Growthpoint anticipates tough commercial property market

GROWTHPOINT Properties was in a strong financial position despite continuing uncertainty in the economy, pressures on net operating income in the South African portfolio and the knock-on effect on property valuations.

The group said yesterday in a ninemonth trading update to March 31 that the focus remained to reinforce the balance sheet, which would enable it to pursue internationalisation, optimise the local portfolio, and generate new income streams from funds management and third-party trading and development.

The R4.3 billion of equity raised last November, R577 million proceeds from the December 2020 Distribution Reinvestment Plan, R827m retained for the 2020 year and R499m retained from the first half of financial 2021, had all bolstered the balance sheet, the group’s management said.

Loan to value was 40.7 percent as at December 31, 2020. Property development activity had been scaled back and there were no material changes to the activity in the Trading and Development division, from that reported in the interim results.

In the international businesses: Growthpoint Properties Australia, Globalworth Real Estate Investments and Capital & Regional, reduced dividends continued to negatively impact Growthpoint’s earnings.

In terms of the Covid-19 pandemic impact, there had been 39 cases of business rescue and liquidation among Growthpoint’s tenants in 2020 that had led to arrears of R124.4m, while in 2019 there had only been 13 cases with a R6.7m impact. “There have only been a few thus far in 2021, but more are likely to emerge once delays in processes and practitioner appointments are cleared,” the group said.

Post the interim period, Growthpoint provided a further R54.5m in discounts to tenants as well as R5.3m in deferrals, while R16.9m had been recovered from previous deferrals.

Arrears decreased to R437.9m at end-March 2021 from R494.2m at end-December 2020. Some R24.9m was provided for, bringing the total bad debt provision to R277.1m at end-March 2021. Growthpoint said it would likely take years for absolute GDP to return to pre-Covid-19 levels, meaning property fundamentals in the South African business would remain under pressure for 12 to 24 months.

The rise in the May 2021 Business Confidence Index to its highest level in three years, the first quarter current account surplus and better-than-expected car sales were however signs of green shoots in the economy.

Office vacancies were at 19.5 percent. Tenants had many options when looking at new premises, including sub-letting space from other downsizing businesses that was fitted out and often furnished. The group’s most significant concentration of offices was in Sandton, where 21.1 percent of the office gross lettable area was located, and where the group has its biggest vacancy exposure at around 25.4 percent of total office vacancies.

“In Gauteng, vacancies are pervasive. The region is under significantly more pressure than KwaZulu-Natal and the Western Cape, where vacancies are concentrated in one or two buildings,” the group said.

In the retail portfolio, some categories such as supermarkets, pharmaceutical, homeware, general value and value fashion were recovering faster than others, but most tenants were still trading below pre-Covid-19 levels.

“Consumers remain under pressure, with rampant unemployment, low consumer confidence and high debt to disposable income ratios.”

Retailers in the restaurant, fast food, entertainment, travel and personal care categories continued to be assisted through discounts, deferrals or restructuring leases.

Edcon arrears have been written off. Ster-Kinekor and CNA, which are both in business rescue, were the largest arrears and accounted for 14 percent of total arrears. In the industrial portfolio, the initial surge in tenant requests for rental deferments and discounts had abated due to the recent uptick in the economy and the associated increased retail sales from the low base of the second half of 2020. Industrial vacancies moved to 8 percent from 7.1 percent in the half-year.

At V&A Waterfront, footfalls for the nine months to end-March 2021 dropped to 10.3 million visitors, 50 percent lower than the nine months to end-March 2020, due to the halt in international tourism.

Growthpoint shares closed 1.89 percent lower at R14.55 on the JSE yesterday.