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Redefine H1 office renewal rate down 24.5%

The accelerated vaccination rollout in Poland bodes well for a strong recovery in that retail environment: CEO Andrew König.

SIMON BROWN: I’m chatting with Andrew König, CEO of Redefine. Results out for six months ending February. Net asset value just below R7.20. Distributable income just above 26 cents. Andrew, morning. I appreciate the early morning time. Your loan to value (LTV) down by 3.6% to 44.3%; you’re targeting 40%. A lot of moving parts there – currencies, valuations. You talk around improvements as well. Your 40% target? What sort of timeframe to get to that target?

ANDREW KÖNIG: Good morning, Simon and your listeners. Our targeted LTV of sub-40% will be reached round about this time next year. It is premised off a very active and deliberate process of selling off non-core assets, Simon. We have concluded transactions to the extent of R4.8 billion; these are being executed upon now, and will take us into the new financial year to complete – which will take us down to that level. 

You did touch on a risk and that is valuations. However, we do believe that we are reaching the bottom end of the cycle from a downward trend. As you know, we had a 1% devaluation in this period, having had a 10% devaluation in the prior year. What we are seeing now is a bottoming out of that and we believe that we are reaching a level where we are going to start growing again, which will also translate into LTV improvements, but that’s not factored in our thinking at this stage.

SIMON BROWN: Okay, got that. So if at some point those valuations start to tick higher, that helps LTV and that’ll actually sort of accelerate and take you beyond the target. Your valuation process – is it the sort of valuating over a three-year rolling period?

ANDREW KÖNIG: No, Simon. At Redefine we value every property twice a year, and it’s done by independent valuers. The interim valuation process is a desktop valuation, and the year-end valuation is a full valuation process that is independently conducted by registered valuers.

SIMON BROWN: Okay. And so twice a year, no tailwind that minus 10, minus one; we could see a tick up, frankly, at the next set of numbers coming through.

ANDREW KÖNIG: We believe so, Simon. With the vaccination rollout programme beginning we believe that’s a signal that things are going to start turning. Confidence is going to start creeping back into the system. Mobility hopefully will follow once the vaccination programme is in full swing, and that will be good for both retail and office sectors. And with that will come valuation improvement.

SIMON BROWN: Your lease renewals, as you mention, office and retail – my listeners understand the pain points that have been experienced in those two areas. Office probably, is it fair to say, is still taking a little more pain than retail?

ANDREW KÖNIG: Very much so, Simon. If you looked at the office sector going into the pandemic we did have an oversupply to start with. Covid has exacerbated the situation and with a sluggish economy, as you know, there’s a low level of take-up of new space and there’s churn in the market, which is also causing a lot of competition amongst landlords to compete on the rentals. That is translating into negative reversions on renewal of leases at the moment.

SIMON BROWN: You mentioned those renewals. I imagine just generally under non-pandemic circumstances there are some leases that sort of drop out, companies go bang, they move premises, whatever the case may be. How are your lease renewals looking in terms of clients renewing, but also in terms of prices you are receiving?

ANDREW KÖNIG: Well, just on that point, Simon, in the office sector we had a negative 24.5% renewal rate for leases that came up for renewal during the last six months. Having said that, we had a 94%, in fact a slightly higher 96% tenant-retention rate. There is give and take in a lease negotiation, and we’d rather hold on to a tenant in this market than let them go elsewhere if it’s just price that’s motivating their reason for moving.

SIMON BROWN: I hear you on that. I’d rather hang on to them. You’ve obviously got the stake in EPP, which is Eastern Europe, which is Poland. My sense is in Poland we have seen vaccinations coming through and we know this story. In Eastern Europe generally, Poland in particular, there are high levels of growth, low levels of unemployment. There has been some pressure on that. But I imagine that as a market we could probably look at them and say, they’re probably ahead of us in terms of pandemic recovery, and certainly ahead of us in terms of growth projections for the country as a whole – and therefore the property space.

ANDREW KÖNIG: Absolutely, Simon. And if you look at where they sit with the vaccination rollout programme, the government has declared that by the end of August this year they would have completed their program, which bodes very well for a strong recovery in this market. The forecast is that within a year after the pandemic they will be back to pre-Covid levels from a GDP point of view, which is very supportive of a buoyant retail environment.

SIMON BROWN: A quick last question. Eskom has just announced that they are sort of quasi-suspending load shedding. You have some solar capacity. You didn’t have any new projects during the period, but when you look at new developments, is solar a serious consideration, perhaps even to give your tenants security of power?

ANDREW KÖNIG: Very much so, Simon. We’ve got one of the biggest solar PV fleets in the country. We generate about 5% of our electricity consumption through solar PV, and every development absolutely has a solar component to it. The one big issue at the moment for us is that Nersa has got a one-megawatt restriction output of a plant; it will be relaxed in due course. Once that happens, we’ll automatically be able to increase our existing fleet’s output by the capacity that that each of the plants can deliver. In anticipation of that, we are very excited that we’ll be able to take our 5% up to closer to 10% in due course. 

SIMON BROWN: Okay. We’ll leave that there. Redefine CEO Andrew König, I appreciate the time this morning.



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