Investec Property Fund (IPF), which owns a diversified portfolio in SA and Europe, has struck an optimistic tone for the year ahead, pinning hopes on an increase in demand from SA’s industrial and retail sectors.
There has been some improvement in SA’s oversupplied office market, but signs are much better in the industrial market, where activity has picked up markedly in the first months of 2022 and clients now seem more willing to pull the trigger despite ongoing uncertainty, joint CEO Darryl Mayers told Business Day.
“Tenants that just reneged on leases two or three years ago are now back in,” said Mayers, shortly after the group reported that vacancies in its industrial portfolio fell to 1.6% at the end of March from 17.2% at the same time last year.
The recovery in the retail and industrial sectors could be enough to offset weak demand in SA’s oversupplied office market, with Mayers saying the office market is likely to remain in the doldrums for at least three to five years.
The group’s distribution per share rose 10.8% to 102.23c for its 2022 year, a R823m payout for a group valued at R9.63bn on the JSE. IPF maintained its payout ratio of 95%, and operating profit rose 8%, helped by vacancies more than halving in SA and sectoral tailwinds for the global logistics sector.
IPF is a real estate investment trust (Reit) that owns a diversified portfolio of direct and indirect assets valued at R22.1bn in SA and Europe. The group’s 86 properties in SA account for two-thirds of its portfolio, 41% in retail by value, 37% in office and 22% in industrial properties.
In Europe, it owns logistics assets in major locations including Germany, France, the Netherlands and Belgium.
Vacancies in SA declined to 4.5% from 11.4% the previous year, better than expected, with the group reporting continued pressure on office assets, but also “green shoots” as corporates have introduced return-to-work or hybrid policies.
Office sector vacancies declined slightly to 9.5% from 9.7%, with IPF saying its teams have been “nimble” in engaging with potential and existing clients and tailoring properties and leases to their requirements.
“We have engaged with every single office industrial client and got a much better understanding of their needs,” said Mayers.
“Gone are the days when you have vanilla leases,” said joint CEO Andrew Wooler.
Its SA portfolio was still written down by 2.6% for the year, due to pressure on office assets. But there was a 12.6% valuation uplift in Europe, which benefited from structural trends such as e-commerce, supply chain reconfiguration and urbanisation.
Rental reversions, or a change in rents on review, fell 18% in SA but grew 3.7% in Europe, and IPF said in April that it is now looking to sell its European portfolio, seeing an opportunity to exit and maximise returns for shareholders.
Wooler said the group has been receiving significant inbound interest for its European assets, with the underlying business remaining strong despite significant economic uncertainty generated by Russia’s invasion of Ukraine.
The return of land war to Europe has thrown the outlook for the eurozone economy into significant doubt, and inflation has surged to multi-decade highs, driven by food and energy costs.
“Many developments remain on hold, so supply remains constrained,” said Wooler. “Those developments that have gone ahead have a higher cost base and higher rents.”
The group’s loan-to-value ratio, a measure of indebtedness, improved to 38.2% from 40.5%, and the group is targeting between 30% and 35%. It identified R1bn in noncore properties for disposal, having already inked R530m worth of deals.
Any sale of its European portfolio would also significantly improve the group’s gearing, with IPF saying it is too soon to start talking about where it may channel any proceeds, though it is sticking to its strategy of geographic diversity.
The group’s shares ended down 2.17% at R11.70.
Update: May 18 2022
This article has been updated with additional information throughout.
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