JSE-listed Fortress Reit has seen a reduction in vacancies across its portfolio as demand for space continues in its logistics and retail assets.
Total vacancies were down to 5.5% on May 31 from 6.5% in December 2021, the company said in its trading and preclose operational update.
“We don’t expect any material tenant failures and we believe that our tenants will be able to absorb rising utility costs and municipal rates,” said CEO Steven Brown.
Brown said contractual rental escalations and market-related renewals will be achieved with no major change in vacancy rates.
Fortress is a real estate investment trust (Reit) specialising in the logistics and retail property sectors. It owns 53 shopping centres in SA and holds a 23.6% stake in Nepi Rockcastle, which has operations in the Central and Eastern European (CEE) region. Its SA logistics portfolio is valued at R10bn with CEE logistics portfolio valued at R1.5bn.
Brown said the industrial property vacancies decreased due to short-term leases being concluded and disposals of some of these noncore assets.
For the financial year ending June, the disposal of noncore assets, mainly old industrial buildings, have achieved R531m in net proceeds at a combined profit to book value of R25.8m.
The office portfolio, which remains part of the noncore assets, had the highest vacancy rate of 29.1% in May from 29.4% in December. About 8,000m2 of the vacancy rate relates to a property that is under due diligence and rezoning for a potential residential conversion by the potential buyer.
Brown said there is growing demand for smaller units in secure industrial parks, with industrial vacancies reduced to 6.9% in May from 10.7% in December.
He said the retail portfolio, which focuses on essential goods and services in convenient locations and commuter nodes, continues to perform strongly in the current environment. Vacancies have remained at 3.7% from December 2021.
“We continue to see strong tenant demand for additional space in well-performing shopping centres,” said Brown.
Demand for well-located prime logistics warehouses saw vacancies decrease to 1.8% in May from 2.6% in December. “Tenant interest in our current pipeline remains robust and we are optimistic regarding letting speculative developments prior to completion.”
Brown said the past six months have seen a notable construction cost inflation that may lead to lower than previously expected net initial yields on new developments. These increased costs cannot be recovered in the form of higher rentals.
On May 31, Fortress had R3bn in cash and its gearing was 39.8%.
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