Write-downs of commercial property book values in South Africa’s listed real estate sector are continuing, with Mall of Africa majority owner and developer of Waterfall City, Attacq, on Tuesday reporting an 8.6% or R1.7 billion devaluation in its local portfolio.
The devaluation, which is on a like-for-like basis (excluding newly completed developments), is reflected in Attacq’s annual financial results for the year ended June 30, 2020.
It comes as the group opted to offer rental discounts to the tune of almost R103 million to tenants impacted by Covid-19 lockdown restrictions, largely in the last three months of its financial year to the end of June. Besides the impact on rental income, property valuers are also pricing in negative rent reversions.
A warning sign
This is the first major devaluation in Attacq’s local property portfolio since it listed on the JSE in 2013. With most of the group’s local assets being newer properties surrounding its Waterfall City mega-development in Gauteng, the devaluation serves as a warning sign to property counters that have older portfolios.
Fellow real estate investment trust (Reit) and South Africa’s biggest property group, Growthpoint, warned earlier this year that commercial property valuations in the country could plunge by between 10% and 20% over the next two years in the wake of the Covid-19 fallout.
While Vukile Property Fund has played down major devaluations taking place, counters that have prime urban retail assets such as Hyprop and Liberty Two Degrees (L2D) have seen a double-digit decline in valuations.
On Monday Hyprop reported a R4 billion devaluation in its South African portfolio, with the book value of its Clearwater Mall being written down by R1.1 billion alone.
Melt Hamman, CEO of Attacq, stressed during a results media briefing on Tuesday that the decline in the valuation of the group’s local portfolio is “mainly on the back of tenant rental relief” due to Covid-19.
“We have seen an 8.6% or R1.7 billion devaluation in our South African portfolio and a R1.3 billion devaluation the MAS Real Estate portfolio [the group’s offshore investment in eastern Europe]. However, Attacq is trading at around a 40% discount to its net asset value [NAV],” he pointed out.
Attacq reported a 10.5% decline in its core distributable earnings per share for the full year, to 73.1 cents.
At its half-year results presentation in March before Covid-19 hit South Africa, the group reported an 11.1% increase in its dividend per share (DPS) and was eyeing double-digit DPS growth for its full year.
On the back of its strong first half performance, Attacq paid out an interim dividend of 45 cents per share. However, the group noted on Tuesday that due to the uncertain economic outlook and need to preserve liquidity, it has decided not to declare a final cash dividend.
“Despite this decision, the company has satisfied all Reit regulatory requirements, including the minimum 75% payout ratio,” said Attacq CFO Raj Nana.
Attacq’s gearing or loan-to-value (LTV) ratio surged from 37.7% to 45.7% over the financial year. The group said the increase is largely due to lower investment property values, the reduced value in the MAS investment and an increase in total interest-bearing debt.
Nana noted that Attacq had extended the maturities of its debt, resulting in no facilities falling due prior to September 30, 2021.
Capital management focus
“At the start of Covid-19, we increased our strategic focus on capital management,” he said. “We have sufficient liquidity available to meet all operational, development and finance costs over the next 12 months.”
He added that the group is looking at disposals to reduce its overall debt. This includes exiting the remaining investments within its ‘rest of Africa’ portfolio (outside South Africa) that the group jointly owns with Hyprop.
Attacq has also earmarked several assets in its South African portfolio for disposal, some of which are at an advanced stage.
Commenting on Attacq’s results, Craig Smith, head of research and property at Anchor Stockbrokers, said: “There are likely to be further declines in property values over the next six to 12 months within its South African portfolio.
“Notwithstanding further declines, Attacq will still be trading at a large discount to NAV.”
He warned: “Attacq will need to continue to actively manage its liquidity and balance sheet, especially in the current environment where the market prioritises balance sheet strength and a strong liquidity profile.
“However, it is important to note that the group has managed to obtain extensions for any debt maturing prior to September 30, 2021 as well as relaxations of its interest cover ratio covenants.”
Smith noted that the major driver of Attacq’s growth is the Waterfall precinct, which includes a significant future development pipeline. “Therefore, the performance of the properties and developments within the Waterfall precinct are key to the longer-term performance of the group.”