Despite the consensus that South Africa’s commercial property sector is under pressure in light of dismal economic growth, things are looking up for Arrowhead Properties (Arrowhead) in the sector.
Arrowhead is bullish into the commercial sector – particularly retail, office and industrial – as it announced a strong pipeline of opportunities.
Over the next six months, the counter expects to conclude a pipeline of commercial properties for acquisition worth R1 billion. As the counter’s commercial portfolio grows, it is also eyeing to dispose properties collectively valued at R70.5 million. Some of the properties up for disposal include an industrial property in Strijdon Park, retail property in Benoni and office property based in Johannesburg.
Arrowhead’s chief operating officer Mark Kaplan says the commercial sector has been competitive, but there are signs of the sector improving.
“Commercial property pipeline has dried up and opportunities dried up for a while. As it stands, the commercial pipeline has picked up based on the pipeline we are looking to conclude,” says Kaplan.
Since Arrowhead’s listing in 2011 it has assembled a commercial portfolio of 155 properties, from its initial 89. The average value per property increased from R17 million during its debut on the market to R41.6 million, with the average lease profile increasing from 2.4 years to 3.7 years.
For the six months to March 31, Arrowhead’s commercial property exposure is 80% by value represents the entire portfolio. However, the company has been more acquisitive on the residential sector where it acquired assets worth R257 million during the period.
It is also on track to list its residential sector subsidiary Indluplace Properties, a real estate investment trust (REIT), by June. The residential portfolio is set to be worth R1.5 billion, read more here.
Head of listed property funds at Stanlib Keillen Ndlovu says Arrowhead now also has meaningful exposure to the residential sector which has favourable demand-supply characteristics.
Arrowhead also has an indirect exposure to more commercial asset through its 23% stake in Dipula Income Fund B units, which represent 11.6% of voting rights in the company. Arrowhead’s financial director Imraan Suleman says the company might increase the stake “if the opportunity presents itself.”
Commercial properties still offer decent returns, as suggested by IPD’s 2014 annual South African property index. Direct property returns, according to IPD figures, decline to 12.9% from 15.9% in 2013. The total return is considerably low when pitted against the return seen in the boom years of 2005 of 30% and about 27% in 2007 (before the start of the financial crisis in South Africa).
The best performing sector for the year was industrial, netting total returns of 14.1%, followed by retail (13.3%) and office (12.1%).
Some industry players view Arrowhead as being too dependent on its core portfolio for growth, but Suleman says growth comes from its acquisitions.
Meago Asset Managers Jay Padayachi says Arrowhead seems to be doing “the right things” to make the portfolio defensive including quality enhancement of the properties and hedging out 96% of the debt over a longer duration. It hedged its debt over 3.9 years.
“What was impressive was a strong core portfolio net property income growth dispelling the perception that Arrowhead draws above-sector growth from financial engineering. And the R 1 billion pipeline is looking attractive at earnings enhancing levels,” says Padayachi.