Dipula in demand as tills ring in townships
Given the huge size of the township and rural economies, there is still lots of growth potential, says CEO
One would have assumed that shoppers in township and rural areas would be harder hit by surging food and fuel costs than their counterparts in upscale urban areas.
But Dipula Income Fund has yet to see any sign of a slowdown in spending in its sprawling portfolio of 86 retail properties. The real estate investment trust (Reit) is one of the JSE’s largest players in the convenience retail sector, with many of its properties in townships, rural areas and CBDs.
Its retail assets are mostly smaller centres of 10,000m²-20,000m² that are typically anchored by a Shoprite, Checkers or Boxer store, and cater to lower-income shoppers’ daily “need to haves”. Dipula’s retail properties represent 64% of its R9.8bn portfolio. It is one of only a few property stocks that still generates 100% of its income in South Africa.
The Reit has recorded impressive trading density (sales per square metre) growth of just more than 10% in its retail portfolio for the 12 months to December. And, unlike most Reits that own large suburban malls catering to higher-income shoppers, Dipula has been able to consistently grow rentals over the past three years.
Average rental reversions are still clocking in at more than 5%, a key performance metric that gauges the strength of tenant turnover and demand in shopping centres.
CEO Izak Petersen says that comes on the back of low or no vacancies in many of its township and rural centres, some of which have waiting lists of tenants. He says: “National retailers are typically still underrepresented in these markets, which has created strong competition for space.”
Petersen refers to Dis-Chem, for instance, which he says is only now starting to “sniff around” townships. Though Clicks entered the market years ago, the group has recently stepped up its township and rural expansion drive.
In the past four months alone, three new Clicks stores have opened in Dipulaowned malls. “We are still looking for holes in other centres to make more space for them,” he says.
In addition, Checkers recently started to
roll out its FreshX concept stores in several of Dipula’s malls. Demand is further underpinned by the rapid expansion of smaller food grocers aimed at the value segment, including Econofoods and OBC.
Another trend is that banks are returning to convenience shopping centres to be closer to customers. At Dipula’s Gezina Galleries in Tshwane’s blue-collar northern suburbs, new leases have been signed with Standard Bank, Absa and FNB.
“Banks closed their stores too early when online banking took off. They are now realising people still want to go into a brick-and-mortar store,” says Petersen. Banks are, however, taking up less space than in the past. He notes they used to typically rent boxes of about 500m². That’s dropped to 150m²-300m².
Asked how Pick n Pay’s potential closure of underperforming supermarkets will affect Dipula, Petersen says most of the 15 Pick n Pay and Boxer stores in its portfolio are franchise-operated, and are “shooting the lights out”.
Citing the example of the Pick n Pay franchise in Meadowpoint Retail Centre, one of six Soweto properties owned by Dipula, Petersen says the store is achieving a “phenomenal” trading density of R10,000 a month. At Dobsonpoint Shopping Centre, a few kilometres down the drag, Pick n Pay’s trading density sits at an equally impressive R5,000 a month.
Petersen says that compares to an average R2,500 a month for Pick n Pay supermarkets in
Joburg’s northern suburbs. Still, he believes Pick n Pay should be spending more money on upgrading the interiors of some of its township stores if it wants to compete with
Shoprite.
“But it will be a pity to lose any Pick n Pay stores in our malls. “Our shoppers like to do comparative shopping and want more than one food anchor in the same centre.”
Despite Dipula consistently increasing rentals in its retail portfolio over the past three years, Petersen expects a “big jump” when rates come down. He says: “People will spend more and retailers will see improved trading, which will enable us to further grow rentals.”
He says sales and rental growth will also be boosted by Dipula’s strategy of investing heavily in upgrades and retenanting initiatives. The Reit spent R150m on revamps last year to keep its properties relevant.
In addition, a R40m enhancement is under way at Gezina Galleries. At Chilli Lane in Sunninghill, Joburg, a R15m refresh was recently completed while R70m was spent to redevelop Dobsonpoint, which was razed in the July 2021 riots.
These investments are already paying off handsomely. For instance, at Gillwell Mall in East London’s CBD, a retenanting exercise that replaced a Game with a Boxer store, among others, led to a 30% surge in sales turnover.
Meanwhile, Petersen has no intention to shift focus to other property sectors or follow many of his Reit peers offshore. “We are providing investors with an easy route to a pure South Africa-based portfolio in markets we know really well. And there’s still plenty of growth potential, given the huge size of the informal township and rural economies, where retail spending is underpinned by social grants.”
Despite a 25% rally in Dipula’s share price since the stock hit a two-year low at end-July, the counter still appears cheap at a 36% discount to NAV and a distributable income yield of about 13% vs the sector’s average 10%.
Anchor Stockbrokers has placed a 12month target price of 600c-650c on Dipula, which translates into potential share price upside of at least 45% on last week’s 420c.
The investment firm says in a research report: “We believe Dipula’s discounted market pricing does not capture its track record, low loan-to-value, low capex requirements and reinvestment opportunities. We see current refurbishment capex adding meaningfully to rent from the second half of 2024 onwards.”
It adds that Dipula’s distributable income stream is of high quality given its diversified portfolio of small and relatively liquid properties and defensive operating earnings, thanks to the essential goods and services sold by its retail tenants and highmargin retail tenant base.
Anchor Stockbrokers highlights the fact that Dipula’s biggest retail tenant by far is Shoprite (16.6% of gross lettable space), “the local grocery retailer with the highest margins, lowest leverage, biggest and fastest-growing store footprint, and healthiest earnings growth”.
In contrast, Dipula has almost no exposure to struggling tenants such as Massmart, Nu Metro and Retailability. “We also like that Dipula’s exposure to Pick n Pay is increasingly through Boxer rather than the traditional middle-income Pick n Pay stores.”