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property sector confidence grows

Redefines’retail portfolio grows as trading conditions in SA improve

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Redefine Properties’ retail portfolio continues to deliver as trading conditions in South Africa improve

Johannesburg, 2 December 2024 – Redefine Properties (JSE: RDF), one of South Africa’s leading real-estate investment trusts (REIT), has noted an improvement in trading conditions in South Africa’s retail sector going into the 2024 holiday season. With positive trends in retail sales, rental renewal rates and visitor foot count, the momentum in the sector bodes well for South Africa’s future growth.

In August 2024, retail sales in South Africa increased year-on-year by 3.2%. This marked the sixth consecutive month of growth in retail activity and at a robust pace. Additionally, foot traffic in major shopping centres rose by 8.3% year-on-year during the second quarter of 2024, a positive trend that has continued since December 2021. The rent-to-turnover ratio, which is a measure of retailer’s cost of occupancy, is now at its best level in more than ten years.

Nashil Chotoki, Retail national asset manager at Redefine, attributed the growth in retail activity to non-discretionary spending, with food and value-focused retailers serving as the main industry drivers. “Within the Redefine portfolio, grocers contribute 64% of turnover growth. Therefore, a tenant mix of essential services and retailers aligned with value offerings that is relevant to the demographics of the catchment areas will be a key success factor for shopping centres. It is why Redefine will increase its exposure to this category to 40% of its GLA in the next financial year,” Chotoki explained. “Lower interest rates and improved consumer confidence will further drive retail sales growth into some of the discretionary retail categories, and, ensuring that the tenant mix of a shopping centre is aligned to this will create sustainable growth.”

These trends come on the heels of the release of Redefine’s annual results for the 2024 financial year (FY24). The REIT’s retail portfolio accounts for 45% of its South African property asset platform, with a carrying value of R28.3 billion (up from R24.6 billion in FY23). Redefine owns 59 retail properties nationwide, occupied by 2,807 tenants with an annual trading density of R34,700 per sqm. The portfolio’s rent-to-turnover ratio of 7.7% reflects sustainable revenue growth prospects across its retail formats.

Redefine also enjoys an active occupancy rate of 95%, which it expects to increase in FY25 due to healthy letting demand. Furthermore, with the help of tenant support programmes and data-driven insights, Redefine ensures tenants are placed in optimal macro-locations to enhance their trading performance. This has enabled Redefine to improve its rent reversion rate on renewal to 0.2% and achieve a renewal success rate of 88%. Our analysis goes way beyond shopper data and combines a variety of data to drive insights to make decisions that inform our strategy at an asset level.

“We have also found that upgrades to stores, particularly grocers, drive improvements in turnover through attracting new customers to shopping centres. That is why Redefine is working closely with national retailers to support this, culminating in 8,500 sqm worth of upgrades scheduled to commence in February 2025,” Chotoki added.

To further diversify income streams, Redefine has pursued alternative revenue opportunities through in-mall and exterior billboards, and electric vehicle charging infrastructure installed at eight sites. Sustainability remains a top priority, with solar photovoltaic plants generating 18% of the portfolio’s energy needs thanks to an installed capacity of 34,587 kWp. Expansion plans will add another 12,351 kWp in capacity.

“There are still challenges in our path, but what is certain is the resilience and promise that South Africa’s retail industry poses from both a consumer and business perspective. Through strategic planning and implementation, and by prioritising the needs of consumers and our tenants, we are fully tapping into the power of retail spaces as social and economic enablers,” Chotoki concluded.

Dipula shines with solid results, solar roll-out and strong prospects

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Dipula shines with solid results, solar roll-out and strong prospects

JOHANNESBURG, 13 November 2024 — Dipula Income Fund (JSE: DIB) has reported a solid set of results for its financial year to 31 August 2024, delivering strong operational, financial and strategic progress. Dipula’s property portfolio produced growth and increased by 4% in value to R10.2 billion, contributing to a 5% rise in net asset value.

