Solomon talks about measuring real (estate) impact

The global focus on corporate accountability will only gain more prominence in 2023 as we increasingly hold businesses responsible for the impact of their actions on society and the environment.

The good news is that there is a growing wave of businesses, and even entire economic sectors, holding themselves to higher ethical standards for their environmental, social and governance (ESG) impacts.

Take the real estate sector, which has historically and globally lacked focus on sustainability considerations. It is estimated that real estate now contributes almost 40% of the world’s carbon emissions.

But the tide is turning.

Successful property investment relies on local prosperity

Driving this is the very nature of commercial real estate itself. This long-term asset class invests predominantly in malls, office buildings, factories and distribution warehouses. These properties cannot be moved elsewhere. They are inextricably linked to their surroundings.

For investment properties to perform, they must be in thriving communities and environments. This has led to real estate becoming one of the most active, engaged and enthusiastic sectors striving to meet the needs of the present without compromising future requirements and ensuring the country’s sustainable future.

Developing human capital and saving non-renewable resources

As a significant employer, the property industry is reaping the advantages of skills and talent emerging from its investment in education, bursary, graduate and entrepreneur development programmes. SA’s real estate companies already see the financial benefits of renewable energy integrated with capital allocation decision-making. Local property companies are managing their water risks as water security grows increasingly tenuous and promoting safety, inclusion and well-being, which are becoming a top priority for their tenants.

Delivering better outcomes

The real challenge lies in ensuring that these well-intended actions lead to genuinely needed, measurable, comparable impacts.

Why is this important? When we work for, partner with, buy from and invest in companies with more significant positive impacts, we make our world a better place.

So, how can our property industry have the most significant impacts, consistently measure and compare them, and ensure they are aligned with real value?

Empowering sustainable decisions

Global sustainability disclosure frameworks are a starting point, but several address different sustainability elements. The result is inconsistent reporting and methodologies for sustainability disclosure and clumsy attempts at ticking global boxes that don’t always fit. For instance, an international decarbonisation disclosure framework won’t reflect that many major local municipalities don’t currently allow energy wheeling to take place or can take years to issue water-use licenses. Load shedding and our vast social needs also set us apart.

So, while critical global goals can only be achieved if we all work together, each country and economic sector has different sustainability risks and the capacity for different impacts.

Enhancing sustainability reporting

2022 saw two standout advancements in sustainability reporting. Internationally, the draft IFRS ISSB Standard became the global banner under which many disparate disclosure frameworks are starting to converge. Locally, the JSE Sustainability Disclosure Guidance referenced the global frameworks and standards in a single localised sustainability disclosure framework. Both help link global sustainability imperatives that transcend geographies and industries.

2023 will bring another welcome advancement. Industry leaders in sustainability reporting are compiling a guideline specifically for SA’s REIT (real estate investment trust) sector and its property peers – listed and unlisted, big and small.

Introducing hyper-relevant impact measurement

The SA REIT ESG framework guidance won’t duplicate other efforts but rather help local property businesses (and their stakeholders) navigate these frameworks. It will consider the big picture, the local operating environment and the real estate context. It aims to present a complete picture of property companies’ sustainability performance, establish an ESG performance baseline and track changes to enable you to make informed decisions about which businesses you support and invest in.

Importantly, it will help hold property companies accountable for their sustainability commitments.

Joanne Solomon is the Chief Executive Officer of the SA REIT Association. She holds a Bachelor in Economics and is a seasoned marketer with 24 years of experience, including working in one of the largest financial institutions in South Africa. Joanne currently serves on the boards of the Green Building Council and the Property Sector Charter Council.

Emira’s signs major deal with international contact centre at Newlands Terraces

Office occupancies in Cape Town and Durban could well be seeing an upswing – welcome news in markets that have suffered from rising vacancies in the wake of corporate downsizing and restructuring in the wake of the COVID-19 pandemic.

According to Ulana van Biljon, COO of Emira Property Fund (JSE: EMI), there has been an increase in enquiries, demand for and take-up of office space by business process outsourcing (BPO) call centres in both the Cape Town and Durban markets recently.

Emira has just concluded a deal worth approximately R44 million with CCI South Africa, the largest international contact centre in South Africa, for just over 4,300sqm of office space at Newlands Terraces in Cape Town.

Newlands is a mixed-use suburb situated at the foot of Table Mountain and is home to upmarket single residential homes, apartment buildings, and student accommodation for the University of Cape Town. It is well known for the Newlands Rugby and Cricket Grounds as well as Newlands Brewery. The location is ideal for CCI, which was looking for a large standalone office building in the southern suburbs of Cape Town.

Newlands Terrace is an A-grade, multi-storey office building located adjacent to the Newlands Rugby Stadium, with sweeping views over the suburb of Newlands and with the backdrop of Table Mountain from Devil’s Peak to Silvermine. As of 1 March 2023, CCI will be leasing 4,333.47sqm out of a total of 4,531sqm available and will take over the remaining area once existing tenants’ leases expire.

