When it comes to property updates, Growthpoint is the most important of them all. With a market cap of R46 billion, Growthpoint is a massive fund that touches practically every type of property in the country. Every investor in the sector follows Growthpoint’s updates closely.

The latest news from the company is an update for the nine months ended March 2022. With the share price down around 13% this year, the property recovery has taken a knock and this update demonstrates why.

It starts off with something you won’t read about every day: Growthpoint’s credit rating is higher than the South African sovereign rating i.e. our government. This sounds silly at first blush, as most of us would invest in the private sector in this country long before the public sector. That’s not how credit ratings work though, as the agencies take a view that the company cannot be better off than the government in a high stress scenario. The companies are a function of the environment they operate in.

The nuance for Growthpoint is that it has significant foreign currency earnings that more than cover foreign debt payments, so the group becomes less risky than the South African government overall. Whilst the credit rating isn’t an indication of equity returns, it’s worth highlighting these points.

The foreign exposure is a theme that is carried into the strategic priorities of the group: international expansion, “streamlining and optimising” the South African portfolio and generating returns from the funds management business.

The three international businesses are listed separately, so investors can check them out for more details. Growthpoint Properties Australia is listed on the Australian Stock Exchange (ASX), Globalworth Real Estate Investments is listed on the London Stock Exchange (LSE) and Capital & Regional Plc is listed right here on the JSE.

The Growthpoint announcement focuses on the South African portfolio., in which total vacancies increased from 10.5% at the end of December to 10.9% at the end of March. That’s at least better than 11.6% at the end of June 2021 but has clearly gone the wrong way.

The fund talks about a “perfect storm” for rent reversions, which means leases are still being renewed at a lower rate than the expired lease. The bargaining power is still in the hands of tenants.

Office sector

In the office sector, the vacancies are just getting worse. They were 19.9% at June 2021, 21.2% at December 2021 and 22.4% at March 2022. Where Growthpoint has managed to secure new leases, the average lease renewal term has decreased to 2.8 years from 4.4 years. Tenants are making full use of the flexibility available to them in this market.

Office reversions of -17.3% reflect the oversupply in this market.

Growthpoint highlights Claremont and Illovo as having achieved good letting. That makes sense to me – these are smaller buildings in prime areas, which makes them perfect for companies that are sticking to hybrid working arrangements.

Larger buildings in traditional office areas are the biggest issue and Growthpoint has huge exposure to Sandton, which is exactly what you don’t want right now. A whopping 21.7% of Growthpoint’s gross lettable area (GLA) in the office portfolio is in Sandton.

Growthpoint has sold seven office assets for R320 million and another four sales worth a total of R546.8 million are awaiting transfer. There are a further nine properties worth R600 million that have been earmarked for disposal.

Retail sector

This is a happier story, with shopping centres reporting turnover growth and smaller neighbourhood centres doing particularly well. In my view, this is a direct result of people returning to their daily lives and quickly popping in at the shops for regular grocery trips.

Footfall has neared pre-pandemic levels and increased basket sizes are still the norm, as people do fewer trips than before Covid.

As Growthpoint has all the data on retailer performance, it’s useful to note that the apparel segment continues to be driven by value fashion (affordable clothing) and that athleisure is trading strongly. The hybrid working trend has been great news for yoga pants and not such great news for formal pants.

The fund also highlights that on-demand shopping has driven business through the malls, positively impacting trading densities (sales per square metre). I scratched my head a bit on that one, I must be honest. Fulfilment of an online order at the local grocery store would count towards turnover clauses but I don’t see how that is any better for densities than someone going to the mall instead.

Rental reversions at -14.5% are at least better than -15.6% in the prior financial year. It’s still ugly out there for property funds but it is becoming less ugly in retail.

Vacancies deteriorated slightly from 4.7% at December 2021 to 4.9% at March 2022. There are major issues at Bayside Mall in the Western Cape which Growthpoint note could create a significant increase in vacancies. That’s my neck of the woods and a beautiful new mall has been built right across the road from Bayside (a really unappealing place), so I’m not shocked by what’s happening there but I am surprised that it can have a material impact on a group this size.

