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Investors are showing increased interest in purchasing office assets, says Growthpoint

A rendering of Growthpoint Properties' Longkloof.

Growthpoint Properties has published its investor update for the nine months ended March 2024, reporting a continual performance improvement in its South African portfolio.

Total space let during the period amounted to 878 107m2 with significant letting of 330 586m2 of new space improving its vacancies from 9.7% at HY2024 to currently 8.5%. The REIT renewed leases of 547 521m2 with renewal rental growth rates improving from -12.9% at FY2024 to -7.1% at HY2024, currently sitting at -6.3%. Its lease renewal rate decreased from 79% at HY2024 to 75% at the end of March 2024, compared to 64.9% at 30 June 2023.

Annual lease escalation rates and lease lengths achieved on renewal have also improved with its average lease period on renewals 3.7 years compared to the 3.5 years achieved during FY2023 and 3.3 years for HY2024. Rental escalations on renewals increased marginally from 6.8% at FY2023 to 6.9% for the half year and nine-month period. Total arrears remain under R129.5m.

Of Growthpoint’s capital and development expenditure funded from asset sales proceeds and cash retained due to its 82.5% dividend payout ratio, R1.7 billion was allocated to developments and capital expenditure during the period. Excluding the disposal of the Kent residential apartments, it sold and transferred ten non-core assets for R665.4 million at a R2.6 million loss to book value. The REIT says that delays obtaining Competition Commission approval and rates clearance certificates, as well as delays at the Deeds Office, have resulted in the lower value of disposals than anticipated.

It has signed sales agreements, with properties awaiting transfer, to the value of R1.3 billion with a number of these expected to transfer before the end of June 2024, and a further R1.9 billion of properties approved for sale in FY2025.

Utilities management remains a key operational focus and given the lower levels of load shedding, diesel costs for the nine months were R103.5 million, lower than the corresponding period in FY2023 (R140 million).

Retail

Growthpoint’s disposals of City View and City Mall, and with Checkers and Shoprite taking occupancy at Bayside Mall, have contributed to an improvement in its vacancies from 6.3% in FY2023 to 5.7% at HY2024, reflecting 4.8% at the end of March 2024. Its core retail vacancies remain low at 3.8%.

Like-for-like trading density growth for the period was 4.2%, mainly driven by value apparel and non-discretionary food spending.

The renewal success rate was 89%, slightly down from December’s 91.9% (FY2023: 83.3%) which was anticipated and will likely continue in FY2025 due to Game not renewing its lease at Brooklyn Mall and Alberton City with Edgars reducing store space at Beacon Bay Retail Park. Rental reversions continued to improve from -9.1% as at FY2023 to -3.2% at HY2024, now sitting at -2.9%.

City Mall in Klerksdorp and City View in Durban were sold for R202 million and R263 million, respectively. The Sedgars property at Woodmead Retail Park was sold for R25.5 million, effective from the 1st of April 2024. The transfer is pending sub-division registration.

Growthpoint signed sale agreements for R51 million for its Sportsmans Warehouse property in Bellville and R253.9 million for Mark Park Shopping Centre in Vereeniging, which are only likely to transfer after yearend. Another five properties for c. R700 million are earmarked for disposal in FY2025.

The upgrade of Bayside Mall in the Western Cape is on track for completion in November 2024.

Growthpoint says it is maintaining a good relationship with Pick n Pay and discussions are “positive”. Excluding PnP Liquor and PnP Clothing, the retailer currently occupies 9.4% of total retail GLA at 108 364m2 and are the REIT’s fourth largest tenant by gross rental.

PnP will be vacating Alberton Mall and Fourways Crossing and Growthpoint has received offers for the space at both malls. It anticipates two Hyper stores, Northgate and Woodmead, to downsize gradually. With no Boxer stores in its portfolio, it says discussions are underway to expand both Boxer and PnP Clothing.

Office

The Group says that office sentiment is improving with most of its portfolio stabilising and investors are showing more interest in purchasing office assets.

It let 148 220m2 of office space and renewed 100 046m2, reducing vacancies from 19.2% at FY2023 to 15.6% (HY2024: 17.8%). Rent reversions improved from -20.1% to -14.7% (HY2024: -15.8%). Its renewal success rate decreased from 60.4% to 56.6% with some tenants continuing to reduce space at lease renewal.

Vacancies in KwaZulu-Natal are 672m² at 0.7%. In the Western Cape vacancies remained at 7.7%. Vacancies in the Gauteng portfolio improved from 24.1% to 19.2% with 16 641m² of the 61 553m² attributable to sales. 10 234m² of the significant 9.4% (or 36 128m²) reduction in Sandton vacancies from 28.7% to 19.3%, was due to disposals.

Indicative of an improving office market, Growthpoint signed 284 deals in the nine months, the biggest being a 9 800m² call centre at Inanda Greens. With low vacancies in its Cape Town portfolio, call centres are showing interest in the Gauteng region.

In total, the Group let 114 751m² in Gauteng including c. 5 000m² to a tenant that previously vacated. Three tenants will be vacating a combined c.10 000m² before the 30th of June 2024. Office vacancies are therefore expected to increase marginally to just over 16.0% for FY2024.

The REIT sold two non-core office assets for R58 million during the period with the transfer of four disposals at R393.4 million delayed to due slow municipal rates clearances being obtained or awaiting transfer at the Deeds Office. A further seven disposals have been approved with total proceeds of R575.9 million expected.

Two key projects are progressing in Cape Town; the R426 million Hilton Canopy Hotel at its Long Kloof mixed-use precinct which expects to welcome guests from December 2024. Its green renovation at 36 Hans Strijdom, which is backed by a fifteen-year lease to Ninety One, is due for completion in June 2025.

