Growthpoint, the largest real estate investment trust (Reit) on the JSE, is still struggling to attract tenants into its office space, and the economic hub of Gauteng – where more than 67% of its office space by value is located – seems to be the most challenging area.
The Reit released its investment update for the three months ended September 2023 on Wednesday, noting that office vacancies across its South African portfolio stood at 18.9%,
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Though much higher than retail and industrial – which recorded vacancies of 6% and 3.3% respectively – office vacancies did mark a slight improvement from the 19.2% reported in its annual results to end-June 2023. This as the Reit let 58 000m2 of space and renewed 33 000m2 during the period.
Office reversions also marked a slight decrease during the quarter, to 18.9% from the 20.1% reported for the full-year period to June.
Above-average vacancies were recorded in Gauteng, coming in at 23.3% during the quarter, slightly down from 24.1%, with the group having trouble letting space in Sandton, the Parktown node and Rosebank.
“The sentiment towards offices is slowly improving, with some of our portfolio KPI’s [key performance indicators] stabilising and more investors interested in acquiring office assets,” the group said.
“Fewer tenants are reducing space, and persistent negative reversions stemming from market rentals not keeping pace with escalations, are showing signs of easing.”
Overall, says Craig Smith, head of research at Anchor Stockbrokers, the group presented a good quarterly update and it is pleasing that it is gaining ground on vacancies and reversions across its segments.
“Clearly it is still a tough operating environment, but it is encouraging that [negative] reversions are improving and vacancies are reducing across all sectors,” Smith told Moneyweb.
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Economic growth
The substandard performance of the office property sector, which is still recovering from the impact of the Covid-19 pandemic, has been a drag on property players with substantial exposure to the segment – but especially so for Growthpoint, which according to its June 2022 factsheet, had 32% of its local gross lettable area (GLA) in office space, accounting for 38% of the portfolio’s value.
Speaking to Moneyweb on The Property Pod earlier this month, MSCI South Africa vice-president Eileen Andrew echoed the South African Property Owner’s Association’s sentiment that the office sector’s troubles remain tightly linked to economic performance.
Andrew agreed that for the segment to get out of the sticky situation it finds itself in, South Africa’s GDP will have to grow by at least 3%.
“We need about 3% growth to bring enough new tenants into our market to create that demand, to mop up that space over time, because the quantum of space is really, really big at the moment. We are looking at a million square metres of space in Sandton alone that needs to be mopped up. That’s a lot of new tenants [that need to come] into that space,” she said.
Listen to Suren Naidoo’s interview with Eileen Andrew, vice-president of MSCI South Africa in this episode of The Property Pod (or read the highlights here):
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You can also listen to this podcast on iono.fm here.
Asset disposal plans
In its update, Growthpoint also guided investors on sales of properties and non-core assets that are in the pipeline. The group has already – in the three months under review – sold and transferred five non-core properties at a value of R308.3 million, R1.8 million lower than the 2023 full-year book value, it said.
Above this, it says it is looking to dispose of a total of three assets and two properties for a total of R721.3 million in the retail sector, while City View in Durban was sold – but is awaiting transfer – for R263 million.
The office sector has three non-core office assets valued at R359 million awaiting transfer, while another five properties worth R545 million have been approved for disposal in the segment as the Reit tries to “optimise the portfolio and recycling capital”.
The industrial sector has five properties worth R155.3 million awaiting transfers while Growthpoint says it is looking to sell a further seven properties in the portfolio worth R422.8 million.
“We believe the performance of our retail and industrial portfolios [has] stabilised and [is] recovering, notwithstanding the challenging South African macroeconomic environment which is having the most pronounced impact on the office portfolio where oversupply and structural issues are still a factor,” the firm said looking ahead to the rest of the 2024 financial year.
“At this early stage in the financial year, considering the impact of higher interest rates across both our local and international businesses for the full year, and the expected performance for the remainder of the year of the three SA sectors, the V&A [Waterfront in Cape Town], GIP [Growthpoint Investment Partners] and our international investments, our DIPS [distributable income per share] guidance for FY24 remains unchanged.”
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