CCI will be using the premises as a BPO centre for an American airline and plans to provide a number of attractive workplace facilities for its employees. Emira will spend around R10 million on the building for CCI, including the upgrade and adaptation of the air conditioning to meet the client’s requirements.

“CCI is increasing its presence in the Western Cape due to the more stable economic environment in the Cape Town metropole. They are among several such businesses that have expressed growing interest in this market,” says Van Biljon.

The deal is good news for Emira, which will see increased occupancy percentages in its portfolio, and for the Newlands area.

“The finalisation of this lease agreement secures a stable income stream with a multi-national tenant for at least the next five years – this despite the fact that there have been some concerns about the now redundant Newlands Rugby Stadium neighbouring Newlands Terraces,” van Biljon notes. “The deal required a focused approach to demonstrate to CCI that the building could work for them and their clients. The Emira team and the broker went the extra mile to create mock-up spaces and visuals that showed what could be done with the space,” she adds.

The Newlands Terrace deal aligns with Emira’s strategy of providing great real estate – in this case a well-located, versatile office building that is able to adapt to meet the changing needs of the office user.

Emira Property Fund is a diversified, balanced REIT with a track record of delivering stability and sustainability through different cycles. It is invested in a mix of directly-held retail, office, industrial and residential assets, indirectly-held investments with specialist co-investors and has equity investments in grocery-anchored open-air convenience shopping centres in the USA.

Emira declares 52cps half-year dividend off robust portfolio structure, rental collections and liquidity

Emira Property Fund (JSE: EMI) reported a half-year dividend of 52 cents per share and distributable income of R333.7m for the six-month interim period to 31 December 2020.

Emira is invested in a quality, balanced portfolio of diverse office, retail, industrial and residential properties. It has 78 directly-held properties valued at R9.9bn in South Africa and equity investments in 10 grocery-anchored open-air convenience shopping centres in the USA. Its portfolio is diversified across property sectors and internationally in a combination of directly-held assets and co-investments with partners who are experts in their respective fields. The Emira portfolio is structured for adaptability to deliver stability and sustainability through different economic and property cycles.

Geoff Jennett, CEO of Emira Property Fund, comments, “In the context of the current uncertain and challenging operating environment, these results reflect the robustness of Emira’s business, portfolio and processes. A key feature of a REIT investment is its cash-backed income component and at Emira we believe that if we can reasonably pay dividends while still protecting our business’s longevity, we should. We are confident that our decision to pay an interim dividend, albeit at suitably conservative levels, is the right one for our shareholders.”

Emira also continued to look after the interests of its tenants, staff, service providers, portfolio of assets, co-investors, funders, communities, and environment. “It is our actions in all these areas that come together to form a sustainable business,” notes Jennett.

Continuing efforts to ensure as many of its tenants as possible survive the COVID-19 pandemic lockdowns’ adverse effects, Emira provided support to 363 tenants with a further R17.8m in permanent rental remissions during the six months. This relief supported some high-risk tenants including gyms, restaurants and entertainment venues. Emira expects to consider further rental concessions in the second half of its financial year, on a limited case-by-case basis.

During the six months from July to December 2020, the effects of the pandemic and its various lockdowns in South Africa continued to batter the local economy, business confidence and household spending placing massive pressure on all key property metrics.

While Emira’s overall direct South African portfolio vacancies edged up from 4.1% to 5.9%, they remained low relative to national averages. Emira’s only directly held residential property, The Bolton, increased its occupancy from 80.9% at the start of the period to 97.5% at the close.

Emira enjoyed a pleasing improvement in rental collections, with collections as a percentage of billings at 99% for the six months ended 31 December 2020. The collection of deferred rentals, in particular, was better than anticipated at 80%.

Emira achieved impressive tenant retention of 83% by gross lettable area (GLA), the largest renewal being the South African Local Government Association at Menlyn Corporate Park in Pretoria, for over 7,000sqm. In addition, it concluded some new leases during the period, the largest being iMvula Healthcare Logistics in 3,500sqm at 1 Medical Road in Johannesburg.

“Overall, the outlook remains challenging and uncertain with further increases in vacancies and reversions still ahead for the property sector. More than ever before, Emira is focusing on maintaining its occupancy levels by retaining existing tenants. Close tenant relationships promote the understanding and agility to deliver appropriate, good quality, well-priced space, which benefits tenant retention and attraction. The manner in which the Emira team has supported and collaborated with our tenants through the pandemic has strengthened relationships, positioning them well for the future, and I commend our people and partners for this achievement.”

