Growthpoint Properties, the largest domestic office landlord with 161 properties, says that key metrics for its retail and industrial portfolios are showing signs of improvement, but its office portfolio remains under pressure.
Growthpoint is the largest South African primary REIT (Real Estate Investment Trust) listed on the JSE and a 50% stakeholder in the V&A Waterfront in Cape Town.
The group’s office properties are valued at R27.4 billion with a gross leasable area of 1.7 million sqm. Its top 10 tenants include Discovery Holdings, Anglo American, Transnet, Allied Electronics Corporation, Absa Bank, Exxaro Resources and Investec Bank.
It said in a trading update on Wednesday (15 June), that the first nine months of FY22 have been characterised by a highly challenging operating environment for its tenants, with persistent countrywide electricity disruptions, unrest and floods in KwaZulu-Natal.
“The macro-economic environment continues to weigh heavily on our domestic portfolio. Total vacancies increased slightly from 10.5% at HY22 to 10.9% at the end of March 2022 but have improved from 11.6% at FY21.”
The office sector, Growthpoint said, remains the most challenging of its three domestic businesses, “but we are seeing some sporadic green shoots”. Key metrics, however, remain under pressure, it said.
“Economic imperatives are driving some companies to reduce their office spaces, and work-from-home routines are creating uncertainty about future space requirements. The good news is that the initial sentiment that offices would no longer be needed is receding with hybrid working patterns set to endure.
“Bigger businesses are returning their staff to offices with different strategies, some fully with others are still on a rotational system. We have started to see smaller tenants that previously vacated their offices return to the market.”
Growthpoint said that office sector vacancies increased from 19.9% at FY21 to 21.2% at HY22 and are currently at 22.4%.
“The sale of non-strategic office assets in other areas has increased our exposure to Sandton slightly, where we have our most significant concentration of offices. Currently, 21.7% of our office gross lettable area (GLA) is located in various buildings in Sandton, where we have 103 000m² or 27% of total office vacancies.”
It said that the office sector is particularly stressed in Gauteng and Sandton specifically, although it expects this business and financial hub to recover in due course.
Renewal success rate improved from 52.5% at FY21 to 55.4% at HY22 and has declined slightly to 53.1% as at 31 March 2022, with the average lease renewal term decreasing to 2.8 years from 4.4 years at FY21 and 3.8 years at HY22, as tenants remain reluctant to commit amid uncertainty, the group said.
“What these numbers do not reflect, however, is how uncertainty is driving positive tenant retention, because businesses are unwilling to relocate until they have more clarity on their future space needs. While we are retaining a high percentage of tenants, some have downsized, skewing the numbers.”
Growthpoint said that liquidations and evictions, relocations within its portfolio, and cancellations where tenants paid cancellation fees, resulted in 21,896 sqm of leases being terminated in the period.
Pressure on rental growth and occupancy level stems from the oversupply of space in the market and weak demand. “Tenants have many options for new premises, including sub-letting fitted-out and furnished workspace from other downsizing businesses,” said Growthpoint.
The group said that signs of recovery are evident in the retail sector, with its shopping centres reporting turnover growth. Smaller neighbourhood and convenience centres are outperforming bigger malls.
Footfalls are generally nearing previous levels, which aligns with overall industry trends, given that people have changed the way they shop with increased basket sizes, it said.
Value fashion remains at the forefront of the apparel segment recovery. The athleisure category keeps trading strongly, said Growthpoint. The growth of online on-demand shopping is driving business through our malls, positively impacting trading densities.”
For one of its more iconic brands, the V&A Waterfront, Growthpoint said that up to 31 December 2021, the Waterfront was still significantly impacted by low international tourism numbers due to pandemic-related restrictions and particularly the UK travel bans in December 2021, due to the Omicron variant.
From January 2022, it experienced a rapid rebound as international tourist arrivals in Cape Town increased, reaching over 70% of pre-Covid levels by end-March 2022.
Operating profit improved by 55% (R318 million) compared to a decrease of 19% (R210 million) on pre-Covid levels in the corresponding prior period to March 2021. Aquarium visits increased by 90% from the same period a year earlier. The Waterfront should return to normalised performance, or better, within the next financial year, the property specialist said.