Dipula is a prominent South Africa-invested REIT with a diversified portfolio of 165 retail, office, industrial and residential rental properties. Convenience, rural and township retail centres produce 65% of its defensively weighted portfolio income, and 60% of portfolio rental income is generated in Gauteng.

Izak Petersen, CEO of Dipula, comments, “South African trading conditions and consumer sentiment are improving post the July 2024 national elections. The new Government of National Unity has been well received, with parties committed to enhancing service delivery. Global and local interest rate cuts, easing inflation, and a stronger Rand also bode well for the economy. We anticipate these macroeconomic improvements will positively impact the property market in the short to medium term.”

Despite recent improvements, the 12 months to 31 August 2024 were challenging due to rising property costs and interest rates at their peak. “Notwithstanding the challenging operational and financial environment, Dipula delivered a good set of results,” adds Petersen.

Dipula’s revenue grew by 7% despite negative rental reversions in government-tenanted offices and lower income due to prior-year disposals. Net property income increased by 2%, under pressure from above-inflation municipal hikes that significantly increased property expenses, higher maintenance spending, and rising third-party contract labour costs. Net finance costs increased by 3%. Overall, prior disposals, bigger expenses and higher finance costs led to a decrease in distributable earnings per share of 4%. The declared dividends totalled 90% of distributable earnings.

Operational results were distinguished by high levels of active leasing. Dipula concluded leases worth R1.4 billion during the year, keeping its portfolio well occupied with longer leases. It achieved robust tenant retention, improved from 84% to 87%, with R1.2 billion of leasing representing renewals.

Retail vacancies improved from 7.5% to 6.4%. However, the overall portfolio vacancy rate was 7.5%, up from 6.0% in the previous year, primarily due to higher vacancies in the office and industrial sectors.

Dipula’s 83 retail properties offer well-located trading spaces and convenient access for shoppers. Each property is tailored to meet the specific needs of the local area, providing essential goods and services that resonate with the community. All tenant categories reported positive turnover growth, with health and beauty, restaurants and fast food, liquor, and hardware delivering the strongest growth. When tenants chose not to renew their leases during the year, Dipula secured replacement rentals at a 14% higher rate. The retail portfolio’s value increased by 8%.

Accounting for 16% of rental income, Dipula’s office spaces offer flexible, modern work environments that cater to the diverse needs of businesses in prime urban locations. While the office portfolio ended the year with a vacancy rate of 22%, Dipula anticipates a gradual recovery in line with recent sector improvements, supported by limited new development activity that will further support rising occupancy rates and healthy rental growth.

Dipula’s mid-sized industrial and logistics facilities in strategic locations represent 14% of its rental income. With a vacancy rate of just 3%, this strong, stable portfolio boasts the lowest vacancy across Dipula’s assets.

Its residential properties provide affordable, high-value housing in economically vibrant locations. This portfolio is 4% of rental income and recorded an average vacancy for the 2024 financial year of 6%.

Dipula’s commitment to tight cost control is evident in its improved administrative cost-to-income ratio, which reduced from 4.4% to 3.3%. While the overall cost-to-income ratio temporarily rose to 42.3% (2023: 39.5%), this increase was mainly driven by elevated property-related expenses and lower municipal cost recoveries. This is, however, expected to return to normal levels of around 40%.

Diligent asset management enables Dipula to reduce risk and improve its portfolio with various value-adding strategies. It invested R169 million in refurbishments and capital expenditure during the year. It also disposed of properties for R37 million, with proceeds funding value-enhancing revamps and the roll-out of renewable energy and backup power.

