The demise of African Bank Investments Limited (Abil) has led Growthpoint Properties (Growthpoint) to count the financial cost it suffered through its exposure to the bank, but the property counter is emphatic that this is a “temporary blip”.
Growthpoint, the largest JSE-listed property company by market capitalisation (R68 billion), says its industrial portfolio with three warehouses, which were tenanted by Ellerine Holdings (Ellerines) – Abil’s furniture retail subsidiary – suffered due to the bank’s collapse.
Growthpoint CEO Norbert Sasse says the industrial portfolio started feel the effects from October, as a result of Abil being placed under curatorship in August and Ellerines going into business rescue in September. Vacancies for the six months to December 31, 2014, increased to 6.4% from 4.9%.
“Vacancies would have been 5.4% had it not been for Ellerines,” says Sasse.
Vacancies in the industrial sector increased by 2.1% to 5.8% with the three warehouses covering 46 404 square metres. The retail sector saw vacancies reach 4% of which 0.5% represents Ellerines with furniture brands such as Bears, Geen & Richards, Wetherlys and Furniture City.
Growthpoint saw total rental arrears in its portfolio increase to R48.4 million from R34.7 million. The counter’s bad debt rose to R11.8 million from R6.6 million. But despite the impact of Ellerines on Growthpoint’s operational performance, Sasse says its exposure to the furniture group is still minimal.
“It [the impact of Ellerines] is quite marked on the industrial portfolio, but thankfully we are a diversified portfolio with retail and office exposure. The impact on the retail portfolio has been nominal. It’s a temporary blip,” Sasse tells Moneyweb.
He says that the warehouses which were occupied by Ellerines are quality assets and are currently under negotiation. “Two of the assets are less than three years old and very lettable. We are aggressively marketing these top-notch industrial properties to tenants.”
Growthpoint might not be able to commit the properties to prospective tenants at the same rate it charged Ellerines, with the rate estimated to be “10% to 15% lower”.
“But at least you can close that gap,” he adds. “The impact for the year to June is going to be marginal, in excess of R20 million on our budget that we would have lost.”
Growthpoint declared distribution growth of 7.5% to 84.4 cents per share.
The impact of Ellerines being placed under business rescue has reached far beyond Growthpoint’s property operations, as the company expects debt taps to dry up. Institutional investors in corporate bonds who were hit by Abil’s collapse are on the fence about issuing capital to companies, including Growthpoint, says Sasse.
This is supported by the decline in Growthpoint’s borrowings from debt capital markets, which declined to R3.4 billion in the period under review from R3.9 billion. Despite this setback, Sasse says the property counter has taken another view to tap into other sources of funding such as traditional banking facilities, which stands at R8.8 billion.
“There are alternatives,” he says. “We are not completely beholden to the independent bond market and we are pretty comfortable with the level of liquidity among the banks. If we need equity, the equity markets are still pretty alive and we could deal with any liquidity issues.”
Access to funding has become difficult in South Africa, as borrowing cost are becoming high. This has prompted Growthpoint to be optimistic about the Australian market. The property company has exposure to the Australian market through its Growhtpoint Australia investments.
“Funding has become easier in Australia; you could not get [debt] facilities for two years. Now you can get five-year facilities easier and the costs keep coming down.
“In Australia you can still buy good assets at 6% to 6.5% and you can borrow below 5%. The dynamics in Australia are positive,” says Sasse.
Growthpoint’s shares were down 1.62% during Wednesday’s trade to R29.17.