Industrial

With the development of top-tier logistics properties, it added 61 652m2 of speculative development, a 28 539m2 modern logistics and warehouse facility for Edward Snell, a 4 457m2 extension at Saligna for Nu Leaf, and 1 000m2 at Mill Road for Laser Logistics. Its speculative industrial developments are enjoying take-up with 37 125m2 let during the period.

Vacancies increased from 3.7% at FY2023 to 4.1% at HY2024 and 4.8% at 31March 2024 with two large tenants vacating 20 000m² and the delivery of the remaining unlet speculative developments.

Trade Park in Durban will be fully let from the 1st of July 2024 when the last unit is occupied, a single unit now remains available at Arterial Road in Cape Town, and two of the three speculative units developed at Central Point in Midrand were let from May 2024.

Coastal regions reflect lower vacancies: 2.2% in KwaZulu-Natal and 1% in the Western Cape. Two-thirds of the portfolio is in Gauteng where vacancies were 6.8% after completing the development of two speculative high-quality logistics facilities in Samrand.

Tenant retention decreased from 82% at HY2024 to 76.5% at the end of March 2024. Rental reversions steadily improved from -10.4% at FY2023 to -6.1% at HY2024 and to -4.4% at 31 March 2024. Growthpoint says it is witnessing positive rental growth on renewals in the Western Cape, where supply and demand are better balanced. Gauteng is still facing negative rent reversions.

Non-institutional investors, mainly owner-occupiers, are still expressing strong interest in industrial acquisitions. The Group sold and transferred six non-core properties for R142.4 million in the nine months. Another three properties sold for R121.8 million and transferred after 31 March 2024. It has signed sale agreements for a further nine properties of R508.8 million awaiting transfer, and six properties are approved for sale for R596.9 million.

Developments

Growthpoint continues to improve the quality of its portfolio with new developments and refurbishments as well as developing assets for Growthpoint Student Accommodation REIT.

Two student accommodation projects were completed and opened at the beginning of the 2024 academic year with two more underway for Wits University students for the 2025 academic year.

The residential units at Kent, La Lucia, transferred realising proceeds of R141 million and a profit of R20.3 million. The residential conversion of the Riverwoods office in Bedfordview into BlackBrick Bedford Urban Resort is 85% sold with the first transfers expected in FY2025.

The V&A Waterfront

Earnings before interest and tax increased by 11% on the comparative period supported by a 23% increase in international air passengers into Cape Town International Airport, local tourism, semigration, new developments completed during the period and continued high demand for office space. The growth was driven by the upward trajectory in retail sales and by extension retail turnover rental, whilst the hotels and Two Oceans Aquarium continued to benefit from improved local and foreign tourism.

Retail sales and visitor numbers increased by 17% and 11% respectively, compared to the prior 9-month period. Precinct-wide, the V&A has negligible vacancies at 0.14%.

Hotels enjoyed consistent high demand, resulting in increased occupancies and revenue per room rates across the precinct. The marine and industrial sector enjoyed strong growth in mooring income including additional income due to diversions from the Suez Canal.

New developments completed during the period include Investec Bank moving into their new 10 500m² building; the first Timeout Market on the African continent which opened in November 2023; the refurbished helistop facility which also launched in November 2023; the completion of Alfred Square which increases public access; and the new Instagrammable  ‘CAPE TOWN’ sign.

The V&A Waterfront funds its development pipeline via a combination of shareholder and third-party funding. It has R2 billion of committed third party facilities, of which R1 billion was raised during the period and R1.75 billion is in the form of green loans. R850 million was undrawn at 31 March 2024.

Distributions to the two shareholders are based on distributable income net of third-party interest.

The V&A has signed a power purchase agreement (PPA) with Etana Energy for 43 gigawatt hours (GWh) of renewable energy a year, enough to supply 70% of the precinct’s energy needs, starting early 2026. This is a milestone transaction in the rollout of the V&A’s sustainability strategy that has as a target commitment to net-zero carbon emissions by 2035.

Growthpoint Investment Partners

With R17.9 billion of gross assets under management across three funds (Growthpoint Healthcare REIT (GHPH), GSAH and Lango Real Estate Limited (Lango)), GIP has its own dedicated fund managers and staff who execute its co-investment philosophy.

Growthpoint earns dividend income from investing and owning 15% to 20% of the equity in the underlying funds. Additionally, through its ownership in the management entities, the Group earns asset management fees. These two income streams together contribute c. R200 million per annum to our distributable income excluding costs of c. R40 million.

The REIT invested an additional R240 million in GSAH in the period, increasing its shareholding to 20.9%.

International portfolio

In line with its focus on optimising its international portfolio, Growthpoint advised via JSE SENS that Capital & Regional had received a non-binding indicative offer from Vukile Property Fund Limited and that Growthpoint had received a preliminary expression of interest from NewRiver Reit plc for its 68.1% stake in Capital & Regional. Vukile subsequently advised in late May 2024 that it did not intend to make an offer.

Growthpoint Properties Australia Ltd (GOZ), which invests in metropolitan offices and industrial assets across Australia, GWI, which invests in office and mixed-use properties in Poland and Romania, and Capital & Regional which is focused on needs-based community shopping centres in the UK, are all listed separately and have published their most recent market updates.

Its international investments are expected to continue performing in line with guidance, which is separately provided for each. Growthpoint Australia released its final distribution and preliminary draft external valuations on Thursday the 20th of June 2024. The 4.5% decline in their valuations will impact the Group LTV while distributions are in line with expectations.                                                                                                                  

Given the negative impact of high interest rates locally and internationally, which has been greater in the second half of FY2024, the REIT anticipates a 10% to 12% decline in Distributable Income per share (DIPS) for FY24.

The Group’s full-year results for the twelve months from July 2023 to June 2024 will be released in early September 2024.