No place to hide for Growthpoint Properties

The recurring theme emanating from SA’s property majors is that rand hedge strategies may have been a case of too little, too late.

That was underscored again last week by sector heavyweight Growthpoint Properties, SA’s largest and most diversified property counter, which is widely regarded as a reliable bellwether of the state of the overall market.

Dividend growth dwindled to a mere 0.2% in the six months to December year on year, down from 4.5% in the corresponding period. Were it not for Growthpoint’s property interests in Australia, Poland, Romania and the UK — which make up 35% of total assets, worth more than R140bn — dividend payouts would have dipped by about 3%.

Still, Growthpoint group CEO Norbert Sasse says the company’s offshore exposure is no longer enough to counter the "dire" state of the economy, which has deteriorated rapidly over the past year. "The bottom line is that our SA business is really struggling. We have never experienced tougher times in the past 20-odd years in this sector," he says.

Rising vacancies and falling rentals are now a reality across Growthpoint’s local office, retail and industrial portfolios. In addition, the company is grappling with rising operating costs, especially from utility bills.

"Load-shedding is causing untold chaos. At Cape Town’s V&A Waterfront alone we have over 200 generators that need to be constantly refuelled, which in turn is placing tremendous stress on the precinct’s airconditioning systems. There are huge additional costs involved in keeping shopping centres up and running during blackouts."

The spike in Covid-19 concerns will further add to Growthpoint’s woes.

Sasse says the company’s largest and most valuable single asset, the R20bn V&A Waterfront, will be particularly exposed to the slump in tourism that is expected to hit Cape Town over the coming months as SA closes its borders to international travellers. Until now the V&A has been Growthpoint’s best-performing local asset "by a mile".

Sasse says rental income generated by the precinct, which Growthpoint and the Public Investment Corp (PIC) bought in a 50-50 joint venture for just less than R10bn in 2011, rose by 7% in the six months to December, while retail trading density (sales per square metre) was up an equally impressive 6.1%.

Occupancies at the V&A’s 10 hotels rose strongly last year, while passenger numbers from cruise ships that docked at the V&A’s international cruise terminal also recorded robust growth. Growthpoint-PIC rents the cruise terminal from Transnet.

Sasse, known for his frank and pragmatic approach, says it would be foolish to think that visitor numbers to the V&A’s restaurants, shops and hotels won’t be affected by a coronavirus-induced drop in cruise ship passengers and the reduction in other international tourist numbers. "The concern is that it’s still a big unknown."

Last year about 24-million people visited the V&A and a sharp dip in international tourists will have a significant negative impact on it. Sasse refers to a recent study which shows that of every dollar spent by an international visitor in Cape Town, 60c is spent at the V&A.

Cape Town Tourism, the regional tourism organisation, said earlier this week that local hotels have already received a number of cancellations on the back of travel bans because of Covid-19, while forward bookings are down 10% for the next two months (year on year).

Meanwhile, Growthpoint continues to make headway to diversify its sprawling real estate empire further beyond SA’s borders as a hedge against the grim local economy and weakening rand.

The company entered the UK as well as the rest of Africa for the first time last year. About R4.2bn was invested internationally, including a controlling stake (51.1%) in UK mall owner Capital & Regional (CRP); a further stake in Eastern Europe-focused Globalworth Real Estate Investments, which is listed on the London Stock Exchange (LSE); and a 50% stake in unlisted Growthpoint Investec African Properties.

Though Growthpoint’s investment in CRP raised many an eyebrow, it seems that Sasse’s contrarian bet on the UK retail property market is already starting to pay off. Though the CRP transaction became effective only in mid-December and contributed just two weeks’ worth of income to interim earnings, CRP delivered revenue of R69.7m (2.7% of distributable income) and a profit of R15.9m.

Sasse believes the R2.9bn investment in CRP was well timed given the deep discount to NAV at which most UK property companies are trading on the back of ongoing Brexit worries and a weaker UK retail climate.

The company, which is listed on both the LSE and the JSE, owns a portfolio of seven community shopping centres, all within a 25-minute commute of London.

Sasse says Growthpoint is taking a long-term view given that CRP’s malls are needs-based and still generating solid income. But he admits it’s early days yet and that UK shopping centre valuations may well take a further knock over the coming months. "We expect UK values to drop by another 10% or so. If it’s much more than that, then maybe we didn’t do such a good deal."

Growthpoint’s share price, like that of many other property stocks, has dipped sharply this year as the recession bites into earnings. With Covid-19 fears hammering local stocks, it’s anyone’s guess where these former blue-chip counters will bottom out.