BUSINESS DAY TV: Tower prepares to enter a holding pattern in SA’s property market
Tower Property Fund CEO Marc Edwards discusses the company’s interim results, and how it is managing its diverging Croatian and South African portfolios
Marc Edwards is CEO of Tower Property Fund.
BUSINESS DAY TV: Tower Property Fund reported a 22% rise in half-year revenue while operating profit surged 47%, but the board’s decision to no longer distribute one-off earnings saw Tower’s distribution per share decline by 15%. CEO Marc Edwards joins us in the studio now with more detail.…
The acquisition of the R1bn retail property portfolio in Croatia during the period — increasing your total portfolio value to over R5bn, currently that exposure sitting at 28% — how are you managing your exposure to Eastern Europe at the moment?
MARC EDWARDS: We’ve been there for a while, we were there from January 2015, so we’ve managed to get very good partners in that region. We’ve got leases which are very low management intensity, in that they’re managed by our partners over there. So we’re able to acquire large properties and have low management input.
It’s the perfect scenario for us at the moment. We’re looking to grow that business quite substantially, there’s a lot of opportunities but you’ve got to manage the South African and the Croatian properties together, they’re very different types of assets.
BDTV: Absolutely, so we’ll take a look at the South African element of your portfolio in just a bit. Before we move on though, we were talking a little earlier in the show about the prospect of rising inflation, yields rising as well, potentially spelling higher rates, a whole lot of political nervousness within the European territories that could spill over into peripheral regions as well. So how are you viewing the risk that brings with it for you?
ME: It’s certainly higher now. The European Union, if it breaks up — which I don’t think it will, there’ll always be some kind of trade agreement that allows free movement etcetera — but the periphery countries would be the ones that would suffer the most. They don’t add much value like a Germany would. So it is a point of concern for Croatia. What is positive, though, is that their economy has come off the back of an eight-year recession, so we’ve bought properties at the best prices. Our rentals are low, as low as they’ve been in 15 years. So from a property fundamental perspective it’s very solid. Political risk around the world at the moment is significant. So it’s just a case of when you buy, you make sure you buy fundamentally correctly.
BDTV: You do talk in your release today about planning to ring-fence your Croatian portfolio into a new investment vehicle. Talk us through that and the rationale behind it.
ME: I mentioned earlier the properties don’t sit well with South African properties. One of the reasons is because inflation in Europe is very low, it’s barely 0.1%, whereas in SA we’re running at about 6% and our leases escalate north of inflation. So you’re typically find a lease escalating in SA at around 8% therefore the properties don’t sit nicely together. We plan on splitting them out where investors can invest purely in a European play if they want one or, if they decide to invest in South African properties, they can invest in those. They won’t be mixed, it will simply be moving a direct property holding into an indirect property holding, which we will still control.
BDTV: Let’s bring it back home now and focus on your South African portfolio, because you talk about … looking to boost core earnings…. What are some of the plans…?
ME: We have a number of properties which have a lot of growth opportunities — there’s purple patches all around, I should say there’s violet patches all around the fund, where we can look to expose a lot of additional GLAs (gross lettable area) etcetera. So that’s what we’re going to be focusing on in the short term, we’re going to be looking to add value to our current portfolio. We haven’t actually acquired a South African property in the last 12 months. The pricing just hasn’t been there. We have seen lately, though, that the pricing has come back, and you’ll see now that the property funds will start buying more properties in SA. The fundamentals are looking quite strong and the cost of funding in SA is looking stable. So we will look to acquire as much as we possibly can.
BDTV: How sector-specific is that?
ME: It’s interesting, retail is getting overtraded particularly in Johannesburg, and convenience retail seems to be the place to play. We don’t look, unfortunately we’re not of the size to look at large regional shopping centres like the Canal Walks, which will always perform well. We look at more convenience, there you’ve got to be careful that you buy well in strong neighbourhoods, so we’re looking at that, and well-placed offices are very good. Cape Town is particularly strong, the outlying areas in Johannesburg … coming here in an Uber, it was chaos in Sandton because everyone’s moving to Sandton, which means everyone’s leaving the outskirts of Johannesburg. So we wouldn’t be buying there, in fact we’re selling seven buildings at the moment totalling about R450m which are in the outskirts of the Johannesburg area.
BDTV: But also a lot of focus on greening your existing portfolio, which points to needing to pick up on new trends that keep the assets that you do have within your stable appealing and in vogue for rental, I guess?
ME: Yes and it’s good, we have these crises in SA, it’s electricity then everyone’s looking at solar and retrofitting their lighting; now it’s water. So we’re looking at water initiatives for our bigger buildings like Cape Quarter. We’re saving about R4m per year at the moment from our solar initiatives and we’ll keep rolling those out to properties which warrant it, but the cost of solar has come down tremendously and you’ll see a lot of the funds looking at their operating costs, particularly this year.
BDTV: When it comes to vacancies, that’s reduced overall to 4% and 4.6% in SA — 0% in Croatia. What’s your target in SA right now and how realistic is it?
ME: We’re very happy at the moment, I think our vacancies will go up. If you look at the national averages they’re running at around 11% at the moment if you look at Sapoa (South African Property Owners’ Association) guidance. We’ve got 47% of our assets in, or 49% in retail and 45% in office, so with that size office exposure I would expect our vacancies to increase.
We do have stable tenants. You’re always one step away from a potential tenant failure and with the political climate often you don’t know where you are. So across the board you’ll see vacancies increase. We’ve seen in the last 12 months, rentals remain fairly flat. We seem to have got through the worst of it. We had a lot of negative rental reversions two years ago, but that seems to have passed out of the system now so I think 2017 is going to be a kind of a holding pattern for most funds.