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Growthpoint’s international assets deliver as SA economy stalls

Property development group concerned about the state of the construction industry and calls for certainty on the land debate.

RYK VAN NIEKERK: Property group Growthpoint reported full year results today. The company is, of course, the largest REIT (Real Estate Investment Trust) with a primary listing on the JSE, it is the twenty-third largest company on the Top40 Index and has a market cap of around R80 billion. During the year, the group performed well and a dividend of 208.6 cents per share was announced – that is an increase of 6.5%.

On the line is Norbert Sasse, he is the CEO of Growthpoint. Norbert, welcome to the show. We are facing tough economic times, should shareholders be happy with a 6.5% rise in the dividend?  

NORBERT SASSE: I think so. My personal view, at the moment, is that any growth is actually good growth. If you look at some of the results that have been published recently by some of the retailers and many of the South African corporates that are exposed to the South African economy certainly times are clearly tough and many of them are reporting lower profits. Nobody is really making losses necessarily but there are certainly lower levels of profit.

We guided the market for about a 6.5% increase at the beginning of the year, we confirmed that at the half-year and we managed to deliver it for the year. The make-up is interesting – large parts of the growth came from our internationalisation strategy and further investments off-shore rather than from the core South African business, which continues to be under tremendous pressure.

RYK VAN NIEKERK: The SAPY Index (SA Listed Property Index) is pretty much the dog of the JSE this year, down 20% since January. Growthpoint’s share price is down around 3.5% year-to-date. Do you think the negative headwinds in the sector are a bit overdone?

NORBERT SASSE: You’ve got to look into it a bit deeper. That 20% decline is obviously significantly weighted towards what happened with the companies in the broader Resilient stable, where those guys were down between 36% and 60%. They are a very significant component of the index and the downward movement in those prices have got nothing actually to do with fundamentals in property. You may or may not be aware of some of the investigations that are outstanding there.

If you strip out the noise from that particular group, the core business of property, property investment and property returns are actually pretty reasonable given the state of the domestic economy. Many of the other listed property companies have also ventured off-shore and certainly those that have ventured off-shore have shown slightly better returns than the ones that are purely exposed to the domestic economy.   

It appears overdone, as you say, but I think we’ve got to strip out that noise, which is linked to the Resilient group. On that basis, it is not quite as overdone as you might suggest.

Nonetheless, certainly there is generally a negative sentiment all around – property used to be the darling and it is facing, undoubtedly, a few headwinds. We are a proxy for the South African economy and if the economy is not growing it is impossible for us to show significant growth in rentals and occupancy.  

RYK VAN NIEKERK: Your vacancy rate increased from 4.4% to 5.4%, that is a one percentage point increase but if you work it out it is actually a significant rise of around 22% increase vacancies. Is that also just a reflection of the economic conditions?

NORBERT SASSE: Undoubtedly. Absolutely. The market has never been more competitive domestically, we have circa 30 listed property players and everybody is vying for the same tenants. I think the one percentage point move is mainly in our office portfolio, our retail portfolio remained relatively stable as did industrial. The bulk of the move was in the office portfolio and that sector has been the weakest of the three for the last two to four years and it may continue to remain weak.

The demand for offices is very patchy and is very specific for a specific kind of office. The tenants are looking modern, energy efficient-type buildings with big floor plates so some of the older buildings are less attractive. As you well know, there is still a fair bit of development taking place, notwithstanding the weak economy, and that is to produce the kind of assets that the market wants.

The movement is directly linked to the economy, where very few companies are growing and expanding. Most of the big corporates are still consolidating and reducing space.

RYK VAN NIEKERK: You sold around 20 properties during the period, that seems to be a large number…

NORBERT SASSE: It is but bear in mind we do also have a significant portfolio. Our total South African assets amount to 454 properties across the country so as percentage, the 20 is not such a big number.

We definitely have taken a view over the last couple of years – if you go back in our results to the last two or three years – every year we have been selling between R1.5 billion to R2.5 billion in assets. This year is probably a little more pronounced. During the year itself, we sold in the order of about R1.5 billion odd worth of assets and at balance sheet date, we held another R3 billion odd in assets for sale. These would be assets that we have sold – we have got signed contracts for the sale, but they haven’t transferred yet. The transfers will happen after balance sheet date.

All in all, we have over R5 billion worth in sales, that is quite a big number. It is part of our strategy to get rid of some of the non-core properties and use some of those proceeds to further our internationalization strategy.

RYK VAN NIEKERK: So, it is not out of the norm and is part of your strategy. But how many new projects are you busy with in South Africa?

NORBERT SASSE: We spend about R2 billion a year in new developments. This year, in particular, certainly the one that has been the highlight of our results for the last two odd years has been the Discovery head offices in Sandton – that is over R3 billion a project, we did that in joint venture with a private developer called Zenprop.

We have future commitments in excess of a couple of billion [rand] so every year, we are spending a couple of billion [rand] on new developments and we’ve roughly been selling an equal amount. Net-net our total asset value in the South African portfolio hasn’t necessarily grown due to the dynamic of selling some and then replacing that with new developments.

RYK VAN NIEKERK: The construction industry is really in a bad space and we have seen some big players such as Esor, Basil Read, Aveng and a few others apply for business rescue. You are related to that industry, are you concerned about this and does it affect you?

NORBERT SASSE: We are deeply concerned about that as it talks to the state of the South African economy. On a broader basis, we are very concerned about it.

If you bring it closer to home, it reduces our ability to get pricing intention. When we go out to tender on some if these developments we don’t really want to be in a situation where you have one or two companies that could potentially do the work for you because that does reduce some of the competition and some of the price tension that you could potentially create. It is certainly worrying for us.

For now, at the level at which we are developing – R2 billion a year plus the Waterfront, where we spend another R500 million to R700 million a year – we do find that there is enough capacity in the construction market to satisfy whatever needs we have and demands we have on them.

RYK VAN NIEKERK: Lastly, are you worried about the current land debate and [its] implications for Growthpoint?

NORBERT SASSE: It is certainly something which is on everybody’s mind, it is something which is very critical not only to us but to the country as a whole.

We are encouraged by the fact that there is a process underway, which seems to be a very well managed process. More recently if you read the press on what the President has articulated on the process, we are encouraged that at the end of the day you’ll have a sensible outcome following a rigorous process and a transparent process.

The critical thing is that, one way or another, there needs to be a level of certainty around the issue and policy needs to be adopted and clarified so that everybody knows where they stand. Once that is clear, then you know what you are dealing with.

RYK VAN NIEKERK: Have you delayed any projects due to concerns?

NORBERT SASSE: We haven’t, at this particular point, delayed any of our investments and new development projects due to these concerns.

In the overall context of the size of the business, the development pipeline of R2 billion a year is relatively modest. But it certainly is something that we take into account when making investment decisions.

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More revaluation journals!

More malls!

More R60k/sqm developments!

Go go go,cash earnings don’t matter

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