Norbert Sasse: In my 15-odd years in property I have never experienced such tough times. Picture: Russell Roberts

Last year, most property stocks were still rewarding shareholders with attractive dividend growth of 8%-12%, well ahead of inflation. That’s no longer the case.

Growth of more than 6% is fast becoming the exception as rising pressure on office, industrial and retail rentals start to erode landlords’ profits. And it’s going to get worse before it gets better.

SA-focused real estate companies that have reported results in recent weeks have all reported a deterioration in trading conditions. Most are forced to be more negotiable on rentals or risk losing tenants to a competitor.

"In my 15-odd years in property I have never experienced such tough times. The sheer lack of confidence and growth in the SA economy is taking its toll," said Growthpoint Properties CEO Norbert Sasse at last week’s annual results presentation.

Though shareholders of the top-40 company will still see their dividend payouts for the year ending June rise by a decent 6.5%, Sasse said investors shouldn’t expect growth of more than 4.5% next year as slow demand for commercial space on the back of a "persistently weak SA economy" continues to bite into earnings.

Growthpoint’s performance for the year to June has been supported by its exposure to the hard-currency real estate markets of Australia, Romania and Poland, which comprise 28% of total assets by value.

But Growthpoint remains the JSE’s most diversified and largest SA-based real estate counter by market cap (R75bn) and is regarded as a reliable bellwether of the state of the local real estate market.

Straight-talking Sasse said it was the first time in his tenure as CEO at Growthpoint that rentals across all subsectors of the market had recorded negative reversions on lease renewals. The company’s industrial portfolio has taken the biggest knock with rentals down 3.3% for the year to June, followed by retail at -3.1% and offices at -2.2%.

"Despite offering more favourable terms we are still losing one out of every three tenants when leases expire," said Sasse.

He noted that all sectors of the property market face an oversupply of stock. The office market is the most problematic due to virtually no corporate expansion, borne out by Growthpoint’s latest office vacancy which has jumped from 6.8% to 8.6% in the 12 months to June.

Sasse referred to health insurer Discovery as one of the few large SA corporates that is still growing its operations and staff and therefore its floor space.

Discovery last year moved into its new Sandton headquarters, a state-of-the art 116,000m² building owned jointly by Growthpoint and Zenprop, which is considerably more than the 70,000m² or so previously occupied by the insurer.

Sasse also noted a trend among corporates to scale down to cheaper offices and make do with less space than they did 10 years ago.

"Most companies’ office space requirements have shrunk by 30%."

Growthpoint’s industrial vacancies were up from 3.1% to 4% over the same period, while retail vacancies remained constant at 3.6%.

However, Sasse said planned store closures by the struggling Edcon group could exert upward pressure on mall vacancies.

Sasse said there was no doubt that consumers had been forced to tighten their purse strings on the back of VAT and tax increases and soaring fuel and other living costs. That is reflected in the fact that trading density growth (turnover/m²) has slowed significantly.

Growthpoint’s portfolio of more than 50 shopping centres — including flagships such as Brooklyn Mall in Pretoria, Northgate in Johannesburg and Constantia Village in Cape Town — recorded trading density growth of only 1.3% for the year to June.

That’s down from about 2.5% in June last year and nowhere near the average 7%-8% most mall owners were still recording three to four years ago.

Cape Town’s V&A Waterfront, which Growthpoint co-owns with the Public Investment Corp, has bucked the general trend and is still achieving above-average income growth and minimal vacancies across its retail, office, industrial and hospitality sectors. "The V&A appears to be a world apart from the rest of SA," Sasse noted.

Retail-focused Hyprop Investments last week reported a similar trend of rapidly declining trading density growth across its R28bn retail portfolio.

Hyprop, which owns nine prominent regional shopping centres including the Rosebank Mall in Johannesburg, Clearwater Mall on the West Rand and Canal Walk in Cape Town, recorded average trading density growth of a mere 0.5% for the year to June, down from 1.4% and 5% in the preceding two 12-month periods.

"SA consumers’ disposable income is under pressure and sales growth is just not there," said Hyprop CEO Pieter Prinsloo at the company’s results presentation. He also noted a shift in consumer spending, with shoppers becoming more value-conscious.

Hyprop nevertheless still achieved dividend growth of a healthy 8.8% for the year to June, which was partially supported by the rental income earned from the new tenants that have taken up almost the entire vacancy left last year by the demise of Stuttafords.

Hyprop’s vacancy has declined from 2.4% to 1.9% in the 12 months to June.

Its outperformance was further boosted by robust growth in its portfolio of six shopping centres in various Southeast European countries. The latter accounted for 12% of total distributable income.

Though there is still sufficient demand from retailers to fill empty space in dominant shopping centres, Prinsloo says rental growth is now clearly under pressure.

Hyprop recorded 1.5% rental reversions on its mall portfolio in the year to June, markedly down from the average 4% growth still achieved on renewals a year earlier.

That has prompted Prinsloo to adopt a more cautious outlook for next year, with dividend growth forecast to slow to between 5% and 7% for the 12 months to June 2019.

The weaker-than-expected guidance provided by property companies in recent weeks, has also led to analysts lowering their dividend growth expectations for the sector as a whole. Keillen Ndlovu, head of listed property funds at Stanlib, expects dividend growth of between 5% and 6% over the next 12 months, with risk to the downside "if we do not see any meaningful economic growth".

He says SA fundamentals are likely to deteriorate further over the next 12 months as more supply, particularly in the industrial property sector, comes onto the market.

Craig Smith, head of research at Anchor Stockbrokers, says there is no doubt that property investors will have to adjust their growth expectations downwards. He is forecasting 12-month rolling dividend growth of 5.5% for the sector as a whole, down from an average 9.5% achieved last year.

But Smith still expects an annual total return for listed property of 12%-14% (compounded annually) over the next three to five years. That compares to an average 18% a year total return delivered by the sector over the past 15 years (ending June).

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