Until 2022, when interest rates in the UK spiked, logistics and warehousing firm Equites was on a roll in Britain. Four years and some share price pain later, the group is just about to sell its last UK property assets to concentrate on its home market. The FM spoke to CEO Andrea Taverna-Turisan about the change.
Did you ever see a situation where South Africa rather than the UK would be your growth engine — it’s quite an about-turn?
We were the darling of the market post-listing in 2014; we managed to sell the logistics dream. We went into the UK [in 2016] because I had experience in that market, and if we hadn’t, we wouldn’t have been able to grow as quickly as we did. On listing we had a R1.1bn fund, and within 8½ years we grew it to R30bn. It allowed us to do two capital raises of R1bn every year because we were deploying the money, and if we were just in South Africa we’d never have been able to, because the market wasn’t big enough to absorb that quantum of cash. The nature of our business with single-tenant buildings is that you’re either 100% let or 100% vacant; it’s not like a retail centre.
As boring as a warehouse is, it’s a very exciting space to be in
So your defence strategy is scale?
Ideally we would want to have a R50bn portfolio, because if a [R1bn] building goes vacant for whatever reason, it’s only a 2% vacancy, which our business can absorb. But with a R20bn portfolio, and a R1bn vacancy it’s 5%, which becomes difficult. The idea was at some stage to have grown the UK business to a scale where we could have unbundled it, and Equites could have remained a key shareholder. But we just didn’t get the scale right, and then at the end of 2022, when interest rates started going the wrong way, that was the end of the dream, basically.
Unlike many other South African firms, especially the retailers, you don’t seem to have been badly burnt, though?
We’ve made money. With every single one of the five assets that were sold last week, the global internal rate of return from date-of-purchase with all the income was in the mid-teens. We would have loved to have got a bit more, but it was important for us to sell. And the problem was not with the existing portfolio, but with deploying fresh capital into new deals with the cost of money there and the cost of money here. When we went into the UK, we had debt at 1%, so we were making a lot of money off the debt portfolio at a 50% loan-to-value. But with the interest rate differential collapsing, the associated cost and risk became too big. We realised that once we’d captured those rent reviews it made sense to on-sell, because the next round of rent reviews we don’t think will be quite as good. Whereas in South Africa, it’s different — we get annual escalations, our cost of debt is incredible, and we are able to execute on deals at yields that are higher than our cost of debt.
Your weighted average lease extension is 13.7 years at a lease escalation of 6.1%. Is that good?
Obviously I’m blowing smoke up my own backside, but we are unique to every other property counter in the country. We’ll never give you 15% growth because the nature of the defensiveness of our portfolio will never afford that, but also we’re not going to fall off a cliff like the other guys who will have good years but then bad years. Our business strategy now is to be a proxy bond, giving a CPI plus 2%-3% growth on distributions every year and to match that with proper NAV growth.
You have two new ‘speculative’ builds that are about to be finished — is that where risk can come in, if they’re not let?
Yes, but when you’ve got 1.5-million square metres of space to let, you can take a bit of speculative risk on 30,000m². By doing it, you’re also constantly keeping the broker network engaged with you. If you’ve got nothing to let anywhere, people forget who you are. And don’t forget, we’re not the only people working in this space. Where we’re doing really good business is in the nonconsolidated part of our financials — like our joint venture with Shoprite. Because of our Reit status, we’re able to create a vehicle which gives certain tax benefits to the tenant/JV partner, and we believe over the next two-three years in South Africa there may be some really good opportunities with some of the big corporates.
Is South Africa’s e-commerce and logistics market at the point where it can sustain all the competition?
With South African GDP not being stratospheric, how do you grow? By taking market share. The best case study is how Shoprite in the past 25 years became the behemoth it’s become. Supply chain, I can guarantee you, is one of the key reasons that happened. And then you bring that to e-commerce; the consumer who is coming through the system is fickle — they want it, and they want it now. And there’s no business that knows that better than Amazon, so it’s going to be interesting with their entry. There are two RFPs [request for proposals] for Amazon in South Africa: one in Joburg and one in Cape Town; we’re involved in the Joburg one, and we hope to be successful. As boring as a warehouse is, it’s a very exciting space to be in. We’re currently sitting at about 12% of retail sales being online, and to put context to that, the UK is at 32%. I’m not saying we’re going there anytime soon, but South Africa has 60-million people, and if you grow that by 1.5%, it’s substantial.
