The investment case for hard currency real estate markets as a hedge against an ever-weaker rand and a feeble economy remains intact.
However, there’s also a view that South Africa-focused property stocks shouldn’t be ignored, especially now that the bad news already appears to be in the numbers.
Unsurprisingly, most real estate investment trusts (Reits) have reported a drop in distributable earnings in recent weeks on the back of higher debt funding costs and expenses related to load-shedding.
Still, the sector seems to be through the worst. Management teams of several local Reits have used the downturn to sweat their assets, which is already translating into lower vacancies, higher tenant retention rates, more palatable rental reversions and valuation uplifts.
Many have sold properties and used the proceeds to revamp tired buildings, roll out backup power solutions and pay down debt. All of it will help once the rate cycle turns.
Last week, Dipula Income Fund reported a particularly impressive improvement in operating metrics in its portfolio for the year to end-August. That’s despite higher debt funding costs resulting in a 6.9% year-on-year drop in distributable earnings.
The company is one of only a few JSE-listed Reits that still generates all of its income in South Africa. Its R9.8bn portfolio includes 86 shopping centres, mostly smaller convenience centres, typically sized between 5,000m² and 20,000m², of which a large portion caters to lower-income shoppers in CBDs, rural areas and townships.
Dipula also owns 84 office, industrial and residential buildings, with the latter including more than 400 rental apartments in low- to mid-income Cosmo City, northwest of Joburg.
In the 12 months to end-August, overall vacancies were cut from 10% to 6%, and Dipula secured almost 200 new tenants worth an additional R300m in rental income a year.
Most of the retail vacancies created by the July 2021 riots have also been filled. CEO Izak Petersen tells the FM that Dipula’s retail centres were particularly hard hit at the time.
“I don’t think there were many other Reits that recorded riot-related losses of more than R100m,” says Petersen.
Dipula’s property valuations increased by 3% on a like-for-like basis in the year to August while the loan-to-value decreased from 36.3% to 35.7%, well within covenant levels of 50%.
Importantly, Dipula has notched up positive rental growth on lease renewals of an average 2% in both its retail and office portfolios. That’s no small feat given that most landlords, in a bid to keep tenants, are still having to drop rentals when leases come up for renewal.
Petersen, who was instrumental in Dipula’s JSE listing in August 2011, believes the Reit’s outperformance comes on the back of its strategy to remain 100% South Africa-based, with specialist knowledge in the convenience retail sector.
So while many of his peers diversified their portfolios offshore over the past decade, Petersen stuck to his knitting. “We now have 15 years of experience in this subsector and know how to tenant these centres,” he says.
Petersen intends to remain South Africa-focused given that he sees plenty of growth opportunities in the rural and township convenience retail market
Petersen intends to remain South Africa-focused, given that he sees plenty of growth opportunities in the rural and township convenience retail market.
He believes smaller centres that cater for shoppers’ daily “need-to-haves” instead of “nice-to-haves” are generally more defensive during economic downturns than bigger malls, where a large proportion of tenants rely on discretionary spending.
Petersen says that has encouraged retailers, especially those in the grocery, health-care and value fashion segments, including Shoprite, Dis-Chem, Clicks, Mr Price Group and Pepkor, to continue to roll out new stores and product categories in rural areas and townships.
“So we’re continuously looking at ways to create space to accommodate more tenants,” he says.
The trend has helped to prop up rentals in this sector. He adds: “Unlike many of our listed peers, we’ve seen no negative rental reversions to speak of in the past three years.”
Ongoing investment in maintenance, upgrades, redevelopments and re-tenanting initiatives is also key to Dipula’s improved operational performance. “We’ve spent R150m on revamps this year to keep our properties relevant. And we can see the benefits coming through in our numbers.”
He refers to Gillwell Mall in East London’s CBD, where a recent re-tenanting exercise that replaced a Game with a Boxer store, among others, resulted in the mall posting an overall 30% increase in sales turnover.
Meanwhile, the successful collapse of Dipula’s complicated A and B dual share structure last year has created more liquidity for investors, with the number of shares in issue having more than tripled from mid-2022. “Our shareholder base has expanded significantly and trading volumes are up 200% in the past year,” he says.
We’ve spent R150m on revamps this year to keep our properties relevant. And we can see the benefits coming through in our numbers
— Izak Petersen
But the share price nevertheless continues to move largely sideways and trades at a sizeable 40% discount to NAV. Petersen ascribes that partly to the disdain for real estate as an asset class (globally), amid record bond yields.
He says some would-be investors may also be waiting for things to settle after last year’s capital restructure. At a market cap of R3.47bn, Dipula is probably also too small to garner interest from the larger institutional investors.
Petersen hopes that the JSE will lower its R6bn valuation threshold for inclusion in the South African listed property index next year, given the extent that market caps of all property stocks have shrunk since the sector peaked in early 2018.
Index representation will place Dipula on more fund managers’ buy lists and help drive up the share price. He argues that besides market cap, “we tick all the other boxes for inclusion”.
Craig Smith, head of research at Anchor Stockbrokers, says Dipula has delivered a “resilient” set of results ahead of forecasts.
Referring to the R190m worth of properties that Dipula sold in the last year, Smith notes that sales were concluded at an average 9% yield, against the market’s value of about 14%, which is “a positive reflection on management’s ability to unlock value for shareholders”.
Anchor Stockbrokers have placed a 12-month target price of R5-R6 on Dipula, which translates into potential upside of at least 35% on last week’s share price of about R3.70.
The stock is also trading at an attractive dividend yield of 15.6%, well ahead of the sector’s average 10%-12%.
According to an Anchor Stockbrokers research report, Dipula is the only South African Reit with office or retail exposure whose distributable income for the 2024 financial year is expected to surpass that achieved in 2019.
It’s also the only local Reit expected to have a lower loan-to-value in 2024 vs 2019. The report reads: “We see [Dipula’s] property portfolio as well positioned to continue outperforming its South African peers.”
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