partners Flanagan & Gerard Property Group.

“Vukile is steadfast in its commitment to disciplined capital allocation. We’ll only pursue opportunities that offer clear strategic alignment and financial upside,” says Rapp.

It has explored various domestic opportunities; however, in most cases, the pricing doesn’t make economic sense. In Europe, Vukile is seeing attractively priced assets, signalling a unique window of opportunity to deploy capital into high-quality assets at attractive prices. While withdrawing its non-binding indicative proposal to the Board of Capital & Regional, it is still actively pursuing various prospects, including entering discussions to acquire direct retail assets in Spain and in neighbouring Portugal.

Vukile has a strong balance sheet, and during the year, GCR reaffirmed Vukile’s corporate long-term credit rating of AA(ZA), with a stable outlook. Only 4.4% of debt is due to expire in FY25. Vukile secured R1.1 billion of funding through an innovative green loan and sustainability-linked loan post year-end. Its interest cover ratio is 2.3 times, and LTV reduced to 40.7%. Vukile has a powerful liquidity position with significant available cash balances of R2.4 billion and undrawn debt facilities of R2.9 billion.

“We’re seeing a significant increase in deal flow in the sector. However, the biggest challenge the industry — and Vukile — faces is accessing capital at a cost that makes deals accretive. With our strong liquidity position, we are well positioned to execute our growth strategy and remain a consumer-focused retail real estate business,” explains Rapp.

Rapp concludes, “June 2024 marks Vukile’s 20th anniversary since first listing on the JSE. Today, it is well established as a 100% focused retail REIT with strong operational metrics, clear strategic direction and significant geographic diversification off which to launch its next phase of growth. We have consistently and significantly outperformed the SAPY index, and, as we move forward, Vukile remains committed to our scalable consumer-led model that creates value for all our stakeholders.”