You don’t have to look too long or too hard to find someone complaining about the state of play on the JSE.
Delistings are frequently raised as an issue, with illiquidity among small caps as a related topic. These are valid concerns to highlight, but one thing that definitely cannot be complained about is the depth of pockets of institutional investors and their willingness to support capital raises in the property sector.
In March, Fairvest had absolutely no problems in raising R400m through the issuance of new B shares. In fact, it got it done at a discount of just 1.05% to the 30-day volume-weighted average price, which is a particularly impressive outcome. It must be thrilled with the timing, having raised it before US President Donald Trump assaulted the market with tariffs.
The market clearly likes the Fairvest story, and why not? About 70% of the value of the portfolio sits in retail properties, which is where you want to be — and it plans to take that percentage much higher. The balance sheet is in good shape, with a recent preclose update indicating a loan-to-value ratio below 32%. For the six months to March 2025, it expects to be at the upper end of the guided distribution per B share of between 45c and 46c. There were even positive rental reversions, so there really is a good story to tell.
Another positive element, particularly in this volatile new world we find ourselves in, is that Fairvest has a simple overall model. It isn’t allocating capital to complicated offshore markets with currency and debt considerations. Instead, it has 127 properties right here in South Africa.
We can all agree that South Africa is by no means the brightest economic star in the sky, but at least it’s a risk profile that investors can understand without too much effort.
Speaking of risk, the office portfolio remains a challenge, as is the case for practically every local fund. Vacancies increased from 9.6% as at September 2024 to 14.8% as at February 2025. Though Fairvest managed to achieve positive reversions of 7%, this came at the expense of tenant retention, which fell from 75.9% to 67.6%. It is clearly playing hardball on price, with the view being taken that it would rather have high-quality leases and empty space than a full building and weak leases.
It isn’t helping the cause here that of the 29 office properties held by Fairvest, just four of them are in the Western Cape. When it can, it will exit this portfolio.
Could we one day see a takeover of Dipula by Fairvest? It’s entirely possible
The industrial portfolio is also predominantly Gauteng-focused, with 21 properties there out of 26 in total. Vacancy rates improved to just 0.5%, reflecting the broader trend we’ve seen of demand for industrial space in South Africa. Tenant retention fell to 82.1%, but that hardly seems to matter as it is filling the space at positive rental reversions of 7.5%. This is certainly an easier exit than the office portfolio.
Fairvest doesn’t just hold direct property investments. The fund has increased its stake in Dipula Income Fund from 5% to 26.3%. This is part of Fairvest’s strategy to become a retail-only real estate investment trust, so this is why you need to look out for disposals of its office and industrial properties.
Fairvest particularly likes the low-income focused retail story in South Africa, which isn’t surprising as this is where much of the growth is to be found thanks to not just population growth, but also the emergence of consumers from low-LSM into mid-LSM bands. This means more people with greater buying power to shift from informal to formal retailers.
How does Dipula fit into this? Fairvest has been a Dipula shareholder since 2014, as it appreciates Dipula’s strategy of having a Gauteng-focused portfolio that targets the low-income retail trend. Through a deal with Coronation, Fairvest upped its stake to become the single largest shareholder in Dipula, paying for those shares through the issuance of Fairvest B shares to Coronation.
Could we one day see a takeover of Dipula by Fairvest? It’s entirely possible. In the meantime, based on the full-year guidance of a distribution per share of nearly 46c, Fairvest B shares are trading on a yield of 9.8%. Dipula, by the way, is on just over 10%.
Fairvest A shares give you an increase in the distribution per share of the lesser of 5% or CPI, so that’s aimed at very conservative investors and pension funds looking for low-risk yields. Most investors are interested in the B shares, where the full benefit of the push into lower-income retail is expected to be felt. The B shares make a compelling case at the moment.
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