Listed property fund, Liberty Two Degrees (L2D), which owns stakes in Sandton City, Nelson Mandela Square, Eastgate Shopping Centre and Liberty Midlands Mall, among other assets, is an indicator of how an open economy bodes well for commercial property.
L2D released financial results for six months to end-June 2022 on Monday, wherein it announced that it would distribute 17.48c per share, a 10.7% increase on the six months to end-June 2021. The company had benefited from customers returning to its centres as the economy opened up as Covid-19 restrictions were lifted and the state of emergency ended.
The commercial property sector and South African economy are expected to recover slowly. But double digit dividend growth is heartwarming for investors who saw dividends collapse by double digits, if they were paid at all, during 2020 and 2021 when the pandemic was raging across SA and abroad.
“2021 was a challenging year for the property industry. The retail sector has had to reassess its ability to address customer needs and keep up with the evolving nature of their demands. Workplace practices have been reshaped with a focus on flexibility and safety yet with a requirement for ongoing collaboration. With cautious optimism, we remain purposeful in creating value for all stakeholders in our business,” said Amelia Beattie, L2D’s CEO.
Beattie said that as Covid-19 restrictions were eased and people received vaccinations, consumer confidence and retail trade improved in the fourth quarter of 2021.
The fourth quarter of 2021 had 22.9% more customers visiting the L2D malls than in quarter four 2020. Consumers were spending more money over fewer visits to the malls with longer dwell times, resulting in higher turnover.
At the end of 2021, occupancy across L2D’s group portfolio had stabilised at 93.7% at the end of the year, having been 93.7% at the end of June 2021 and 93.3% at the end of December 2020.
L2D has exposure to well-established modern malls which attract highly diverse customer bases. Its occupancy levels are very high with Sandton City at 98.3% and Eastgate Shopping Centre at 94.6%. While it may be retail-focused, its office vacancy remains above the MSCI quarter four 2021 office occupancy benchmark, which fell to an all-time low of 84.0%.
“The outlook for the office rental market remains a concern due to office oversupply and the change in usage patterns,” the group said.
During the year, 291 renewals and new leases were concluded, equating to 147,507m² or 15.6% of total portfolio gross lettable area.
Annual turnover in the retail portfolio was 24.5% higher than in the comparable period, with turnover in the fourth quarter up 15.8% on quarter four of 2020 and 5.1% on quarter four of 2019. Sandton City and Midlands Mall recorded the largest increases in turnover in rand terms. In 2021, Sandton City outpaced 2020 and 2019 annual turnover by 31.3% and 4.3% respectively, generating its highest ever annual turnover of about R7.4bn.
“Luxury brands, technology and grocery categories, continued to show an exceptionally strong recovery,” Beattie said.
She said that “while retail shows promising recovery, sectors such as hospitality, food services and offices continue to bear the brunt of Covid-19 related restrictions and weak economic activity. The hospitality sector, which was impacted by the lack of business travel and conferences, remained under severe pressure thus constraining income from those properties. While it positions us for the upside as occupancies recover in line with the opening of business and travel sectors, our outlook for the sector remains guarded”.
Nevertheless, Sandton City continued to impress with visitors choosing to stay longer there and make larger shops than they did at malls like Hyde Park Corner.
The hospitality sector’s contribution to L2D’s net property income was R65m less than in 2019 and R17m less than in 2020.
L2D like a number of other landlords is concerned about how municipalities value its assets to so they can charge rates.
“Property rates and utility cost hikes above inflation and rental growth rates remain a concern. Apart from greening and other initiatives to lower consumption, L2D is engaging alongside industry peers with the relevant authorities. L2D continues to engage with the City of Johannesburg in respect of the finalisation of the valuation of Sandton City, against which an appeal has been lodged.” The group said.
Beattie said L2D was continuing to align its properties to “emerging needs” and had plans in place to address the underperforming assets in its portfolio.
“We have a focused operational strategy, grounded in robust property fundamentals, and remain committed to executing our business in a sustainable and flexible manner,” Beattie said.
L2D was unlikely to sell any of the stakes it owned in retail centres and was optimistic that the larger Liberty group would sell stakes in more retail assets to the fund. L2D would consider acquiring smaller property funds but only at attractive prices and where the fund it acquired owned a portfolio which didn’t have a strong of glaring weaknesses.