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Growthpoint office vacancies have hit 20%

CEO Estienne de Klerk tracks company sector performances across the different geographies and rationalises the year-end bonuses paid.

FIFI PETERS: When was the last time you went to the Cape Town V&A Waterfront? For myself, it was in May before the Delta variant landed and lockdown Level 4 happened, restricting leisure travel out of Gauteng.

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But one of the owners of the V&A Waterfront – that is Growthpoint – joins the SAfm Market Update right now to talk about the situation on the ground, as well as the company results released a little earlier today (September 15, 2021).

I’m speaking with Estienne de Klerk, the CEO of Growthpoint South Africa. Estienne, thanks so much for your time. I was just looking at the numbers there regarding the V&A, and I see that things are still looking pretty tough. What is the situation on the ground?

ESTIENNE DE KLERK: The fact that we aren’t receiving any tourism has been quite difficult for the V&A; probably about a third of the tenants occupying a space in the V&A are quite dependent on tourism – all the hotels, restaurants, even jewellery, and so on, certainly that kind of trade. And while we are on the red list for the UK and other, let’s say, big tourist destinations for the V&A, that’s going to be pretty difficult for the V&A.

FIFI PETERS: I’m just looking at a headline in front of me right now on my TV screen, and it is speaking about the growing calls for South Africa to be dropped from the UK’s red list. I suppose you are also eagerly awaiting that.

ESTIENNE DE KLERK: We are very, very supportive. Purely the real estate business across the country has suffered quite heavily under many of the government regulations. Every time you go through another phase or the latest wave, the third wave, we obviously have to implement many of those regulations and our tenants suffer from that.

But then there are also positive parts of the business. Our fund-management businesses is growing quite strongly, as is our Australian business which has done very, very well. And, if you look at the South African business. It certainly has performed better than last year, where we were in the eye of the storm with Covid. In fact, even one of our businesses, the healthcare real estate business, has actually grown quite strongly at 11.6% distribution growth. So it’s not all doom and gloom.

FIFI PETERS: Would you say the healthcare part of the business received a booster shot from the pandemic?

ESTIENNE DE KLERK: In fact not so. The reason is that many of the private healthcare hospitals and the like are quite dependent on specific elective surgery. In many cases they were not able to perform elective surgery and as such it put certain pressures on their financial metrics as well.

But I would say it is an area that still needs to be developed in South Africa. There’s a huge need for quality healthcare among all our communities. That fund that we have there with several other investors certainly, we believe, is a big growth area in the real estate space over time.

FIFI PETERS: Your wings across the real estate space are spread quite far: 46 shopping centres, 166 office buildings, 208 industrial properties – according to your most recent statement. How would you describe the health of your overall portfolio?

ESTIENNE DE KLERK: Clearly the office sector has been most effected – not so much by Covid, but certainly by the weak economy that South Africa has been facing probably over the past five, six years. Covid just really compounded the challenges there, and we do need economic growth. Employment has a very direct correlation to the health of the office sector, so that area is a bit difficult.

Retail – South Africa is very well serviced with retail, potentially even over-serviced in the metropolitan areas. In the short term, specifically, all these lockdown regulations have made it a little bit difficult. But I would suggest that over time the sector should recover, certainly as the vaccination programme rolls out across South Africa.

And then the industrial side of the two sectors has probably performed the best. Interestingly enough, there we’ve had probably the most cases of business failure, specifically in areas that have links to the construction industry, steel or eventing and tourism. Those areas have been particularly difficult. But on average no sector store performs reasonably strongly.

FIFI PETERS: But with the office, I would argue that Covid has had an impact on how people view the office and view the need for an office in some corners. Work from home or this hybrid model of working is influencing the decisions of some companies to relook at their current office space. What are your tenants saying?

ESTIENNE DE KLERK: No doubt. I think the use of office probably will change over time. I think it’s pretty uncertain as to exactly what the impact ultimately will be, but the impression we get is that most corporates still believe in having an office, and the sustainability of working from home is under question as we speak. The reality is that most staff will require flexibility.

I do think that you’ll find that more amenities will be required in the office to attract staff back into the office space. There are many activities where collaboration, training and kind of corporate culture-building activities cannot happen from a work-from-home scenario. I think many people actually prefer working in the office. But, given the current situation and the regulations that is being hampered. I think those will improve as the working population gets vaccinated and business can sort of return to normal.

But we do expect that, certainly if we go and look at some of the research we’ve done in Australia and some of these developed markets, flexibility probably reduces the requirement by about 10%, maybe 15%. That certainly has started playing out in our markets to some extent, but there are countervailing pressures. So social distancing and amenities and sort of collaborative space require additional space. So it’s very difficult to say; worst-case scenario is a 10 to 15% reduction in that requirement.

FIFI PETERS: Does that apply to your own offices? I’ve been to one of them in Sandton; it is very spacious. There were a lot of people in the office – it was a very different time back then. But how are you thinking about your own office. Estienne?

