November 14 2024 11:15
SOUTH AFRICA
Dipula Income Fund, the JSE-listed real estate investment trust (Reit) which invests in a mix of commercial properties, might have been cautious to make to acquisitions in the past few years but its decision to focus on improving its existing portfolio appears to have paid off.
Dipula (JSE:DIB) released financial results for its financial year to end-August 2024, in which its property portfolio grew 4% in value to R10.2bn, which contributed to a 5% rise in net asset value.
Dipula owns a diversified portfolio of 165 retail, office, industrial and residential rental properties. In recent years, the group has shifted its focus more so to convenience, rural and township retail centres which collectively produce 65% of its defensively the company’s portfolio income. As much as 60% of portfolio rental income is earned in Gauteng.
“South African trading conditions and consumer sentiment are improving post the July 2024 national elections. The new Government of National Unity has been well received, with parties committed to enhancing service delivery. Global and local interest rate cuts, easing inflation, and a stronger Rand also bode well for the economy. We anticipate these macroeconomic improvements will positively impact the property market in the short to medium term,” said Dipula’s CEO Izak Petersen in a media presentation.
But Dipula has also faced Despite recent improvements, the year to end-August 2024 was because of rising property costs and interest rates at their peak.
“Notwithstanding the challenging operational and financial environment, Dipula delivered a good set of results,” said Petersen.
Dipula’s revenue grew 7% regardless of negative rental reversions in government-tenanted offices and lower income because of prior-year disposals. Net property income increased 2%, under pressure from above-inflation municipal hikes that significantly increased property expenses, higher maintenance spending, and rising third-party contract labour costs. Net finance costs increased 3%. Overall, prior disposals, bigger expenses and higher finance costs led to a fall in distributable earnings per share of 4%. Dipula declared dividends which totalled 90% of distributable earnings.
Petersen said while the group had had to cope with rising costs of business and inadequate infrastructure and service delivery in parts of the country, Dipula’s operational results were still distinguished by high levels of active leasing. Dipula concluded leases worth R1.4bn during the year, keeping its portfolio well occupied with longer leases, he said. It achieved robust tenant retention, improved from 84% to 87%, with R1.2bn of leasing representing renewals.
Retail vacancies improved from 7.5% to 6.4%. The overall portfolio vacancy rate was 7.5%, up from 6.0% in the previous year, because of higher vacancies in the office and industrial sectors.
Dipula has 83 retail properties. All of the tenant categories for these properties reported positive turnover growth, with health and beauty, restaurants and fast food, liquor, and hardware delivering the strongest growth. When tenants chose not to renew their leases during the year, Dipula secured replacement rentals at a 14% higher rate. The retail portfolio’s value increased 8%.
Accounting for 16% of rental income, Dipula’s office spaces offered flexible, modern work environments that catered to the diverse needs of businesses in prime urban locations, said Petersen. While the office portfolio ended the year with a vacancy rate of 22%, Dipula anticipated a gradual recovery in line with recent sector improvements, supported by limited new development activity that will further support rising occupancy rates and healthy rental growth.
Dipula’s mid-sized industrial and logistics facilities in strategic locations represent 14% of its rental income. With a vacancy rate of just 3%, this strong, stable portfolio boasts the lowest vacancy across Dipula’s assets.
Its residential properties are in the affordable housing sector. This portfolio represented 4% of rental income and recorded an average vacancy for the 2024 financial year of 6%.
The company’s administrative cost-to-income ratio reduced from 4.4% to 3.3%. While the overall cost-to-income ratio temporarily rose to 42.3% from 39.5% in 2023, this increase was mainly driven by elevated property-related expenses and lower municipal cost recoveries. This is, however, expected to return to normal levels of around 40%.
Dipula invested R169m in refurbishments and capital expenditure during the year. It also disposed of properties for R37m, with proceeds funding value-enhancing revamps and the roll-out of renewable energy and backup power.
“We’re building a future-fit portfolio by investing in sustainable assets. This year, we rolled out the first phase of our solar photovoltaic programme, which is now live at nine of 10 sites. The project increases Dipula’s solar power capacity by 5.3 kWp, taking it from 1.6kWp to 7kWp – a number we plan to treble in the next 24 to 36 months. We also invested in waste and water management, community investment, staff training and wellness, and nurturing new talent through internships,” said Petersen.
Dipula’s sustainability strategy rests on a systematic process, pinpointing and tackling risks and opportunities that matter most to its business and stakeholders, guided by the UN’s Sustainable Development Goals, he said.
Dipula restructured its debt facilities from March 1 2024 with a R3.8bn syndication programme, extending its weighted average debt expiry period significantly from 1.9 years to 4.1 years. Dipula maintained debt levels comfortably above all covenant requirements, with a year-end gearing of 35.7%, an ICR of 2.7 times, and undrawn facilities of R80 million. Solid balance sheet metrics ensured Dipula‘s credit rating was affirmed at BBB+(ZA) and A2(ZA), respectively, with a stable outlook.
Looking ahead, the “long negative cycle for South African real estate is showing signs of improving” according to Petersen.
“As inflation eases and the power grid stabilises, we foresee rental growth and a slowdown in cost increases. This should bolster business and consumer confidence, potentially spurring economic investment and strengthening property fundamentals, despite navigating ongoing challenges presented by failing municipalities,” said Petersen.
Petersen said his company expected better performance from the 2025 financial year, having completed various capital projects. Dipula’s retail and industrial portfolios are poised to continue their robust performance, while the office sector is expected to experience a gradual recovery. High occupancy levels are anticipated for the affordable residential sector, with rental growth that at least keeps pace with inflation. Dipula expects distributable earnings growth of at least 5% for the year ahead.
He said the group would continue to consider acquisition opportunities even though it had not acquired assets for a number of years.
“The sector is ripe for consolidation now. We are always considering things which fit our investment criteria but we won’t be pushed to do deals just for the sake of scale,” Petersen said.
A number of neighbourhood and medium sized shopping centres are suffering from high vacancies as consumers have battled through the pandemic, a slow growth economy and rising unemployment.
“Dipula’s strategy prioritises capital allocation to energy sustainability, portfolio- and income-enhancing developments and elevating tenant quality. Discerning investment decisions, positive economic trends and focused management will drive improved performance and continue to deliver sustainable value for our stakeholders,” Petersen said.
alistair@propertyflash.co.za
