Property Flash


November 16 2023

The diversified real estate investment trust (Reit), Emira Property Fund found it tough going in the six months to end-September 2023, its financial results for that reporting period showed this week.

The company which owns a mix of buildings including 9 Long Street and 80 Strand Street offices in Cape Town, Boskruin Village Shopping Centre, Hyde Park Lane and Knightsbridge offices in Johannesburg and Wonderpark Shopping Centre in Pretoria, has had to battle through a high interest rate environment like its peers have. Emira’s tenants have also battled with high administrative costs which are rising at ridiculous rates. These include electricity and water costs.

Emira said the reporting period had been transformative. It completed the disposal and transfer of its holding in the rural and lower-income retail property venture, Enyuka Property Fund to co-investor One Property Holdings. Emira’s CEO Geoff Jennett said this was a successful exit from an indirect investment at a favourable price in a single deal aligned with its objectives. Emira finalised the scheme of arrangement for specialist residential Reit, Transcend Property Fund, enlarging its foothold in the defensive residential property sector that now represents 16% of Emira’s South African portfolio value. A number of listed property funds are appreciating that residential property is an investable asset class.

Sales at Emira’s residential development, The Bolton, have been slower than many market commentators expected. Feenstra helped Emira create the Bolton about five years ago. The apartments in the development were built to attract upper middle class renters and wealthy investors. Emira is trying to sell off all of the units. The group reported it had moved beyond the halfway mark in the sale of its units at The Bolton.

It had completed a full cycle with The Bolton, transforming offices into residential units and fully leasing them, and now reaching the stage where the best use of this capital was to sell off individual units, at higher prices, on a sectional title basis and reallocate the proceeds to other strategic investments, it said.

Emira also continued to benefit from the buffer it has created against the low-growth domestic environment in an asset-by-asset capital allocation approach to co-investment in the US with in-country specialist partner The Rainier Companies, securing a meaningful 19% of its asset base offshore, Jennett said.

“It is a common misconception that Reits are passive property investors. At Emira we are extremely active in capital allocation; we don’t simply buy and hold. We constantly evaluate our assets for their best use and proceed accordingly,” he said.

Emira’s 91 property portfolio includes commercial, retail, office, industrial and residential assets valued at R12.1bn. Emira’s offshore asset base is made up of equity investments in 12 grocery-anchored open-air convenience shopping centres in the better-performing economy of the US representing a total equity investment of R2.8bn (USD151.9m). The group did see its US returns weaken slightly after there were business failures at some of its assets there.

Emira’s its dividend per share of 61,74c for the six months to 30 September 2023 decreased by 7.1% from the prior first half because of higher interest costs on debt, one-off events impacting distributable income from its well-performing US investments and the sale of the high-yielding Enyuka. Emira’s total direct portfolio value increased by 0.7% and net asset value increased during the six-month period by 0.4%.

There was improved overall vacancy in its commercial property portfolio from 4.7% to 4.1% over the six months with all sectors outperforming their SA benchmarks. In addition, like-for-like net property income grew 1.4%.

The retail portfolio of primarily grocery-anchored neighbourhood centres achieved trading densities growing 3.8% year-on-year. The total weighted average rental reversion improved over the six months from -5.5% to a pleasing -2.6%.

Vacancies in Emira’s office portfolio of mainly P- and A-grade properties improved, decreasing from 12.5% to 12.0%, showing more demand for well-maintained office space. The total weighted average rental reversion also improved over the six months from -14.8% to -8.8% but still reflects the ongoing depressed fundamentals in this sector.

Emira’s diversified industrial portfolio delivered a strong performance, with vacancies further decreasing from 2.1% to a negligible 0.6% and stable rental reversions, improving slightly from -6.5% to -6.0%.

Load shedding continues to plague South Africa and push up operating costs for businesses, and diesel costs for backup power generation in Emira’s commercial property portfolio was a slightly higher R17.7m, of which 87% was recovered from tenants in line with lease agreements.

The commercial portfolio benefitted from R68.1m in tactical upgrades, including installing backup power at three properties in response to South Africa’s electricity crisis and various sustainability initiatives such as cost-saving energy and water efficiency projects and waste management systems.

The composition of Emira’s portfolio in the residential property sector has changed considerably from the prior comparable period. It now includes Transcend’s 20 residential properties plus The Bolton in Rosebank. Emira’s residential portfolio offers 4,063 units in Gauteng (87%) and Cape Town. The properties are in high-demand neighbourhoods and cater to the affordable rental market in the R4,500 to R8,000/pm range. They are attracting growing demand as high interest rates make renting a more favourable option than buying for many South Africans. The portfolio’s 3.4% vacancy rate includes units intentionally left untenanted for a unit-by-unit disposal process. During the period, 157 of The Bolton’s 282 had been sold and transferred and Transcend disposed of 95 units.

In the US, Emira’s 12 equity investments are grocery-anchored dominant value-oriented power centres. Real GDP growth in the US economy accelerated to 4.9% in the third quarter of 2023, from 2,1% in the second quarter. Inflation eased from 4.9% to 3.7% in the six months to the end of the third quarter. Additionally, consistently low unemployment of 3.8% was reported in the robust US job market.

Distributable dividend cash flow income received from Emira’s US equity investments increased by R12.9m, with both 32 East and Beldon Park resuming dividend payments. However, once-off adjustments for tenant failures meant that leasing commissions and tenant installation allowances, usually amortised across a lease period, were written off during the six months. This affected Emira’s share of the accounting income but not the portfolio cash flow it received, Jennett said.

Emira’s balance sheet was robust. Proceeds from the sale of Enyuka helped to keep debt levels lower in the persistently high interest rate environment, contributing to an improved loan-to-value ratio from 44% to 41.2% and cash-on-hand of R850m.

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