September 13 2024 10:00
The executive heads of SA’s largest property group, Growthpoint Properties, believe that the fund’s structure and assets remain extremely strong and its fortunes will improve in 2025.
Group CEO, Norbert Sasse and SA CEO Estienne de Klerk said the company was primed to enjoy a continued improvement in its performance in 2025. The two executives spoke at a media presentation following the release of financial results for the year to end-June 2024. This is as interest rates fall.
Growthpoint’s share price rose 1.30% on Friday to close at R14.05. It was flat over a 1-week basis. It had fallen around 3% upon the release of the results. There was a negative reaction to Growthpoint’s dividend projection being another drop in its 2025 financial year.
OPTIMISM
Analysts, economists and armchair experts are pricing in interest rate cuts for SA at the end of September or latest November. The country’s monetary policy committee will meet on September 19 and then again in two months time. Lower interest rates lead to lower finance costs for landlords like Growthpoint, leaving the group with more cash to pay out as dividends.
Sasse said: “The improvement in our domestic portfolio’s property fundamentals and the strong operational performance of our international investments, indicate that we may have passed the lowest point of the curve and are now seeing signs of improvement. We successfully progressed the company’s strategic initiatives in a year that was as tough as ever but ended with brighter prospects on the horizon.”
“There is undoubtedly a greater sense of positivity, which has resulted in a rise in foreign investment in SA bonds and equities and will become more evident in the property sector as higher interest rates start working their way out of debt-servicing cost. Interest rates are anticipated to come down, and the effect of this is likely to start showing in our business from the second half of financial year 2025. Nevertheless, the ongoing refinancing of interest rate swaps and cross-currency interest rate swaps at significantly higher rates continues to remain a challenge for earnings growth,” Sasse said.
De Klerk said the company’s direct and indirect investments in the 2024 financial year, remained overshadowed by higher interest rates globally. Growthpoint would distribute a total dividend per share (DPS) of 117.1cps, 10% down from the prior year, based on a payout ratio of 82.5%. Total property assets decreased 2.8% to R174.7bn at year end.
The Place – Sandton (Office property)
Growthpoint’s diversified portfolio and income streams position it defensively for financial year 2025, according to de Klerk.
“The improvement in its domestic portfolio’s property fundamentals and the strong fundamentals of its international investments indicate the bottom of the property cycle,” he said.
The ongoing impact of high interest rates, both locally and domestically, remained a challenge for distributable income per share (DIPS) growth in financial year 2025, which is expected to decline by 2% to 5%.
“As Growthpoint assesses interest rate expectations across its investment geographies, it is evident that there are positive indicators supporting its outlook for financial year 2026 when Growthpoint expects positive distributable income per share (DIPS) growth to resume.
LOCAL IS LEKKER
The JSE-listed company which is well-diversified with investments in some of the best-rated commercial property assets in the country. It owns half of the V&A Waterfront and the Government Employees Pension Fund (GEPF) owns the other half. The V&A is the most valuable asset in SA valued at about R23bn, meaning Growthpoint’s stake is worth R11.5bn as is the GEPF’s. Growthpoint’s directly held portfolio was worth R66.3bn which is 47.9% of total assets by book value. This portion made a 47.8% contribution to distributable income per share.
In South Africa, Growthpoint owns and manages a diversified core portfolio of 345 retail, office, and logistics and industrial properties. It also owns nine trading and development properties.
Growthpoint invested in the portfolio with upgrades and new developments of R2.1bn in the reporting period. It sold 17 non-strategic properties for R907.7m during the year and two trading and development properties for R294.3m with a combined profit on book value of R24.4m. It intended to sell R2.8bn of assets in financial year 2025. In total, Growthpoint has sold 161 properties for R12.4bn since 1 July 2016. It also continued to recycle capital from the sale of smaller, non-core properties into developing and redeveloping quality assets.
With almost all key numbers improving, the SA business delivered an admirable operational performance. Overall, vacancies improved with excellent letting, reducing from 9.7% to 8.7% over the year. Even office occupancies made a noteworthy recovery. Rental renewal growth demonstrated an equally encouraging trend, moving from -12.9% to -6.0% over the same period. Likewise, its renewal success increased from 64.9% to 76.3%. Bad debts and arrears reduced dramatically and are reverting to long-term trends,” said de Klerk.
The SA valuations, with a portfolio value of R66.3bn (FY23:R64.1bn) at financial year 2024, were positively affected by the improved property metrics across all three sectors and reduced vacancies in the office and retail sectors coupled with the repositioning of the portfolio to higher-quality assets by way of disposals and developments.
