JSE listed real estate investment trust (Reit) Octodec Investments, a diversified property group which focuses on investing in the inner cities of Johannesburg and Tshwane, enjoyed strong growth in leasing enquiries, as housing demand exploded in the year to end-August.
“There is a clear demand for affordable, quality accommodation in both the Tshwane and Johannesburg central business districts (CBDs). Due to the success of our value-enhancing initiatives, we have seen an impressive 33% increase in leasing enquiries. We intend to accelerate the rollout of these offerings to more residential buildings to attract new tenants,” said managing director Jeffrey Wapnick.
He said Octodec had been able to record a large dividend pay-out and a material reduction in vacancies in the residential and industrial sectors, with the residential portfolio in particular performing ahead of expectations.
“Although there has been a continued downward resetting of rentals across most sectors, from an Octodec perspective, several renewals are being concluded at increased rentals and demand for space in both Johannesburg and Tshwane CBDs remains strong,” he said.
Octodec owns a diversified portfolio of 246 residential, retail, office, industrial and specialised properties situated in the major metropolitan areas of Tshwane and Johannesburg. The portfolio, including an equity-accounted joint venture, has a lettable area of 1 557 460m2 and is valued at R11bn, making Octodec a mid-sized property group by assets in terms of SA’s listed sector.
Octodec experienced an increase in residential leasing activity resulting in significantly reduced vacancies and positive reversions on renewals which have positively affected the group’s results.
Residential income increased 7.6% year-on-year primarily because of the return of students to universities for in-person classes and increased activity at OR Tambo Airport, which greatly benefited letting activity at Kempton Place. Kempton Place is one of Octodec’s increasingly popular residential developments.
“With vacancies almost at pre-Covid-19 levels, the focus will now change to increasing rentals per unit while at the same time being cautious of the impact that high inflation and increased interest rates will have on the disposable income of tenants and the consequential effect on vacancies,” said Wapnick.
He said that Octodec’s retail shopping centres continued to perform well, with positive reversions on new leases and renewals. As a result, rental income from Octodec’s shopping centres increased 5.9% year-on- year.
But the first half of the year was still affected by lockdown restrictions and the Octodec’s street shops experienced subdued activity with several negative rental reversions concluded during the year, and a slight increase in vacancies resulted in an increase in rental of 3.0% year on year.
“Our CBD assets are well located in convenient locations with high foot traffic. Despite market conditions still being under pressure for the typical South African consumer, we continue to see renewed confidence from large national retailers to sign extended leases for larger pockets of space and willingness to test the CBD market with brands previously only found in malls,” said Wapnick.
Octodec’s office portfolio struggled to a degree as the landlord battled to sign new leases with tenants. Some potential tenants also wanted to rent less space. Octodec said in a statement that an oversupply of office space in the major cities, because of hybrid or work-from-home models, for example, continued to put pressure on occupancy levels at office buildings, corresponding with the broader sector trend. As a result, rental income in Octodec’s offices decreased by 1.3% year-on-year.
Wapnick said he was very pleased with Octodec’s results and that his team’s institutional knowledge had helped the fund perform well amid Covid-19 and a weak economy.
“I think a few aspects are really helping us as a company. If you look at our residential portfolio you see the demand for good homes has returned. During Covid-19, people moved from the inner city to rural areas. They are now moving back post the pandemic,” Wapnick said.
He said competition was increasing in the inner city. Divercity, a private developer and landlord, had for example added 2500 units to the inner city.
“Their apartments are nearly sold out. What we are finding is that there is space for strong competitive landlords,” said Wapnick.
He also said that retail tenants were competing for market share across SA which helped the likes of Octodec.
“So we are finding that top retailers want to be in our spaces. There are only so many malls and retail centres for example, and I find that these companies want top be in the right space with the best landlords,” said Wapnick.
He said to attract tenants, Octodec would also make new uses for space such as creating cashless laundries at an office or retail space.
Despite general rental pressure in the industrial sector, occupancy has improved considerably, with a number of Octodec’s industrial buildings being 100% occupied.
Octodec FD, Anabel Vieira said Octodec’s financial metrics were also improving.
“The distributable earnings calculation was positively impacted by reduced debt and the lower interest rate environment at the time, which reduced finance costs. We have made strides over the past two years to manage both our hedging profile and debt maturity profile, and we will continue to monitor opportunities to extend existing hedges, where appropriate,” she said.
There was also a marked improvement in the conclusion of sales of properties previously identified for sale. Octodec has sold and transferred 20 properties for a total net consideration of R218.4m.
“Although the property sector as a whole faces certain headwinds, including poor municipal service delivery as well as rising inflation, increasing utilities costs and high-interest rates, we are confident that Octodec is well positioned through its niche expertise, diversified and defensive portfolio to benefit from a medium-to-long term economic recovery,” said Wapnick.
Octodec’s distributable income after tax increased 30.0% from R358.4m to R466.1m in the year to end-August 2022. Octodec’s board declared a final dividend of 80.0 cents per share, with a total dividend of 130.0 cents for the full year compared with financial year 2021 when it declared 50.0 cents. This represented a 160% increase on the prior year.