Despite subdued South African economy and its impact on tenant base, which continues to constrain the growth of its local portfolio, Investec Property Fund Limited (IPF or the Fund) on Tuesday posted an interim dividend of 70.93 cents per share (cps) for the six months ended 30 September 2019 (2018: 68.81 cps). This represents DPS growth of 3.1% year-on-year which is line with guidance provided in May. Guidance for the full year is maintained between 3% and 5%.
The subdued South African economy and its impact on the tenant base continues to constrain the growth of the local portfolio. Increased bad debts, void periods and negative reversions negatively impacted like-for-like net property income (NPI). Despite these drags however, LFL NPI grew in line with expectations at 1.3%. The rental rebate given to Edcon further impacted the NPI, however, the underlying property metrics remain strong as evidenced by a vacancy of 3.9% that compares favourably to the rest of the industry.
Commenting on the Fund’s performance, joint CEO, Darryl Mayers said: “The difficulties facing the broader South African economy have resulted in a marked increase in business failures and liquidations, translating into bad debts that impact the Fund. This is a key focus area for the Fund and, in line with our active asset management, we ensure that we remain close to our clients, engaging them early while continually monitoring the arrears balances. This has not impacted the quality of our portfolio. Our focus on ensuring we have the best of breed assets in each sector is reflected in our strong leasing activity for the period; during which we were able to re-let or renew 89% of the space that became available.”
The Fund focuses on long-term value creation through investment in quality property, underpinned by strong real estate fundamentals that will ultimately withstand the cycles and deliver sustainable long-term shareholder returns. This strategy has seen four non-core South African properties sold, the Fund’s minority position in Ingenuity exited and its holding in IAP halved, with the capital recycled into the European and UK platforms on an earnings enhancing basis.
The trends of oversupply and subdued demand in South Africa remain a challenge. Demand for office space has not picked up since the Fund reported its 2019 results and the impact of client arrears is increasing. Despite this, the office sector has achieved very strong letting in the current six-month period due to the quality of the portfolio and active asset management with vacancy remaining flat at 7.0% and is expected to improve by March 2020. Similarly, excellent letting was achieved during the period for the industrial sector which is showing resilience despite the challenging market. However, the client base continues to be under pressure which is evident in the increase in bad debts and arrears. The retail sector has delivered similar growth to FY19 and continues to produce strong results despite the trend of subdued consumer spending, with 99% of space expiring in the period let and generating +6.4% LFL NPI growth.