Property group Redefine has published its financial results for the year ended August 2019, highlighting pressure on rents as big groups – like banks – reduce their physical presence in shopping malls.
The group reported an increase in revenue to R8.4 billion across all operations, comprising contractual rental income of R8.54 billion (up from R7.88 billion in 2018), rental income accrual of R93.7 million, and investment income of R153.7 million.
Operating profit was flat at R5.48 billion, but profits before finance costs and taxation was down significantly to R4.98 billion, from R8.73 billion in 2018 due to impairments and other equity losses.
The total comprehensive profit for the year was at R3.37 billion.
Redefine manages a diversified property asset platform of local and international investments, including Centurion Mall, Alice Lane, Blue Route Mall and Black River, among others.
The group’s South African operations took a hit in rental income during the year, with renewed rental leases (covering 454,000 square metres) being reduced by 2%. Vacancy rates increased to 5.1%, from 4.5% before.
Commenting on its financial performance, Redefine said that it is currently operating in an environment with nothing to stimulate meaningful economic changes, and thus expects weak local property fundamentals to prevail over the medium-term.
“GDP growth is expected to be lacklustre, plagued primarily by electricity supply constraints and the weak global environment,” it said.
“Compounding the situation is the lack of clarity on contentious reforms, including land expropriation without compensation, the national health insurance, prescribed assets and the sale of ill-functioning state entities.”
It said that its future guidance would be based on the assumption that these trading conditions will prevail, but will also “brace itself” for any unexpected events to occur.
Redefine said it expects property fundamentals to remain weak over the medium term, with risk events like load shedding adding to the uncertainty.
“Interesting and volatile times are here to stay, and we need to make the most of the resultant opportunities. We are living in a world of costly capital and Redefine is therefore focusing on reducing balance sheet risk while still delivering sustainable quality earnings,” said chief executive officer, Andrew Konig.
The group declared a final dividend of 48 cents per share.
Banks reducing footprint
Across its retail portfolio, Redefine said it has seen a noted decline in space occupied by South African banks, as the groups move to reduce their footprint in shopping centres.
The only data published by the group reflecting this was for Standard Bank, which is the only bank listed among Redefine’s top 10 tenants.
In FY 2018, Standard Bank – the 10th largest retail tenant for the group – had a gross leasable area (GLA) of 62,087 square metres, contributing R12.2 million to the company’s gross monthly rental (GMR).
However, in FY 2019 this has dropped to 54,870 square metres (a reduction of 7,217 square metres less), with the GMR contribution declining to R10.77 million.
Across all of the group’s top 10 tenants, only two groups increased their square meterage (Pepkor and the government), with all others either holding (Macsteel and Robor), or reducing their coverage.
Despite reductions at the top, GMR for the top 10 increased to R144 million, accounting for 28.8% of the total GMR of R500.2 million.
Standard Bank, by far, was the biggest loss of in GLA for the group among its top 10, however.
As South Africans move towards more digital banking channels, established legacy banks such as Absa, Standard Bank and FNB have made moves to down-size their bricks and mortar operations.
This has led to branch closures for Standard Bank, and strategic moves to decrease the size of bank branches among the other groups.
Even among banks that are expanding their branch networks – such as Capitec and African Bank – new branches are taking up less space.
As a result, Redefine said it is altering its strategy. Specifically, it noted that one of its priorities, looking ahead, is to reconfigure banking malls on its properties, while working on tenant retention.
As has been the case with Edcon (which reduced its GLA by 1,523 square metres) Redefine noted that the trend with “right-sizing” was not limited only to banks.
“There has been continued pressure on the total cost of occupation,” it said, noting pushback on rentals and escalations.
Edcon will continue to reduce space, it noted, adding that this would also be a priority in the coming financial year.