95% of the portfolio is concentrated in 26 of the 42 retail assets, so there is more concentration than I expected. Growthpoint wants to de-risk the portfolio and plans to sell properties in excess of R1 billion that no longer meet the investment criteria.

The highest arrears amount is R43.4 million owed by Ster-Kinekor. Growthpoint would very much like you to go watch Top Gun, if you don’t mind.

Industrial sector

Industrial properties have been the relative winners in the pandemic. Still, whilst some funds enjoy zero vacancies in the industrial book, Growthpoint is dealing with 6.2% vacancies. That’s at least better than 9.4% at the end of June 2021.

The reason for the vacancies is that Growthpoint has a large and geographically diversified portfolio, whereas smaller funds often have a handful of properties with blue-chip tenants. This makes Growthpoint vulnerable to issues like business rescue processes at smaller tenants. 40 tenants have concluded business rescue proceedings in this period and terminated their leases.

Rental reversions of -8.1% have improved from -10.9% in the prior financial year.

The good news is that selling industrial assets is rather easy at the moment. Assets worth R353 million were sold and transferred, another R400 million in properties are awaiting transfer and R650 million worth of properties have been identified for disposal.

V&A Waterfront

The Waterfront is such an important property that Growthpoint reports it separately. By the end of March, international tourist arrivals in Cape Town reached over 70% of pre-Covid levels, so there’s still room for further rebound.

Vacancies at the iconic property are just 1.85%, with even the offices enjoying almost no vacancies. In this world, you want to own the very best properties you can.

In exciting news for the tourism sector and my beloved Cape Town, the V&A has confirmed more than 100 cruise arrivals for the next season, starting in October 2022.

The Waterfront should return to normalised performance or better within the next financial year.

Trading and Development

Growthpoint has reduced its speculative development activity. Still, the division earned revenue of over R130 million and sold properties worth R855.4 million in this period.

Growthpoint Investment Partners

In this segment of the business, Growthpoint co-invests in and co-manages specialist alternative real estate portfolios. There are three funds with total assets under management of R15 billion, which Growthpoint hopes to double in the next five years.

Growthpoint Healthcare REIT owns hospitals and medical centres. It has a pipeline of development and acquisition projects has raised funding from the International Finance Corporation. The focus is on raising further capital from development finance and institutional investors.

Growthpoint Student Accommodation REIT enjoys a R2 billion portfolio of seven properties that are 99% let. Student accommodation is an important asset class and two further properties are being developed. Like in the healthcare portfolio, specialist financing is available. A great example is the R550 million social loan from Standard Bank for funding for students from lower-income communities.

Lango Real Estate is focused on assets in Nigeria and is a successful, dividend-paying operation. It is busy with its second fundraising round and is even targeting a listing on the London Stock Exchange in the next three years.

Other stuff you should know

Growthpoint’s weighted average interest rate on local debt is 7.9%. After including cross-currency interest rate swaps and foreign-denominated loans, it decreases to 6.0%. Both those numbers are slightly higher than at the end of December 2021, reflecting the higher yield environment.

On the renewable energy front, Growthpoint is targeting 32MW of solar power by the end of FY23. 12.9MW has already been achieved across 19 sites.

Outlook

South African retail and industrial properties are mostly on the mend but things are still difficult. The office portfolio is in serious trouble. The V&A Waterfront is a gem that is set to bounce back as tourism returns to our beautiful country.

In the international listed groups, Capital & Regional is on track to resume dividend payments. Growthpoint Properties Australia is described as a “standout performer” which is obviously good. Globalworth is paying lower dividends than Growthpoint would like as the fund is retaining surplus cash on the balance sheet. Growthpoint wants to “unlock value” from that investment which could mean anything, really.

Growthpoint’s FY22 results will be released on 14 September and the fund pays dividends twice a year of 75% of distributable income. As you consider your investments in this sector, keep in mind what Growthpoint is telling you. This is the broadest possible look at local property conditions.