It’s no secret that local property stocks, which only recently emerged from pandemic-induced income losses, are again being squeezed by bad news.
Diesel costs to keep generators running during intensified load-shedding at malls, offices and factories have added millions to monthly operating costs.
Higher debt funding costs and ever-rising municipal rates and utility bills, amid collapsing service delivery and failing infrastructure, are also adding to commercial property owners’ woes.
The upshot is that many South Africa-focused real estate investment trusts (Reits) have been forced to lower their earnings forecasts.
Redefine Properties, one of the largest office, retail and industrial landlords in South Africa, is no exception.
This week it released results for the six months to end-February. Management cut its distributable income guidance for the full year to end-August from 54c-56c a share to 48c-52c a share.
That is against 53.7c a share achieved for the year to August 2022. It’s one reason the stock took a drubbing on Monday, closing 7% down after results were released.
The property group released a respectable set of interim results, propped up by its retail and logistics interests in Poland where operating metrics have bounced back to pre-pandemic levels
Investors were seemingly surprised by the extent of the earnings review.
Ninety One portfolio manager Ann-Maree Tippoo says the market didn't expect Redefine's debt funding costs to escalate at the pace that they have.
“Unfortunately, management didn't sufficiently communicate the risk of such a large negative revision at the pre-close presentation in February,” she says.
However, Tippoo says despite the “disappointing” distributable income guidance revision, operating metrics in both the South African and East European businesses are solid across all sub-sectors.
She notes that pockets of encouraging data points and trends have emerged.
Group distributable income grew by a respectable 7.2% to R1.6bn in the six months to February, which was propped up by Redefine's retail and logistics interests in Poland where operating metrics have pretty much bounced back to pre-pandemic levels.
The completion last year in March of Redefine’s takeover of EPP — Poland’s largest retail asset manager in terms of gross lettable area — added R300m to distributable income. It’s the first time since the onset of Covid that Redefine has resumed dividend payouts from EPP.
Besides its 95.5% stake in EPP, Redefine owns and manages a portfolio of logistics and self-storage properties in Poland.
Total property assets worth just more than R94bn are now 63% South Africa-based, with the remaining 37% in Poland.
Redefine COO Leon Kok says despite the tough trading environment, there has been a notable improvement in operating metrics such as retail trading densities (sales/m²), vacancies and rental reversions in the local retail portfolio.
However, load-shedding and related costs are likely to take their toll on the performance of its retail assets. As for the industrial portfolio, despite moribund economic conditions, it continues to provide what Kok refers to as a “defensive’’ element. Even more encouragingly, Kok says Redefine’s office portfolio is starting to show signs of recovery with “green shoots” emerging.
Though office rentals are still under pressure in many nodes, reversions on lease renewals have slowed — from an average -17.4% to -12% year on year. Office vacancies are down from 16.4% to 14.3% over the same time.
Take-up of high-end, “premium” office space in Sandton, Rosebank in Joburg and across Cape Town has increased noticeably.
Vacancies in Redefine’s premium portfolio is now at only 6.7%, which Kok says reflects Redefine’s multiyear strategy of selling older, poorer performing office buildings and focusing on modern, quality stock instead. About 87% of Redefine’s portfolio now consists of A-grade and premium-grade buildings.
Take-up of high-end, ‘premium’ office space in Sandton, Rosebank in Joburg and across Cape Town has increased noticeably
Kok believes load-shedding has supported the return to the office, with landlords who offer buildings with reliable alternative energy sources and quality facilities having a clear advantage.
He says talk of Sandton, South Africa’s biggest office node, turning into a ghost town didn’t play out. In fact, the office component of Redefine’s Alice Lane mixed-use office complex opposite Sandton City is virtually fully let.
“For the first time in many years we are starting to see potential for rentals to move up again in prime nodes like Sandton and Rosebank, where there is particularly strong demand for smaller and mid-size offices.’’
Traffic volumes in Sandton have risen incrementally over the past six months, which Kok suggests points to office workers finally returning to their desks.
“We are no longer seeing those quiet days we became accustomed to in 2021/2022,” he says.
The company has also closed letting deals with three private schools and tertiary institutions, which will help mop up vacant office space in Bedfordview, Pretoria and Sandton.
“The private education sector isn’t necessarily a silver bullet as they have very specific needs in terms of location and facilities,’’ says Kok. “But we have to be creative in finding alternative uses for empty office space.’’
In addition, Redefine has repurposed about 30,000m² of traditional office space for serviced and coworking usage across 12 locations, through leases with WeWork and IWG’s Regus brand.
Despite an improved office letting environment for top-end buildings, Kok doesn’t expect an overall increase in net take-up until visible inroads have been made into the country’s high unemployment levels.
But he says the company is well poised for organic growth when the market “eventually” turns.
While South Africa’s official office vacancy rate eased somewhat from a record high of 16.7% in June last year to 15.8% in March, prime office vacancies had a far more pronounced drop from 14.5% to 9.2%
Latest data from the South African Property Owners Assocation (Sapoa) reflects a similar trend. While South Africa’s official office vacancy rate eased somewhat from a record high of 16.7% in June last year to 15.8% in March, prime office vacancies had a far more pronounced drop from a record 14.5% to 9.2%. Sapoa’s quarterly survey sample includes more than 3,000 office buildings across 52 nodes.
Craig Smith, head of research at Anchor Stockbrokers, agrees there has been a “flight to quality”, which is benefiting owners of prime office space. But he warns that a “material” oversupply continues to linger in many nodes.
One thing that could help the office recovery is that few, if any, developers are planning to build new offices, which Smith says will help improve the demand/supply dynamics over time.
Earlier this week Redefine was trading at a discount to NAV of just more than 50% and a forward dividend yield of about 14%.
Ridwaan Loonat, senior property analyst at Nedbank CIB, has placed an overweight recommendation on Redefine.
He says though this week’s share price weakness reflects the market’s disappointment about management’s earnings guidance revision, “Redefine still trades at an attractive dividend yield”.
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