Residential-focused Indluplace Properties says local councils remain a risk to its operations along with above-inflation increases, lack of service delivery especially in the inner city of Johannesburg, and lack of improvement in resolving billing problems.
CEO Carel de Wit told Business Day that higher-than-inflation increases for services is the biggest threat to the business’ long-term survival.
“We do not recover all municipal costs from our tenants, and this erodes value for shareholders over time — while high cost of water and electricity adds pressure to our tenants,” De Wit said.
Indluplace’s portfolio, valued at R3.4bn, comprises 9,282 residential units focused on the affordable end of the residential rental market located in Free State, Mpumalanga and Gauteng. It also has 15,494m² of retail space, about the size of two soccer pitches.
De Wit said the biggest part of the fund’s portfolio is located in the City of Joburg (CoJ), and recently the municipality changed the way sewerage and refuse services were charged, and these were also back-billed, resulting in additional and unexpected costs to property owners still recovering from the Covid-19 pandemic financial strain.
For the six months ended-March, municipal costs accounted for the biggest chunk of operating expenses, and have been since 2022.
In addition, though the majority of the fund’s bills are up to date, any disputes relating to amounts charged are not well received by the council as it threatens building management staff with cutting off services.
“We have employed additional expert staff to deal with council issues — this implies legal fees to prevent incorrect disconnections and force council to do their jobs,” said De Wit.
As an example, he said for many months on end the fund has experienced numerous estimated meter readings, incorrect meters on accounts, incorrect tariffs and delays in replacing stolen or damaged meters.
“Our biggest headache is a building in the CBD where CoJ has been charging us incorrect tariffs for years — we obtained a court order confirming our version, but CoJ is refusing to correct the billing,” said De Wit.
Instead, the city is using customer payments to pay their legal fees defending why they have not done what the court instructed them the council to do, and this has been ongoing for more than five years.
Lack of and poor service delivery is a huge inconvenience to the business operations. Basic infrastructure repairs take longer to repair, and when final done, the workmanship is substandard that it quickly becomes a problem again, said De Wit.
“Street lights are not repaired timeously, and this creates opportunities for criminals especially in the inner-city areas.”
He said lack of maintenance of pavements have become dangerous for tenants and their children to use — and with numerous traffic lights continually out of order outside — crossing the roads is very dangerous.
During the reporting period, residential portfolio occupancies improved 4.3 percentage points year on year to 94%, and it reported a turnaround in the student portfolio, with 2,425 beds, as occupancies surged 55 percentage points over the past year to 98%.
The portfolio recovered substantially attracting more than 350 new tenants per month over the six months, with February recording a record number of 472 new leases and significantly improved occupancies in the student portfolio.
Average rentals across the portfolio reached R4,384 per month with 0.7% average escalation while average inner city rentals were R3,897 with 0.1% average escalations. The company anticipates rentals to increase in line with inflation.
But when looking at the retail space, the occupancy rate was 5.1 percentage points lower, at 86.3%.
At end-March, Indluplace had total debt of R1.36bn of which 73.2% is hedged with a 9.5% weighted average cost of debt. Its loan-to-value was 38.6%.
Total income rose 7.2% to R302.8m and net property income 8.5% to R138.4m.
Operating profit decreased 0.9% to R136.2m, while distributable income improved 2.5% to R56.5m. Net asset value per share, used to assess the value of a real-estate investment trust (Reit), was down 4.1% to 664.07c.
Indluplace did not declared an interim dividend as it awaits a possible takeover from fellow JSE-listed Reit SA Corporate Real Estate but will pay out a clean-out dividend if all goes ahead as planned.
De Wit said they are positive about the continued performance of the fund with the residential portfolio and the fund having recovered to almost pre-pandemic levels — with growth in net property income exceeding 7% compared to the same period in 2022.
“We are seeing improved occupancies in both the traditional portfolio, and a remarkable turnaround in the student portfolio — we expect a strong second half of the year,” said De Wit.
Update: May 24 2022
This article has been updated with new information from Indluplace CEO.
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