Growthpoint’s Cape Town and KwaZulu-Natal portfolios stood out, where all three sectors are nearing full occupancy. This is a good sign for positive rental reversions, as both markets are becoming more competitive, de Klerk said,
Growthpoint’s total expense ratio for its SA business increased to 36.7% (FY23: 35.9%), primarily driven by disposals, above-inflation hikes in municipal rates and taxes, and rising utilities costs.
“On a positive note, with less loadshedding in 2024 so far, diesel spend reduced from R140.0m in the 2023 financial year to R112.6m in the 2024 financial year, and diesel cost recoveries as a percentage of recoverable diesel spend was 82.0%.
The SA logistics and industrial portfolio was well-let despite a few challenging vacancies and has benefited from ongoing leasing success. Like-for-like net property income (NPI) grew by 2.6%. Renewal success increased considerably from 59.1% to 78.3%, and renewal rental growth moved up from -10.4% to -3.3%.
During the year , Growthpoint completed the speculative development of 15 units totalling 63,017 square metres across Cape Town, KZN and Gauteng. It also completed two client-driven developments in Gauteng, including a 28,375 square metre logistics warehouse in Isando.
The SA retail property portfolio like-for-like net property income increased substantially, swinging positive from -1.7% for FY23 to +4.1% for FY24, and the portfolio value increased 0.9%. Its core vacancy remained at 4.0%. Growthpoint’s retail portfolio benefited from refurbishments and extensions at several malls, and strong trading density growth of 4.1% (FY23:6.2%) with the Western Cape outperforming at 5.7%.
In addition to the upgrades and extensions at River Square and Vaal Mall completed during the year, Growthpoint was set to finish the major redevelopment of Bayside Mall in November 2024. Its upgrade of Beacon Bay Retail, including a 3,100 square metre expansion incorporating Builders Express, is scheduled for completion in June 2025. The Longbeach Mall extension for its 2,300sqm Builders Express will be ready in November 2025.
The office sector continued to recover as people returned to offices, and Growthpoint’s SA office property portfolio showed a welcome increase in value of 1.2% after printing a 0.9% decline in the prior year’s value. Vacancies were reduced yet again across all nodes, improving from 19.2% to 15.1% at FY24.
Sandton, which represents 22.2% of Growthpoint’s office portfolio, showed a particularly notable change for the better, with vacancies reducing by around 33,000 square metres during the period, taking the node’s vacancy rate from 28.7% at FY23 to a much improved 20.1% at FY24. Like-for-like net property income for this sector continued to firm, moving from -1.9% for FY23 to -1.0% for FY24. Similarly, renewal growth also improved significantly from -20.1% to -14.8%.
Growthpoint has two demand-driven developments underway in its office portfolio. It has initiated a net-zero carbon redevelopment at 36 Hans Strydom in Cape Town for Ninety One, who will occupy the building on a 15-year lease once completed in July 2025. Additionally, in response to tourism and hospitality demand in the Western Cape, Growthpoint is developing the 154-room Hilton Canopy Hotel in its Longkloof mixed-use precinct, set to open in December 2024.
Growthpoint’s in-house trading and development division develops assets for its own balance sheet, earns development fees from external projects and profits from the sale of trading and development assets, and development projects for Growthpoint Investment Partners (GIP). This year the division earned R42.2m of trading profits, R9.8m of development fees and R25.4m of net property income.
The division was active with third-party trading and development projects, selling out its first residential development, Kent residential apartments in La Lucia, Umhlanga, and a small community shopping centre in KZN. Additionally, its Riverwoods office-to-residential conversion in Bedfordview, is 80% sold, with proceeds expected in FY25. It also delivered two student accommodation properties, Horizon Heights and Fountains View, for the 2024 academic year. The team is currently working on The Crescent Studios (previously The Podium) and Arteria Parktown (33 Princess of Wales).
GIP grew its assets under management (AUM) and fees. It ended the year with R18.0bn of AUM, growing towards its goal of R30bn of AUM by the end of the 2027 financial year. GIP includes three funds that are distinct from Growthpoint’s retail, office and logistics and industrial core assets. They are Growthpoint Healthcare Property Holdings, Growthpoint Student Accommodation Holdings, which operates under the Thrive Student Living brand, and Lango Real Estate with office and retail assets in Ghana, Nigeria and Zambia, and land in Angola and Nigeria.
“Overall, Growthpoint Investment Partners made a steady contribution to our earnings with mixed results for the dividends and management fees earned across its three funds. Management fees increased by 10.2%, while dividends dropped by 16.0%. Growthpoint Investment Partners is actively raising capital in the funds, which are increasingly enjoying opportunities for growth through both development and acquisition,” said Sasse.
Post-reporting period, Lango concluded a $200m deal where it bought a portfolio from JSE-listed SA landlords, Hyprop Investments and Attacq. The portfolio included three malls in Ghana (Kumasi City Mall and West Hills Mall and Accra Mall, all in Accra) and one mall in Nigeria (Ikeja City Mall in Lagos).