“We’re building a future-fit portfolio by investing in sustainable assets. This year, we rolled out the first phase of our solar photovoltaic programme, which is now live at nine of 10 sites. The project increases Dipula’s solar power capacity by 5.3 kWp, taking it from 1.6kWp to 7kWp – a number we plan to treble in the next 24 to 36 months. We also invested in waste and water management, community investment, staff training and wellness, and nurturing new talent through internships,” reports Petersen. Dipula’s sustainability strategy rests on a systematic process, pinpointing and tackling risks and opportunities that matter most to its business and stakeholders, guided by the UN’s Sustainable Development Goals.

Dipula’s prudent balance sheet management underpins its consistent, sustainable financial returns. It restructured its debt facilities from 1 March 2024 with a R3.8 billion syndication programme, extending its weighted average debt expiry period significantly from 1.9 years to 4.1 years. Dipula maintained debt levels comfortably above all covenant requirements, with a year-end gearing of 35.7%, an ICR of 2.7 times, and undrawn facilities of R80 million. Solid balance sheet metrics ensured Dipula‘s credit rating was affirmed at BBB+(ZA) and A2(ZA), respectively, with a stable outlook.

Looking ahead, the long negative cycle for South African real estate is showing signs of improving. Research highlights stronger leasing performance across office, retail, industrial and residential properties.

“As inflation eases and the power grid stabilises, we foresee rental growth and a slowdown in cost increases. This should bolster business and consumer confidence, potentially spurring economic investment and strengthening property fundamentals, despite navigating ongoing challenges presented by failing municipalities,” notes Petersen.

The company expects better performance from the 2025 financial year, having completed various capital projects. Dipula’s retail and industrial portfolios are poised to continue their robust performance, while the office sector is expected to experience a gradual recovery. High occupancy levels are anticipated for the affordable residential sector, with rental growth that at least keeps pace with inflation. Dipula expects distributable earnings growth of at least 5% for the year ahead.

“Dipula’s strategy prioritises capital allocation to energy sustainability, portfolio- and income-enhancing developments and elevating tenant quality. Discerning investment decisions, positive economic trends and focused management will drive improved performance and continue to deliver sustainable value for our stakeholders,” Petersen concludes.

Value in the current oversupply of commercial property space

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At these levels, there’s value in the current oversupply of commercial property space 

For the past seven years, South Africa’s listed property sector has been in the doldrums. A toxic cocktail of economic weakness leading to rising vacancies, the devastating impact of COVID-19 lockdowns and higher interest rates, and the added burden of load-shedding and various other costly utility challenges, created a perfect storm. It brought cruel headwinds for property owners that have left investors wary. But the winds of change are blowing.

Listed property share prices are starting to show an increased value proposition and this will inevitably lead into the physical commercial property market.

So far, in 2024, real estate investment trust REIT returns are up in excess of 50%.

Nowhere are signs of a real estate turnaround more evident than in the Western Cape, where offices that sat vacant just 18 months ago are now full.

The semigration trend to the province is part of this. But it’s not the whole story. Improving sentiment post the Government of National Unity (GNU), less loadshedding easing strain and costs, and the first reduction in interest rates, together with the expectation that they will fall further, are country-wide factors all contributing to a surge in sentiment and confidence.

In addition, most corporates are now insisting on a return to in-office work, resulting in a greater need for office space. This spells opportunity – particularly in Gauteng, which is the hub of South Africa’s economic engine, and where vacancies are still prevalent.

There’s more value to be unlocked

Successful investors look further than headlines to find value. And, as the economy starts to stir, savvy investors can scent opportunity.

Property is inherently cyclical, and it’s starting to pick up the first gusts of coming tailwinds. Yes, the sector still has an oversupply to digest, but there’s value in it if acquired at the current low pricing levels. As offices fill up and economic sentiment improves, their values will increase commensurately.

With the anticipation of reduced vacancy levels, property investment becomes more attractive, and the prospect of new developments becomes increasingly feasible, drawing investors and speculators back into the market. It’s a potentially tantalising prospect after years of stagnation.

