FIFI PETERS: Equites Property Fund is a property group that specialises in logistics properties here in South Africa, as well as in the UK. In this morning’s statement when it released its results (to end February 2022), it communicated that it had met its own expectations as a company by delivering double-digit returns to its shareholders in the 2021 financial year. It also said that, as of this month, May, its South African portfolio of 1.2 million [square metres] was fully occupied.
We’ve got Laila Razack, CFO of Equites Property Fund on the Market Update for more, Laila, thanks so much for your time. Would it be correct to say that business is booming, particularly as it pertains to your South African portfolio?
LAILA RAZACK: Hi, thank you for having me. I think that that’s probably fair to say. I think we’ve been through a period of incredible turmoil and uncertainty, but all of that economic uncertainty has really supported the trend and demand for logistics assets. So, as far as our assets go, both in South Africa and in the UK, I think it’s fair to say that business is booming.
FIFI PETERS: How different does the picture look as of now, today, May, as you and I have this conversation, compared to your company year-end in February?
LAILA RAZACK: I think that there are a couple of factors which we’ve really seen coming through in South Africa, which only strengthened between February and May. One of those is really supply-chain optimisation. Retailers in South Africa are looking to improve supply chains. Globally we’ve seen supply-chain disruptions. We’ve seen the ports being absolutely jampacked. We’ve seen headlines about supply-chain disruptions throughout the last 18 months, and,
…I think in South Africa what we’re seeing is that a lot of retailers are looking to fortify and strengthen their supply chain, the distribution centre [DC]or the warehouse [being] an essential part.
What we’re seeing is a lot of demand. The big retailers have completed a transaction with TFG, The Foschini Group, the consumer group. We are building them a new DC up in Gauteng. We are also expanding one of the DCs which is already in our portfolio, and we’re seeing a lot of that demand coming from other retailers who are just looking to fortify the supply chain.
FIFI PETERS: And the picture in the UK? I think you suggested in some of your opening remarks that the picture is not materially different from [that in] South Africa – is that correct?
LAILA RAZACK: It’s stronger. What happened with the advent of Covid was that we found a shift in the retail landscape. Consumers used to go into a bricks-and-mortar store, and they’d do most of their shopping on the high street, whereas now in the UK above 25% of all total sales, excluding fuel, is done online. At the peak of the pandemic it actually reached 36% of total sales [being done] online. So what’s happened is that suppliers and retailers have had to change the way they think about their supply chain, and Amazon was very active in the market. They’re starting to pull back slightly, but there are other retailers who are looking next, for example – very active. And in the third-party logistics providers, the DSVs and the DHLs, all of the companies that need to actually do those deliveries are very active in that market.
The other thing which is really strength in their investment case is that with Brexit and with the supply-chain disruptions I spoke about earlier, a lot of companies are setting up DCs and warehouses closer to where their end users are. Whereas before they adopted a just-in-time shipping or supply-chain approach, now they’re adopting what we call just-in-case. So they have DCs closer to their end customers so that they don’t run out of stock, so that there aren’t these supply-chain disruptions which interrupt their businesses.
In the UK it’s absolutely booming.
We’ve had a record two years of logistics assets in the UK outperforming every other asset class, and it really is just a fantastic space to be in right now.
FIFI PETERS: So these positive changes that have happened in the logistics industry – are they here to stay, or does everything go back to the way it was once we finally fully deal with the pandemic, once we finally fully deal with some of the knock-on effects of the pandemic, being the disruptions to the supply chain?
LAILA RAZACK: There are some which are definitely here to stay; I think trends such as e-commerce. I don’t think those will reverse once consumer behaviours change. There will always be space for bricks and mortar, and for more people going into stores from an experiential point of view. But consumer behaviour has changed and the supply side to supply these online sales has definitely changed and I think that that’s here to stay.
On the supply-chain disruption side, what these disruptions have caused is that retailers are really looking at the entire supply chain, and it’s not only dealing for all, making provision for crisis. It’s really how they can make their supply chain the most resilient it can possibly be. I think that in doing that there’s a lot of consolidation. Some of them may have had four smaller DCs around various areas of the city and now they’re looking at making one big DC where they can benefit from economies of scale. So I think that trends like that are really here to stay – and we don’t really see that slowing down in the near term.
FIFI PETERS: So, just given the fact that you are essentially fully let in South Africa, you’re fully let, business is booming – in fact, it’s even stronger in the UK – I’m interested in the rate at which you’re accepting these and you’re taking these new tenants, because we know that the property sector has had to give quite a lot of relief throughout the past two years on rent, on rent increases and the like. So talk to us about that. At what cost are you getting new tenants and keeping existing tenants?
LAILA RAZACK: What we’ve seen is over the last three or four years rental growth has been quite muted and, as you rightly said, during the pandemic we had to make a lot of provisions. Our impact was slightly less than the retail tenants, but there were still a lot of tenant concessions and renegotiations.
What we are seeing now, however, is that inflation has come through in building costs and that has actually increased the cost of building these facilities. What that means is that it has naturally forced rentals to start moving.
For example, a box that we could build at R10 000/square metre 18 months ago, due to increases in steel costs and in all other types of building materials, that same box now costs us R12 000/square metre. That means that in order to lift that and to make a wheel/deal ……7:15 that is accessible to us, we have to start charging higher rentals.
So we are being a lot more discerning about the rates at which we market these properties and we’re being careful about the tenants that we choose and the type of relationships we enter into. But definitely from the market conditions right now the demand, as well as the fact that there are very low vacancies and construction cost inflation – all of those are really contributing to an environment where we see rental growth coming through.
FIFI PETERS: Is this similar to the model, I suppose, that you will follow in the latest distribution census that you are building for — is it Promontoria Logistics UK? That deal is also coming out today. So on that deal your shareholders can rest assured that you’re not doing it for change.
LAILA RAZACK: No. That deal is an interesting deal. We’re not actually keeping that deal. We are not keeping those assets. We have joint-venture partners in the UK who work on unlocking land parcels, so they obtain zoning on land. As you know, land is incredibly scarce in the UK, and zoned land is incredibly scarce. In the deal with Promontoria there was land which we had acquired an option over. Our partners took that land through zoning and we’re selling the land to Promontoria. We are then constructing two boxes on the land for them and we’ll recognise a profit on the sale of land, as well as a development profit. So that’s just an additional source of revenue for us. That revenue which we generate we won’t distribute and that’s really to form part of our reserves, because it’s once-off for capital in nature. We’ve decided that we won’t be distributing it but it will go straight to the net asset value it’ll provide reserves by. It’s just another way in which we’re looking to make our business more resilient.
FIFI PETERS: The situation in the Ukraine, the war there, we’ve seen it, it has rattled Europe. We read a headline today that the EU now is even proposing further sanctions in terms of banning Russian citizens from buying European property. How has the war impacted you in any way so far, or are you largely insulated, given that your business is in the UK?
LAILA RAZACK: I’d like to say that we’re insulated, and to a large extent we are, but really our economic shocks – interest rate, exchange rate, anything which causes uncertainty – we have to be mindful of, and mindful of how we manage the risk. Once again, however, where there is uncertainty and where there are these disruptions, people do look to fortify just their approach and to really make their supply chains and their businesses a lot stronger.
So there isn’t a direct impact on us right now. We don’t operate in that region. Our focus is really in the UK, but it’s just the general sentiment. We are mindful of the risks to our business, but then also opportunities that may present further down the line.
FIFI PETERS: Right. Laila, thanks so much for your time. We’ll leave it there, ma’am. Laila Razack is the CFO of Equites Property Fund.