Equites Property Fund, specialist owner and developer of prime logistics assets, is selling its UK development business as it has become difficult to raise capital to fund the development pipeline in the present environment.
Equites owns logistics assets in SA and the UK, with nearly a fifth of total revenue being generated abroad.
The total portfolio consists of 70 properties, 60 in SA and 10 in the UK, spanning 1.4-million square metres, about the size of 200 soccer pitches.
Its tenants are multinationals prepared to sign leases for 10, 15 and 20 years and who, given their commercial might, tend to meet rental payments on time.
The company has 10 UK income-producing businesses with assets valued at £305m.
Equities said it will focus on SA with a development pipeline of about R3.7bn across more than 304,000m2 of prime logistics space which includes three development and sale and leaseback agreements with Shoprite to the value of R3.3bn with 20-year lease terms.
The company entered the UK logistics sector in 2016 to grow the fund and diversify against investment risk. In 2020, the company partnered with UK property investor Newlands Property Development and formed Newlands Group Limited (ENGL) — the development business being sold. Equites owns a 60% stake in ENGL.
“The joint venture partnership was to necessitate injections of capital and, post the UK capital markets meltdown in 2022 and changing market dynamics, we took a difficult decision to sell now so as to better position ourselves for growth,” CEO Andrea Taverna-Turisan told Business Day.
He said selling the development business was not part of the initial offshore strategy, but rising inflation and interest rates as well as falling property values required that the company take a prudent approach to this business.
“For the first time since listing in June 2014, Equites has capital constraints.”
He said that to raise capital in SA to fund the development pipeline in the UK would mean raising funds at a substantial discount to net asset value (NAV), and this was not feasible.
Since launching, the partnership has completed several developments and retains an expected development pipeline of about £2bn (+R44bn) over the next seven years.
There has been huge interest from global investors and developers, but Equites will sell its stake if the board believes the offer will maximise value for shareholders.
High inflation and interest rates have halted growth in the UK real estate sector, making it harder for companies with high debt levels to raise capital.
With the challenge in capital markets expected to continue, the deployment of equity and debt will require investors with exposure to the UK to adapt to survive.
Taverna-Turisan said they are exploring disposing of the development business to extract value for shareholders and have balance sheet flexibility for when new opportunities arise.
He said shareholders want distribution growth over time and sustainable long-term earnings.
“The decision to sell is us taking a step back to position ourselves to take two steps forward for when the market turns positive again,” said Taverna-Turisan.
In its annual results to end-February, like-for-like property in its UK portfolio dropped 21% on a like-for-like basis in British sterling.
Distribution per share (DPS) rose 4.1% year on year to 169.60c at a payout ratio of 100%. NAV per share decreased 10.5% to R16.65.
Funding costs affected DPS growth negatively by 0.8% as the group refinanced debt facilities in SA and the UK. Property acquisitions contributed to 0.3% growth in DPS.
Its loan-to-value (LTV) — a key measure of the financial health of a property company — rose from 31.5% to 39.7% and the company intends reducing this to 35% by the 2024 financial year.
CFO Laila Razack said the UK devaluation increased LTV 2.3% due to the 21.4% devaluation of the portfolio in sterling while the SA portfolio valuation increased by 4.3%
Razack said the cost of funding in the UK rose from about 3% in 2021 to 6% in 2023. “In SA, financing costs base rate increased by 325 basis points and our cost of debt increased by half of this.”
COO Riaan Gous said the SA portfolio’s fundamentals are strong with a healthy weighted average lease expiry of 13.1 years, 0.1% vacancies and premium tenants in place.
“We continue to see high demand for logistic assets. Given our strong development pipeline, we are confident to meet this demand,” said Gous.
At 10.36am on Tuesday, the share price was down 7.56% to R14.19. By close of trade, it was the third-biggest loser on the JSE, falling 7.23% loss.
Update: May 9 2023
This article has been updated with new information from Equites management.
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