Investec Property Fund’s diverse portfolio offsets challenging domestic market

Nick Riley
Investec Property Fund’s CEO Nick Riley.

Investec Property Fund has announced an interim dividend of 68.81 cents per share for the six months ended 30th of September 2018. This represents a normalised DPS growth of 5.4% year-on-year. Guidance for the full year is maintained between 5% and 5.5%.

A net asset value growth of 2.9% per share is attributable the fund’s offshore investments (Investec Australia Property Fund, Investec Argo UK Property Fund and an investment into a Pan-European logistics portfolio) which provided the necessary geographic diversification to offset the muted growth in the local market.

CEO of Investec Property Fund, Nick Riley comments:

“The domestic landscape remains challenging and is not expected to improve in the short term. The funds offshore exposure to quality real estate, however, provided attractive returns to underpin the Fund’s growth in the current period.”

The subdued domestic environment has resulted in a lower demand for space, downward pressure on rentals, longer void periods, a higher cost to attract and retain clients, and no local acquisition activity. Consequently, net property income growth from the South African portfolio tracked historical lows of 1.7%. The remainder of the growth in DPS stems from the fund’s offshore.

Locally the fund is spread across Office (37%), Industrial (21%) and Retail (42%). The office sector experienced significant pressure as result of the supply/demand imbalance across the major office nodes, while the industrial sector continues to be negatively impacted by the current economic climate. However, the retail portfolio has remained resilient despite the subdued trading conditions reflecting positive letting activity and recording a low vacancy of 0.8%.

Overall, despite the challenging environment, vacancy has decreased since last reported, from 4.0% down to 3.1%. The fund also re-let or renewed 91% of space expiring in the period, as well as 42% of opening vacancy.

“The decrease in vacancy in a market that favours tenants rather than landlords is testament to the quality of the assets and the relationships the Fund’s management has nurtured with its client base. It speaks to the quality of the underlying base portfolio and a strong client base. Our strategy of investing in quality assets, with strong property fundamentals remains central to our approach,” added Riley

There was limited local acquisition activity during the period, with R71.3 million invested into Izandla to fund development opportunities. However, the fund will reinvest R0.6 billion through the recycling of capital from the proceeds of sale of seven local properties.

The fund has earmarked capital to be deployed into the European platform (that generates cash-on-cash returns in excess of 10%) or other value enhancing investment opportunities. This is in line with the fund’s intent to grow its offshore exposure to 20% of income from offshore assets.

The Pan-European logistics portfolio has outperformed the initial acquisition budgeted income return of 10.5%, delivering 11.6% during the period. At 30 September 2018, the underlying properties in the portfolio were revalued equating to 13.9% capital return on Investec Property Fund’s initial investment in Euro, further underpinning the fund’s investment into the platform. This equates to a ZAR capital return of 14.7%. The fund continues to be a strong supporter of its 20.9% investment in Investec Australia Property Fund and its intention to dual-list on the ASX.

“We expect the challenging sector dynamics to continue for the short term. However, recent proactive initiatives by government around investment and job creation are encouraging and support a more positive outlook in the medium to long term. Against this backdrop, we remain focused on revenue security, delivery of differentiated service to clients and optimising balance sheet metrics while growing our portfolio through measured expansion both locally and internationally” comments Riley.

Nick Riley will be stepping down as chief executive officer of the Fund with effect from 1 December 2018. Riley will be taking on a broader role within Investec Bank Limited, however, he will remain on the board as a non-executive director.

“Andrew and Darryl will take over as Joint Chief Executive Officers of the Fund with effect from 1 December 2018. Both Andrew and Darryl are experienced and respected members of the Investec Property team, and the Fund will continue to benefit from their vast experience in finance, listed environment as well as in direct real estate management and development,” concluded Riley.