Disciplined, sustainable growth

In fact, the future prospect is more alluring than it has been for a long time. This is even true in the local REIT sector, where we still see share prices that significantly undervalue their businesses, but with the incoming tailwinds, we will inevitably see an acceleration towards the recovery on the horizon.

When market sentiment overshoots fundamentals, long term investors like Emira stay focused on what makes business sense, not getting caught up in the hype –  acquiring at below value in places where economics are suppressed and disposing when values are full. It all comes down to strategic capital allocation and responsible growth. When markets show extreme dislocations from value, that is the time to to move and take advantage of what will eventually show as long-term value creation.

Demonstrating its agility and business sense, Emira’s recently sold off its portfolio in sought-after Cape Town at what it perceives as fuller value. This strategically aligned move freed-up capital to be deployed in Poland, where returns are extremely enticing (undervalued with strong economic growth prospects) and where we had identified the right entry point (co-invested into equity with local partners with growth aspirations) – a decision that makes business sense for Emira in its pursuit of diversification and value creation.

The stage is set for a long-awaited turnaround

Rising REIT returns, reducing vacancies, and returning office appetite all point to a sector in recovery mode. The property cycle is turning, and those with a keen eye for value are already taking notice.

The South African property sector still has meaningful operational and infrastructure hurdles to overcome, but the winds of change are starting to blow and, with a nuanced understanding of the sector and a discerning eye for emerging potential, there’s substantial value in listed property stocks right now with further value to be found in the future

Redefine positioned for growth as sector confidence improves

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Redefine positioned for growth as operational performance, sector confidence improves

Johannesburg, 27 August 2024 – Redefine Properties CEO Andrew König emphasised the company’s focus on mindful optimism during its Capital Markets Day 2024 in Sandton, Johannesburg, on Tuesday. He described how the business is positioned for growth as shifts in the operating environment, despite the persistence of economic and socio-political stresses, contribute to improved levels of confidence in the property sector, citing anecdotal evidence to support the company’s posturing.

Redefine’s property asset platform, currently valued at R100.4 billion, comprises key real estate assets in the retail, commercial, logistics, and industrial sectors in South Africa and Poland. Over the last five years, Redefine has transformed its property asset platform by reducing exposure to multiple risk universes through non-core asset disposals and reallocating capital to growth sectors and geographies like Central and Eastern Europe, where there is the prospect of emerging market growth at a lower risk premium.

König clarified on Tuesday that Redefine’s strategy of sectoral and geographic diversification is aimed at delivering stable returns by mitigating the cyclicality of sectors and reducing economic risks and vulnerabilities in the domestic environment, such as resource and infrastructure crises that impede growth in South Africa.

“Even though the SA environment remains challenging, we are committed to the continent’s most diversified economy, which continues to demonstrate resilience in the face of adversity. How we adapt to overcome obstacles and seize opportunities will ultimately distinguish us as the country’s best Real Estate Investment Trust.”

König said Redefine had adopted an ‘opt-for-the-upside’ approach, meaning that the company embraces opportunities within the real estate sectors it operates in, even when faced with obstacles, rather than choosing to divest. Now, Redefine is expanding its approach to all its stakeholders by inviting them to “join the upside” as the tide turns in its favour.

Encouraging improvements in operational performance

Redefine’s South African portfolio has benefited from an active asset management strategy to transform it to a defensive portfolio of high-quality assets that is well diversified, according to COO Leon Kok. He also stated that most of its operating metrics have stabilized and is well positioned to deliver organic growth.

“Take, for instance, the Western Cape’s office sector, which was engulfed in a perfect storm of oversupply, tepid economic growth, and the rise of remote work. Today, office space is in high demand and facing a stock shortage, with the city recording a 20% increase in market rentals over the past few months. This shift is driven by the growing popularity of business process outsourcing, the semigration trend, and the return of businesses to physical office settings,” Kok said.