As part of its strategic asset management, Emira has an ongoing capital recycling programme and, under this focus area, Emira disposed of a Gauteng building to its tenant, Steiner Services. The R34.5m sale price realised a 17% premium to book value and an exit yield of 8%, supporting Emira’s realistic property valuations. It has two assets valued at R171.3m held for sale.

Emira continued to maintain and improve its properties while scrutinising capital expenditure. Fortunately, consistent investment into the portfolio over the years has ensured that its portfolio remains relevant and attractive on the whole. Elevating energy efficiency and water conservation remains a focus area of its capital improvements. Its photovoltaic (PV) solar programme’s positive environmental and operational impacts were further enhanced with two new installations completed and one commenced during the period.

“We continue to expedite alternative energy supply, water harvesting and back-up power projects in light of utilities supply disruption and the overinflated increases of utilities, rates and taxes costs,” notes Jennett. Emira kept a keen focus on containing costs. Even so, its property expenses increased 5.9% during the six months.

Emira’s equity-accounted investments – Transcend Residential Property Fund, Enyuka Property and its USA investments – delivered R118.3m of distributable income for the half-year.

A 34.9% stake in specialist JSE Main Board listed REIT Transcend gives Emira indirect exposure to the residential rental property sector. Transcend’s total property portfolio is valued at R2.5bn, and Emira received R23.4m of distributable income from Transcend.

Through Enyuka, a dedicated rural retail property venture with One Property Holdings, Emira invests in 24 lower-LSM shopping centres valued at R1.7bn. Notwithstanding the economic impacts felt during the six months, the rural retail sector outperformed all other retail sectors, resulting in lower-than-expected rental concessions granted. Emira received R41.9m of income from Enyuka via interest on its shareholder loan, as well as an asset management fee of R2.3m.

On the international front, Emira invests in grocery-anchored dominant value-orientated convenience retail centres in robust markets in the US with the Rainier Companies, and Emira’s share had a carrying value of R1.4bn at the close of the period. The type of property in which Emira invests in the US performed better than enclosed malls and lesser quality properties in the context of COVID-19. They are geared towards communities, provide essential goods and services especially with grocer anchors, focus on the popular value retail segment, have quality tenants, and offer open-air environments where people feel safe. The period was defined by reduced COVID-19 restrictions, more government stimulus and relief, fewer tenant requests for rental relief, and a high 100.4% collection of all rentals billed. Distinguished by sound property fundamentals and a high-quality tenant base, the portfolio has a weighted average lease expiry of 5.9 years. With limited leases up for renewal, a positive rental reversion of 1.5% was achieved, but, as expected, vacancies increased from 5.2% to 8.5%. Vacancies should reduce by year-end with deals that focus on high credit-quality tenants. Distributable income received by Emira from its investments in the US was R72.7m.

Emira reduced its direct portfolio value by a carefully considered 3.6% for the period and, in accordance and taking into account a reduced derivative liability number, its net asset value (NAV) decreased by the same percentage.

The REIT continues to benefit from diversified sources of funding and has facilities across all major South African banks. Emira met all commitments to its funders and reduced its finance costs by lowering its debt levels and as a result of lower interest rates. It reduced its loan-to-value (LTV) ratio slightly from 43% to 42.5%, as it moves closer to its long-term LTV target of below 40%. Emira closed the interim period with a group interest cover ratio (ICR) of 3-times. Global Credit Rating Company affirmed Emira’s corporate long-term credit rating of A(ZA) and short-term rating of A1(ZA) with a negative outlook, in September 2020. At 31 December 2020 it had access to undrawn facilities of R720m and cash on hand of R122.6m, which adequately covers short-term commitments.

Continuing its good business journey, Emira made a significant improvement in its B-BBEE rating, moving from a level 5 to a level 2 contributor, with a verified effective 76.68% black ownership. The improvement furthers Emira’s positive role in the economy and society.

At Emira, our numbers show that we are consistently doing all the basics, and doing them well, even in an exceedingly difficult environment. We are encouraged by the possibility of an ongoing low-interest-rate environment and the potential for economic recovery increasing towards the end of 2021 provided that the rollout of vaccines goes ahead successfully. Emira will continue to protect and generate value for our stakeholders with a robust balance sheet, well-funded and sustainable operations, and a diversified, balanced portfolio of quality properties,” Jennett concludes.

Given the current uncertainty, Emira’s reiterated it would not provide earnings and distribution guidance until such guidance is highly probable. However, it reaffirmed its management KPI target for distributable earnings of 119.7 cents per share for the year to 30 June 2021.

Closing the economic gap through genuine reform and partnerships

The spread of COVID-19 since the beginning of 2020 continues to have a devastating impact on South Africa’s s socio-economic environment. Unfortunately, the spread of the virus escalated dramatically as we entered 2021, with a fresh surge in COVID-19 cases since December 2020, resulting in the reintroduction of extended level 3 lockdown measures.

