Deteriorating economic conditions in South Africa dragged down property giant Growthpoint’s performance for its half-year to December, virtually wiping out the income growth it achieved from its offshore property investments in Australia and Europe.
This was the key message from Growthpoint executives speaking during a media briefing on Wednesday, following the release of its interim results.
Growthpoint, a JSE Top 40 company and SA’s largest primary listed real estate investment trust (Reit), reported nominal growth in dividends per share (DPS) of just 0.2% or 106 cents per share for the six months ending December 31, 2019.
While this was in line with the group’s guidance for the period, it confirms Growthpoint’s worst DPS performance since Reit legislation came into place in late 2013.
“These are the toughest conditions we have experienced in 20 years,” said Growthpoint Group CEO Norbert Sasse.”The only reason we are seeing some growth is due to our internationalisation strategy.”
“The group’s growing international footprint gives us a bit of a defensive edge. The considerable gains from our internationalisation strategy were erased by the underperformance of our domestic property portfolio as a result of SA’s economic decline, with the V&A Waterfront being an exception,” he noted.
“Economic conditions in South Africa have deteriorated to such an extent and pace that we needed other strategies to literally stand still [from a DPS growth perspective]. And there is no sign of short-term recovery.
“With the SA economy declining further, we are still guiding for nominal full-year growth, if any,” he added.
Sasse was loath to offer any DPS forecast for 2021, saying the group will only comment when its 2020 full-year financial results are released in August.
With the coronavirus outbreak hitting the global economy – and already impacting Growthpoint’s key markets in SA, Australia and Europe (it has a presence in the UK, Poland and Romania) – he concedes that the virus presents a risk to growth.
“What happens with coronavirus only time will tell, but for the SA economy to recover we need a strong global economy and more foreign direct investment,” said Sasse. He pointed out that with the financial health of both the government and the private sector in SA having deteriorated over the last few years, both sectors had a reduced ability to stimulate growth in the economy.
Growthpoint, which now has a R160 billion property portfolio in SA and offshore, reported distributable income growth of 2.2% for the six-month period to R3.2 billion. During the period, it invested R4.2 billion internationally, including a R2.9 billion deal finalised in December for a 51% stake in UK retail Reit Capital & Regional.
The deal saw its offshore property exposure increase to just over 35%, adding to its 62% long-time majority stake in ASX-listed Growthpoint Properties Australia (Goz) and 29.4% stake in LSE AIM-listed Globalworth Investment Holdings (GWI), which invests in the Central and Eastern Europe nations of Poland and Romania.
Although its investment in Capital & Regional was finalised in the last week of 2019, Growthpoint said the UK fund had made a positive 2.7% contribution to its distributable income growth. GWI contributed 2.9% of Growthpoint’s distributable income growth, while Goz made a 0.8% contribution.
Growthpoint now owns and manages a diversified portfolio of 563 property assets, including 441 properties across SA valued at R79.2 billion and a 50% interest in the properties at Cape Town’s landmark V&A Waterfront, valued at R9.7 billion. The domestic portfolio saw a 2.9% decline in its contribution to the group’s overall distributable income.
Estienne de Klerk, CEO of Growthpoint’s South African operations, said almost all of its local portfolio metrics weakened during the six months, with overall vacancies increasing from 6.8% to 7.4%.
Office vacancies increased from 10.4% at its 2019 year-end to 11.5% for its half-year, while retail and industrial vacancies were up marginally. Rental arrears also increased and bad debt expenses spiked from R4 million (FY19) to R20.8 million for the interim period. The group also saw a R730.7 million devaluation of its overall SA portfolio.
De Klerk said the V&A Waterfront was the star performer yet again within its SA portfolio, noting that the group’s properties in the Western Cape and KwaZulu-Natal are performing better than the rest of the country.
He added that the group is still investing in SA, having pumped around R1.4 billion into new developments and capital improvements during the period.
This includes the development of the landmark new R1.2 billion 144 Oxford Street office building in Rosebank, which was completed in February 2020. The building was developed as a speculative project; however, Growthpoint has secured a major anchor tenant that will take occupation in July.
Commenting on Growthpoint’s half-year performance, Nesi Chetty, senior listed property fund manager at Stanlib, said SA’s negative operating environment continues to weigh on the group’s DPS and net asset values, with both flat over the period.
“Growthpoint has sufficient liquidity and fairly new centres, so the group hasn’t needed to rebase their earnings and adopt a payout ratio like we have seen from other listed property companies,” said Chetty.
“The group is still guiding to effectively zero [DPS] growth for the full year. While their international assets are likely to deliver good yields and returns, this will be offset to a large extent by the pressures seen in the local property portfolio at an operating income level.”
Chetty also warned that the spike in coronavirus cases will have a negative impact on inbound tourism to SA, which will affect the performance of the V&A Waterfront, the country’s top tourist attraction.
Ian Anderson, chief investment officer at Bridge Fund Managers, also raised concerns about the potential ramifications of the virus.
“The spread of the coronavirus in Europe is a significant risk for the SA businesses that have invested heavily into the region over the last five years or so.
“At this stage we can only speculate what the final impact will be, but it’s certainly something else for investors to worry about.”
Anderson points out that from Monday, all schools, universities, museums and cinemas in Poland will be closed to prevent the spread of coronavirus. “They only have 26 confirmed cases and no deaths, but are already taking quite drastic action, which is likely to curtail economic activity in the region and discourage tourism.”
Listen to Nompu Siziba’s interview with Estienne de Klerk of Growthpoint SA: