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In a slow local market, Growthpoint looks to Oz, Eastern Europe for growth

SA portfolio shrinks following asset disposals.

NOMPU SIZIBA: International property group Growthpoint reported its interim results today. For the six months ended December 2018 the company reported that its group property asset base grew to R138.7 billion, up from 4.3% on the six months ended December 2017. Its net asset value rose by 0.5% to 2 570 cents/share, and the company has declared an interim distribution or dividend of 105.8 cents/share to shareholders. That’s up 4.5% on the year prior.

To tell us more about the numbers and what’s behind them I’m joined on the line by Estienne de Klerk, the CEO of Growthpoint South Africa. Estienne, when you talk about having boosted your property assets by 4.3%, does this speak to the valuation of the properties you had before, or is it a consequence of having acquired or built more properties in the period under review?

ESTIENNE DE KLERK: Nompu, it actually is a combination of a couple of things. In the South African context, the portfolio actually shrunk slightly in that we had some disposals – around R2.8 billion. And then we also kept the valuations more or less the same as in the comparable period. So most of the growth that you see in the assets is really through the growth in acquisitions in our Australian and our Eastern European investments, as well as the revaluation in some of their assets.

In Australia there has been a really firm real estate market, and that has benefited the valuations in Australia.

And in Eastern Europe they have acquired more than €538 million worth of assets over the past period. So it’s been very active in that market.

NOMPU SIZIBA: In the South African market you are concentrated in the commercial sector, covering the retail, office and industrial space. What has your experience been in terms of vacancy rates in these categories? And, based on what we hear about a tough economic environment, particularly for the retail sector, was that one of the poorer performers?

ESTIENNE DE KLERK: Yes, the South African economy is probably the toughest that we’ve ever experienced. I don’t think in the real estate space, since we’ve been involved as management, have we ever seen all three sectors in a negative sort of trend. As a result, demand across the economy is reasonably weak.

Now, each one of the three sectors has slightly different dynamics. In retail I think a lot of the pain that is in the market isn’t all really economically driven, so clearly that plays a big role in the sales in the stores. But the amount of additional retail space that’s been developed is to a large extent being driven by the retailers themselves committing to those leases, and so you also have a result that you’ve got a weak fundamental market.

But across the board we can see that trading densities aren’t growing as strongly, although in our case they are still growing at 1.5%-odd. So it’s not all doom and gloom.

We also have made quite a big investment in the retail space in refurbing our shopping centres. We are spending around R500 million trying to upgrade these centres and ensure their dominance in their specific markets.

If we look at the office market, the market is probably the most impacted by the economy, and there we haven’t seen any growth at all. If anything, the market is probably contracting and finding that consolidation of office space, and people moving to cheaper office space, is kind of the trend in the market, particularly where there is the lack of confidence in a market as we have at the moment – economically, politically and otherwise. It’s also not conducive to signing long, big leases. So we are finding that deals are tough to come by and, if we do get them, then they are a little bit more expensive and the rentals are a little weaker. So there we have seen our vacancies tick up to 10.2%, and we are working really, really hard to try and combat that and turn that trend around. In the short term, if you look at their comments, that’s going to be a little difficult.

NOMPU SIZIBA: Yes.

ESTIENNE DE KLERK: The Eastern Cape and Durban, as two specific markets, have performed relatively better, and in those markets we don’t have these kind of vacancy rates at all. So post the election we hope to see some confidence return to the market, and we have done a lot of letting. Across the board, just in the first six months, we’ve done about 680 000m2 of letting. To contextualise, that would be probably half of Sandton that we’ve re-let in six months. So those are big volumes that we are putting through, and the market across the board is quite tough.

And the industrial side of the three sectors is by far the strongest. There we actually see still-positive reversions when we look at the leases that come up for renewal. But there are difficult nodes. We’ve found Midrand is quite tough. And any industry that is exposed to the construction sector – you’ve seen the news coming out of Group Five which has gone into business rescue. And then a lot of industries related to that, electrical suppliers and so forth, are finding things incredibly difficult. We’ve seen liquidations in many of those sectors.

So those markets are a little tough, but across the board the local portfolios are doing well.

Of course the V&A is a whole different kettle of fish. There demand is still very strong for new developments, and we are still seeing reasonably good growth there, albeit that the period until December was a little more difficult on the back of the water crisis. We saw a big drop-off in tourism into South Africa, specifically to the Cape, and that had a bit of a negative impact on the V&A. But I think over the long term we should see very, very strong growth there.

NOMPU SIZIBA: Estienne, based on everything that you’ve just said, when it comes to rental escalations, what has that meant? Has that meant that you haven’t even been able to raise escalations even as far as inflation?

ESTIENNE DE KLERK: Just to give some context on the statement, when we sign our leases we do have rental escalation. Typically, if you’ve signed a five-year lease, the average in-force escalation is just under 8% – around the 8% level. That has been maintained. Where the pressure has come is obviously on the up-front negotiation, on that commencement rental. That’s where in retail and in office those numbers have been slightly under pressure, and have gone slightly negative. But in industrial that number remains positive. So it’s not all doom and gloom; it’s just that obviously that initial rental negotiation is taking much, much longer where there are confidence issues, and then there is a bit more difficulty in terms of growing the rental. But our escalations in force remain intact.

NOMPU SIZIBA: In terms of your debt, you indicate that your gearing levels rose to around 35.9%, and you have described this level as conservative. So what sort of levels would be uncomfortable for you?

ESTIENNE DE KLERK: I think we’ve undertaken to the rating agencies – just to provide you some comfort, we have a nominal value of R35.3 billion worth of debt, which is the 35.9% to the total value of the assets. The reality is, if you take the interest number that we have to pay, that is covered multiple times by our earnings. So our debt is very conservatively structured, and our rating from Moody’s remains at AAA. We are one of only three companies in the country that have a AAA rating. I think the other two have international guarantees from their holding companies, so Growthpoint probably has the best South African credit available, and as such we still have very good access to the corporate debt market, the bond market. In fact, roughly 44% of our debt today comes out of the corporate bond market, where we are accessing debt directly from the institutional investors. And then we have very, very strong relationships with all the banks in the South African context. What we are seeing is that they are very, very comfortable with the way we have structured our balance sheet, and their ability to receive the interest, which is obviously paramount in this discussion.

Our two international subsidiaries, being Growthpoint Australia, also funds off a tame balance sheet, and in fact it has a rating very similar to that of Growthpoint on the international scale, and in fact can raise debt slightly more cheaply because their assets are in Australia, and the Australian national scale rating is so much better than that of South Africa.

In the Polish and the Romanian market, Globalworth has also been able to issue into the euro bond market. They have issued in excess of €1 billion worth of debt, and they are also finding those markets’ store quite deep and liquid, and priced better than certainly Growthpoint, the mother ship so to speak, can achieve itself purely on the back of our exposure to South Africa at this stage.

NOMPU SIZIBA: You indicate that your group strategy has been to optimise and streamline your South African portfolio, and introduce new revenue streams through your funds management business. Were you able to deliver on that strategy in the period under review? And just expand a little on what your funds management business focuses on, and the sort of returns that you are able to achieve.

ESTIENNE DE KLERK: I think our main focus on the South African portfolio is to optimise it. We have been trying to dispose of a portfolio of assets into the market, but with the way the interest-rate environment has gone, and the liquidity constraints in the South African context at the moment, it hasn’t really been that successful. And, as I mentioned earlier, we have disposed of about R2.8 billion worth of assets, which is quite significant. But ongoing, we are trying to run these assets at the most optimum; we still invest in the assets. We are trying to ensure that they earn the highest return they possibly can, and I think that will be ongoing.

In terms of our fund management business, we’ve got two initiatives which we’d like, that are up and running. The is a joint venture with Investec Asset Management, called the Growthpoint Investec Africa Property Fund, and we have raised commitments of $212 million. We are hoping to have that full commitment deployed by near the middle of the year, end of June. So we have progressed quite far with a couple of transactions, which hopefully will see us acquiring assets across Africa. That’s the one initiative,

The second initiative is that we have on balance sheet if you’d like, is the Growthpoint Healthcare Fund, and there we have managed to raise investments from local institutional investors into the fund, and the assets on balance sheet at this stage are round about R2.5 billion, which is invested into four hospitals as well as a block of medical chambers, which is attached to one of the hospitals.

We’ve also go quite a nice pipeline of assets that we are looking to acquire and develop. And, as we speak, Growthpoint on behalf of the fund is building the new Pretoria head and neck specialist hospital in Menlyn Maine, and hopefully over time we’ll be able to roll back the asset into the fund. So very, very good initiatives and I think it’s early days in that business. Hopefully we’ll be able to add some funds down the line and the idea is to grow and create a good, sustainable business.

We’ve also got a trading and development business, which not only develops for Growthpoint. We are building buildings for ourselves, but we are also prepared to develop for third parties, and we’ve got about R900 million worth of development ongoing for third parties – in other words, developing properties for other people.

We also do a bit of trading, where we buy buildings or we acquire them and we try and upgrade them and then sell them for a profit. But this market at the moment is being pretty conservatively positioned on that side of the trading and development activities.

But both of those initiative are growing quite nicely.

NOMPU SIZIBA: Our thanks to Estienne de Klerk.

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