Western Cape-focused Spear Reit says it is well positioned to benefit from a shift in real estate fundamentals geographically along with the continued tailwinds created by the effects of semigration and good governance.
Spear’s portfolio includes 28 industrial, retail and office assets predominantly in Cape Town. The properties are located in desirable localities and are underpinned by strong lease covenants and quality tenants.
“Clear policy and good governance in the Western Cape will continue to attract investments into the region and Spear will benefit from this,” CEO Quintin Rossi told Business Day.
Spear is always looking for growth opportunities — the fund is selective on what to acquire given a high interest rate environment and compressed yields, especially in the retail sector.
Rossi said with capital costs north of 10%, Spear prefers to buy back its own shares instead of doing dilutive deals. The company already knows the pain points and opportunities in the business.
During the reporting period, repurchase initiatives amounted to 3.07-million shares. Spear used the proceeds from the sale of a noncore asset disposal to buy back shares.
“We have always said we want to increase our exposure to the industrial and retail property sectors; we are prudent about capital allocation and growing income.”
Rossi said several private property owners are talking to Spear about section 42 of the Income Tax Act involving asset-for-share transactions. Effectively, these owners can swap out direct Western Cape real estate risk for indirect risk with a property manager like Spear. The transaction has tax benefits where that taxpayer exchanges an asset for shares in a company.
For the six months to end-August, occupancies reached 94.19% with a weighted average lease expiry of 27 months. As measured on October 6, rental collections were near 99% at R21.9m.
“We are a cash-backed income fund, and investors are rewarded for their patience given that we are reporting free cash flow from operations,” Rossi said.
Spear’s portfolio value increased 5.85% from R4.22bn in February to R4.46bn.
Rossi said the office portfolio has seen a reduction in vacancies, with buildings in established nodes sought after. The business process outsourcing sector drove demand for office space, he said.
Semigration — the movement of people from one city or province to another — has beneficial effects for Spear’s portfolio.
Rossi said some companies establishing C-suite localities in Cape Town are choosing Spear’s premium buildings, driving further demand for office space.
Some businesses in Johannesburg are silently, but evidently, moving their executives to some of their premium buildings, which is driving further demand for office space.
For example, he said in the residential property market, semigration is driving home sales and new developments, creating further retail and industrial investment opportunities for Spear.
Update: October 24, 2023
This article has been updated throughout with new information from Spear Reit CEO Quintin Rossi.
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