In SA, Growthpoint has installed 40.7MWp of solar power and has 123 green building certifications. It signed a milestone Power Purchase Agreement (PPA) for renewable energy, securing 195GWh of green power, equating to 32% of its FY23 energy consumption. Its recently announced e-co2 solution provides tenants with renewable electricity at fixed escalations. Further, reducing water and waste intensity is a priority for FY25. Learn more here: https://iono.fm/e/1468939 on the Another Brick in the Wall podcast.
THE V&A SOARS
The V&A achieved negligible vacancies at just 0.3% across the precinct, and strong demand supporting rental levels. The new Union Castle building is fully let, anchored by Marble restaurant and a flagship Nike store, and will open in time for the festive season.
The V&A’s like-for-like net property income, which includes a growing portion of operating income, increased 13.4%, a strong number compared to other retail centres across the country.
The V&A Waterfront
Sasse said Growthpoint, the GEPF and other parties would invest up to R4.5bn into the V&A Waterfront over the next two years. This destination shopping and entertainment area saw record tourism visits in December 2023. The V&A achieved a turnover of R1.2bn in that month.
Of the R4.5bn, around R2bn will go into two internationally branded hotels, one of which is the Table Bay Hotel. That hotel is receiving an overhaul worth R1bn and being transformed into an InterContinental Hotels Group property. Another R1bn will be spent on a Marriott Hotels property which is under development. It will operate as a five-star establishment under Marriott’s edition brand. Also, R700m will be spent on a new upmarket residential development at the V&A.
There are plans to expand the area around Granger Bay at a cost of R20bn. These are based on the V&A securing additional development bulk approvals for 440 000m2 from the City of Cape Town.
The V&A Waterfront
MOSTLY JOY ABROAD
Growthpoint owns 57 office and industrial properties in Australia valued at R54.7bn through a 63.7% shareholding in Growthpoint Australia and six community shopping centres in the UK valued at R9.2bn through a 68.9% investment in LSE- and JSE-listed Capital and Regional. Through its 29.5% investment in LSE AIM-listed Global Worth Investments (GWI), Growthpoint owns an interest in 59 office and mixed-use properties in Poland and Romania with its effective share valued at R15.1bn. Growthpoint reinvested the June and December 2023 dividends received from C&R and GWI and invested in C&R’s open offer for the acquisition of Gyle Shopping Centre in Edinburgh.
STRONG METRICS
Growthpoint’s group SA Reit loan-to-value (LTV) ratio was 42.3% (FY23: 40.1%), affected mainly by an increase in Growthpoint Properties Australia’s (GOZ) LTV as a result of valuation write-downs. It recorded an interest cover ratio (ICR) of 2.4 times (FY23: 2.9 times).
As much as 78.9% of its SA debt book is fixed for an average term of 1.9 years at a rate that moved up from 9.1% to 9.6%, or from 6.7% to 7.2% if you include cross-currency interest rate swaps and foreign-denominated debt. Net SA finance costs increased R381.0m from the 2023 financial year, and its weighted average term of debt increased from 3.5 years to 4.0 years.
“We believe LTVs, linked to valuations, are stabilising, other than possibly for GOZ where interest rates are lagging. We will, however, continue to focus on strategic initiatives to preserve liquidity and balance sheet strength in the long term. This supports us in achieving our key goals of enhancing the quality of the SA portfolio and optimising our international investments,” said Sasse.
Growthpoint was well capitalised with access to liquidity, with R465.9m cash on its SA balance sheet and R6.3bn in SA unutilised committed debt facilities, with both numbers including Growthpoint Investment Partners which is a funds management business. It will retain a further R842.3m from its 82.5% payout ratio. Growthpoint has a modest R2.8bn of debt maturing in the next 12 months, and the outlook for both its Fitch global scale rating at BB+ and national scale rating at AAA(zaf) and Moody’s global scale rating at Ba2 and national scale rating at Aa1.za, remain stable.
De Klerk said Growthpoint continued optimising its international investment, with 42.1% of property assets by book value located offshore and 32.4% of DIPS earned offshore. Foreign currency income remained steady at R1.6bn.
THESE EXECUTIVES ARE OPTIMISTIC
“South Africa’s commercial property industry is definitely picking. Loan-to-values are stabilising and while it may take time for lower interest rates to pass through the system, we are moving in the right direction,” said de Klerk.
Growthpoint expected distribution growth to fall between 2% and 5% in the year to end-June 2025, less severe than the 2024 financial year’s 10% drop.
alistair@propertyflash.co.za
Ed’s note: These economy will need to play along and politics not retard the progress of real estate if Growthpoint’s performance is to step up another gear. Good luck!
