Fortress Real Estate Investments Limited has published its FY2023 results, highlighting that it now has its largest portfolio of direct real estate assets at R30 billion, excluding developments in progress, coupled with the lowest vacancy rate in its history, dating back to its listing in 2009, of 3.7%.
“At the core of this result is the continued capital recycling through the disposal of older, under-performing properties to fund new developments which are in demand and have lower structural vacancies. Our continued strategic focus on developing and letting premium-grade logistics real estate in South Africa and Central & Eastern Europe, as well as growing our convenience and commuter-oriented retail portfolio, has proven to be successful,” said Steven Brown, CEO of Fortress.
“Rising interest rates have impacted commercial real estate globally, both from a valuation perspective and an increase in funding costs. South Africa has not been immune to this global trend, but the impact has been less pronounced than in developed markets. Higher interest rates have led to flat investment property valuations across our portfolio, despite higher net operating income. Fortress has hedged 85% of its interest rate risk for a period of 3,5 years, which has mitigated the impact of higher interest costs on our debt. The South African banking and debt capital markets remain stable, which means that we can access debt on good terms and at fair prices. In contrast, many developed markets face challenges of much higher interest rates, coupled with falling capital values.”
Fortress continues to see strong demand for new logistics space in South Africa, particularly in well-located and secure logistics parks. This has translated into a record low vacancy in this portfolio of 0.5% from 2.9% as at the 1H2023 reporting date. The logistics portfolio weighted average lease expiry (WALE) has improved to 4.7 years (FY2022: 4 years) as a result of longer-term leases concluded on the new developments.
During FY2023, Fortress completed R3.5 billion of new, state-of-the-art logistics developments, including the 163,533m² Pick n Pay distribution centre at Eastport Logistics Park, which is valued at R2.24 billion.
“We have strategically slowed the pace of the speculative warehouse developments, as we have successfully developed over three-quarters of the 1,000,000m² pipeline we controlled around five years ago. Due to the buoyant market for new logistics facilities, we remain positive about adding speculative supply, but need to balance this against keeping key sites available for attractive pre-let transactions. Pre-let developments carry less risk, although take longer to secure, increasing the holding cost on the undeveloped land,” said Brown.
Fortress’ exposure to the Central Eastern European (CEE) region has provided a strategic diversification benefit with a 26% increase in the valuation of the direct portfolio when converted to SA Rand over the period and a 27% increase in the value of the NEPI Rockcastle investment held throughout the period. Both the direct logistics assets in the region and NEPI Rockcastle have again performed well.
During FY2023, Fortress converted from being a Real Estate Investment Trust (REIT) to a Real Estate Investment Company.
“In light of Fortress’ particular focus on developments and our investment portfolio composition, the REIC structure allows for tax benefits which could significantly reduce any tax leakage as it pertains to the relationship between the company and our shareholders. The waters remain as yet untested for this transition; however, we are cautiously optimistic about the efficiency which can be gained as it pertains to tax payable at company and shareholder level,” explained Brown.
“The coming year will bring opportunities to well-capitalised real estate investors who are well-placed to take advantage of opportunities in a market where many sub-sector fundamentals remain strong, but where many businesses are primarily focused on their balance sheet and liquidity positions. At Fortress, our focus on total returns over the long term will continue to drive our investment and capital allocation decisions,” he concluded.
The company’s loan-to-value ratio decreased from 38.7% at 30 June 2022 to 35.9% at 30 June 2023.