ESTIENNE DE KLERK: From a Growthpoint perspective we’ve always had a level of flexibility for our staff to be able to work from home and work in the office. Being a property company, we’re obviously quite cost-conscious and as such we’ve always had quite humble space, if you like. In saying that, from our perspective I don’t see our requirement changing materially because I think we’ve probably already gone through quite a big part of that metamorphosis.

FIFI PETERS: On to your shopping malls, things you say are looking a little bit better. I was at a mall even at the weekend and there were quite a lot of people; all the parking bays were full. But at what cost has it come for the group to keep all your tenants put?

ESTIENNE DE KLERK: If you go and analyse the level of discounts that we have offered our tenants – and that’s across the board, not just those limited to retail – from April last year to the June 30 it was over R475 million. We’ve also offered them deferrals on rental for another R191 million-odd. And if you just take the extra costs of having to implement all these regulations, that was another R13 (million). So we probably spent close to R680 million-odd on looking after the health of our clients, if you like, the tenants.

And I think what we are seeing is that in the retail formats certain sectors have performed pretty well. So food, homeware, electronics, value fashion and these components, home decor categories, have performed pretty strongly.

The areas that have been pretty weak are restaurants and all the areas where regulations directly impacted on these tenants. So that’s the area where we’ve had to focus; that obviously is a big area of small business so we’ve had to spend quite a lot of money in helping small businesses through this difficult time and continue to lobby with government to loosen the regulation somewhat and drive harder on the vaccination programme. Ultimately the only way South Africa can come back to work and start operating normally is through that. And what we’ve seen is where regulations have been relaxed and trade does come back and those businesses will recover. So it’s absolutely essential from an employment perspective that our country goes back to work.

FIFI PETERS: Just give us a sense of your experience of the various lockdowns in the various geographies in which you operate –Australia, South Africa, Europe. What has your experience been and which lockdown would you say has been the hardest for the group?

ESTIENNE DE KLERK: If we go and look at the different geographies, let’s start in South Africa. There we had pretty tough lockdowns and regulations that were continuous, and in very specific sectors it really impacted tourism and restaurants very materially – as well as the liquor sector. We’ve seen that play out and I think there’ve been huge job losses in those specific sectors.

If we go to Australia, that is an ‘island’ and it did a sort of lock down the ‘island’ to some extent; but actually economically the country is performing well, and our portfolio there is doing really, really well. In fact, valuations have gone up by over 8%, and the NAV per share over a 14% increase. So that business is in a very, very strong position and hasn’t really been impacted by Covid at all, or the regulations.

Then if we move to Eastern Europe, our main focus there is industrial, big corporate clients and office buildings. Yes, it was impacted by lockdowns to some extent, but because we have very big quality tenants in that business that managed to get through this period reasonably well. But both Australia and Eastern Europe pulled back their distributions just to ensure that the balance sheet is strong in both those businesses.

And then I would say of all the businesses, the worst impacted – we’ve got a small business in the UK that owns seven shopping centres. The UK was probably the most draconian on lockdown regulations, and what probably hurt us even more was that the government effectively put regulations in place where the landlords could not act against any non-paying tenants. So many of them didn’t pay – not because they weren’t trading well, but just because they were protected by the government per se. We are working through some of that and the UK is coming out of lockdown now and has opened up its economy quite a bit.

As we looked at the soccer over the weekend, you could see people all back in the stadium. So we do think that the shopping centres that are community centres and sort of service the communities in terms of their needs-based shopping, we’ll return to normal and particularly hopefully potentially do very, very well.

FIFI PETERS: Just on the student housing, the new venture there, what are your expectations from that part of the business in the medium term?

ESTIENNE DE KLERK: That is a fund where we co-invest together with other institutional investors into the specific space. There is a huge need and demand for quality accommodation at our universities. The government has obviously recognised that through the NSFAS [National Student Financial Aid Scheme] fund, which supports this area.

So what we are looking to do is hopefully being able to attract quite a bit of capital into those specific areas and help consolidate that market and create a quality real estate business that provides quality facilities for our students at the universities across our country.

FIFI PETERS: Estienne, a last question. You’ve gone against the grain presently in your sector by rewarding your shareholders with a dividend this time around. Many of your peers in the sector aren’t, because things are tough. So what then can your shareholders look forward to in the year ahead?

ESTIENNE DE KLERK: At Growthpoint, as we went into this very, very difficult period through Covid, we had a distinct focus on ensuring that our balance sheet strength was there. So we raised through two equity raises and low disposals probably R6.3 billion, and brought down loan to value, certainly on the South African balance sheet, to around the 35.1% mark. So the balance sheet is in very good condition, which means that it puts us in a position to be able to distribute still in the ordinary course to our shareholders.

What we have further done is we have reduced that payout ratio. So from a Reit perspective we have to pay out at least 75% of our taxable earnings. We are paying out at around the 80% level and I probably foresee that that will be sort of be the conduct going forward – just to retain some capital in the ordinary course which we use for maintenance and for capital expenditure.

FIFI PETERS: All right. Estienne, thanks so much for your time, sir. That’s Estienne de Klerk, the CEO of Growthpoint South Africa.

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