Nationally, the number of vacancies in the office sector has decreased for eight quarters running. The most recent data from the SA Property Owners Association for the second quarter of 2024 showed a decrease to 14.2%, which is 2.5% below the high point for office vacancies and falls in line with Redefine’s vacancy rate for FY24.

National asset manager for office, Scott Thorburn, stated that the demand for quality A- and P-grade assets, which comprise the majority of Redefine’s office portfolio, has bolstered the occupancy rate to 87.8% for FY24. According to Thorburn, the rise in market rentals observed in stronger nodes in Johannesburg and Cape Town will help ensure sustainable and robust returns as the office sector recovers.

Redefine is also witnessing positive rental reversions in the retail space, indicating that the industry has turned the corner and is about to enter a growth phase. According to Redefine’s National asset manager for retail, Nashil Chotoki, the retail portfolio’s sales and overall turnover have already surpassed pre-pandemic levels. The company expects this growth to continue, driven by its expanding exposure to clothing and necessities, as well as by a potential drop in national interest rates, which would increase consumers’ disposable income.

Positive post-election developments helps business confidence

Along with the sector’s encouraging operational performance, König said that reduced political uncertainty following the formation of the Government of National Unity, a strengthening currency, and advancements made since the launch of Operation Vulindlela in 2020 to address long-standing constraints related to electricity supply and the availability of digital spectrum have all contributed to improved confidence levels in the real estate market.

“The emphasis now needs to shift to addressing the country’s inefficient freight logistics system, the deteriorating performance of local government, and ageing water infrastructure that is impacting supply networks. The new resource challenge is limited water supply, and this is a difficult matter to manage.”

With further major water outages expected due to scheduled maintenance and ongoing infrastructure issues, Redefine is planning to get ahead by executing a water resilience strategy focused not only on reducing water consumption but also on developing additional storage capacity. This strategy aims to provide up to a five-day buffer in certain buildings, increasing their water security in case of a major outage.

Electricity supply, on the other hand, has improved significantly, which König said is itself confidence-boosting and translates into significant savings for a business like Redefine, which was previously burning through hundreds of thousands of litres of diesel to supplement energy supply, with those costs having to be shared with tenants.

Strong focus on efficiency, cost reduction supports organic growth

Despite domestic headwinds and administered costs growing faster than rental income, CFO Ntobeko Nyawo said Redefine maintained positive operating leverage across key segments. Nyawo described the Group’s 75.3% net operating profit margin as a remarkable achievement given the circumstances and an excellent demonstration of the emphasis on cost containment and efficiency.

“Energy costs continue to drive up operating expenses, but the deployment of solar PV as part of our priority to maximise efficient natural resource consumption is generating cost savings. This, along with other cost-saving initiatives, such as disciplined cost containment while growing revenue, is yielding stable operating leverage,” he explained.

Redefine has made significant strides in sourcing efficient capital, as evidenced by the R15.6 billion in green funding it has raised since 2022. This has transformed the Group’s funding profile, with 35.3% of Group debt now linked to green finance. This promotes the long-term decarbonisation of buildings, which Nyawo said have become more desirable and drive higher value due to reduced operating costs and the systemic risk linked to climate change.

“The business has remained cash-generative, with collections across the Group remaining healthy in both the South African and Polish portfolios due to this efficiency drive and focus.”

Nyawo said Redefine’s balance sheet is stable and will continue to be managed conservatively to sustain growth as market dynamics evolve. The expectation that interest rates are shifting to a cutting cycle is significant, and a 25 to 50 basis point cut will lower finance costs and support share price growth, enabling the company to consider capital retention opportunities through the dividend reinvestment programme.

The Group is pleased to announce that it has maintained its earnings guidance of Distributable Income Per Share at 48 cents to 52 cents for FY24.

Looking ahead, Redefine is engaging with tenant stakeholders to broaden and expand the scope of sustainability initiatives, aiming to reduce scope 3 emissions and deepen its ESG impact. Additionally, technology capabilities are being strengthened to improve the tenant experience.

 

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