Dipula Income Fund – the mid-cap real estate investment trust (Reit) that made a bid for SA Corporate Real Estate earlier this year – has embarked on a fully fledged venture to diversify into the residential property market.
Speaking to Moneyweb on Wednesday following the release of its full-year results to August 31, Dipula CEO Izak Petersen said the group had launched a new unit, Dipula Urban Village, as part of its expansion into the residential market.
“By the end of our 2020 financial year, we plan to have around 10% of our gross group income come from our newly branded residential division. We are looking to have between 1 000 and 1 500 residential apartments within this new internally managed division, which will grow over time,” he added.
At the end of its 2019 full-year, Dipula held a R8.9 billion portfolio of retail, office and industrial property assets across the country. In 2018 the fund started converting some of its office properties, which had higher vacancies, into apartment blocks as it dipped its toes into the residential property market.
In the face of tough trading conditions locally, several of Dipula’s larger industry peers have diversified offshore in recent years in search of better returns. But Dipula has chosen to remain a purely SA-focused Reit.
“We don’t have plans to invest offshore,” says Petersen. “Beyond the traditional property sectors of retail, office and industrial, we are now diversifying into the residential market in SA.”
He says the Dipula Urban Village is being developed as a fully-fledged and branded residential operation.
“This means that our all our residential buildings, whether located in Joburg or Cape Town, will come under the Dipula Urban Village brand. We aim to ensure the same level of service and quality in all our residential buildings. The apartments will be rented out.”
Petersen says while some of Dipula’s new residential stock is from office-to-residential building conversions, the fund is open to new developments in the residential space as well acquisitions. Dipula will take delivery of 420 residential units in January next year in one of its first major residential schemes, valued at R235 million.
Rael Colley, a real estate analyst at Anchor Stockbrokers, says Dipula’s diversification into residential “can be seen as a defensive move”. However, he notes that the residential rentals market in SA is also currently under pressure.
“The new division seems to have been born out of Dipula’s initial conversion of some of its office properties to residential. This might be a defensive play by the fund, but the mid- to lower end of the residential property market is stagnant in terms of rental growth currently, especially in the R3 000 to R7 000 a month range,” adds Colley.
He says the fact that Dipula’s residential assets are not in the highly competitive CBD market is a positive. “Locations outside the city centres and near suburbs generally get higher rentals.”
Dipula, which has an ‘A’ and ‘B’ share structure, delivered a mixed bag of results for its full-year. The fund saw improved operational metrics, but distributions for the period were lower.
Its dividend per A-share increased by 4.2% year on year to 110.25 cents per share (2018: 105.81 cents) and is in accordance with the A-share dividend policy. The dividend per B-share reduced to 82.71 cents per share (2018: 99.68 cents), resulting in a combined dividend per share of 192.96 cents. This was down compared to its 2018 full-year combined dividend of 205.48 cents per share.
On the operational side, Dipula managed to reduce overall vacancies in its property portfolio from 7.5% to 6%. It also secured positive rental reversions in its retail and office property portfolios. The fund’s retail and office properties contribute more than 80% of its gross income.
While Petersen concedes that Dipula’s dividend per share had declined for the year, he points out that the group’s revenue increased by 17% – from R1.14 billion to R1.34 billion.
“We issued further shares in the fund late last year, which has also led to a dilution of the dividend payout. Also worth noting is that we are paying out our full dividends for the year, unlike a few other funds that are holding back a percentage of dividends in the context of difficult market conditions,” he adds.
Commenting on Dipula’s results, Colley notes: “For a purely SA-focused fund, it has delivered a decent performance. Its dividend per share is slightly lower than the guidance it gave at the half-year, but this is still pretty much in line with expectations. While Dipula’s dividend growth guidance for next year turns positive again at 2%, this reflects the tough listed property market.”