In an effort to limit the effects of lockdowns on economic activity, household income and corporate earnings, save jobs, and contain the spread of COVID-19, the government introduced several relief schemes and initiatives. These initiatives included tax relief measures, a R500 billion fiscal stimulus package and several programmes to help SMMEs and their employees across sectors most affected by COVID-19 and lockdown measures.

While many of these programmes genuinely helped some companies, the success rate is not uniform across the various schemes. On the one hand, the Tourism Relief Fund was able to disburse its total R200 million budget to help 4 000 companies. However, arguably the fund itself is not enough to address the industry’s needs. On the other hand, the performance of the R200 billion Loan Guarantee Scheme has been dismal. Since its inception, participating banks have only approved around R17.84 billion in loans under the scheme, with the value not expected to surpass R19 billion.

In terms of tax relief measures, government announced multiple measures, including several tax payment deferrals, fast-tracking VAT refunds, and a tax subsidy to employers. These measures were expected to provide support for businesses to continue operating and pay employees and suppliers.

While it’s hard to ascertain how much support companies actually received, monthly tax revenue collection data from the National Treasury shows that there has been a significant slowdown in tax collection from some tax categories beyond the effects of slower economic activity. For instance, from April to December 2020, the skills development levy collection contracted by 44.5%, the most significant drop in any tax category. At the same time, VAT refunds throughout the year have accelerated, growing from about R16 billion in February to over R20 billion in December.

The COVID-19 related lockdowns led to a substantial decline in South Africa’s economic growth in the second quarter of 2020. Positively, GDP growth rebounded at the start of the second half of 2020, surging by a massive 66.1% quarter-on-quarter, seasonally adjusted and annualised. While the bounce back in economic activity resulted from the lifting of the severe COVID-19 lockdown measures, the cuts in interest rates by the SA Reserve Bank and the increased and extended social payments and other relief measures by the government provided further support.

Although the South African economy improved far more than expected in Q3 2020, the subsequent resurgence in COVID-19 infections unfortunately dampened the recovery into the first part of 2021. For 2020, South Africa’s GDP is expected to have contracted by around -7.4%, while for 2021, GDP growth is forecast at around 3.5%. Considering that between 2015 and 2019, South Africa achieved an average annual growth rate of only 0.8% and a mere 0.2% in 2019, growth of 3.5% in 2021 appears encouraging. Still, it is well below the level of output required to reverse the losses experienced in 2020. South Africa’s economic growth needs to be at this level on a sustained basis to generate a meaningful increase in employment.

The main driver of the economic recovery is the strong base effects, as all sectors of the economy continue to recover from historic lows. In addition, the global recovery should support South Africa’s rebound. A generally weaker rand, coupled with strong commodity prices should boost key mining exports, also helping South Africa’s economic performance.

Given that consumption makes up almost 60% of South Africa’s GDP, the rebound in retail activity and the service sector will be important in South Africa’s growth trajectory for 2021. The consumption recovery is expected to be led by high-income consumers who have kept their jobs and maintained their income during the pandemic. While the sharp rise in joblessness disproportionally affected low-income consumers, they benefitted from the top-up in social grants, the COVID-19 relief of distress grant and employment programmes. The historically low interest rates and the subdued inflation rate has also led to a recovery in retail activity, although this has been uneven and relatively slow.

Although the recovery in economic growth is highly dependent on the successful distribution of effective COVID-19 vaccines, this could be stalled by ongoing load shedding and the threat of government implement stricter lockdown measures in response to any future resurgence in infections. Consequently, limiting the spread of the virus, providing relief for vulnerable populations, and overcoming vaccine-related challenges are key immediate priorities for South Africa.

In trying to improve South Africa’s growth performance in the medium to long term, this year’s National Budget’s policy choices reflect that fiscal policy is currently ineffective in directly revitalising the South African economy. In particular, government cannot afford to cut taxes extensively to boost household consumption and corporate investment given the extreme fiscal constraints. Equally, the National Treasury has very little scope to meaningfully further increase public spending, given that its current debt trajectory has worsened considerably.

With that said, government’s growth initiatives need to move ahead rapidly in trying to initiate a wide range of private/public partnerships to stimulate growth and employment. This includes continuing to make it easier to do business. Fortunately, there is a clear intention on the part of government to implement a range of drastic changes to the government’s budget in order to control expenditure, but at the same time find a way to implement a series of growth-friendly policy initiatives, including government’s infrastructure initiative.

Ultimately, the success of the government’s growth and employment agenda in 2021 and beyond will be determined not by the quality of its policy documents but instead by its ability to make progress in implementing real reforms that encourage the business sector and population in general. Closing the gap between South Africa’s current trend growth rate, and a modest target of 3% on a sustained basis is going to require a significantly greater implementation effort than is currently evident, including the coordination of economic policy across key government departments and actively partnering with the private sector.