Equites Property Fund, theJSE-listed REIT focused on the fast-growing logistics sector, is considering selling its UK R44 billion development pipeline after rising interest rates resulted in its property values there falling by a hefty 21% in the past year.
The share price responded, falling 8.93% to R13.94 by midday yesterday, and closed 7.23% lower at R14.24 well down from R20.22 that it traded at a year ago.
It was also disposing of non-core South African and UK assets to unlock capital and fund its development pipeline, and has shifted its focus to the local market.
“Given the change in market fundamentals in the UK, Equites has noted its primary geographic focus for acquisitions and developments will shift to South Africa where it continues to witness unabated demand for warehousing space, driven by national retailers and third-party logistics companies optimising their supply chain networks,” CEO Andrew Taverna-Turisan said in the annual results yesterday.
He said in a telephone interview that their UK development pipleine required some £2 billion (R47bn) of capital over seven years, and it was not feasible to raise this capital on South African capital markets at present. He said judging from “lots” of interest received in the UK he was confident that the board would receive a good offer.”
The move generated comment on Twitter such as The Passive Income Guy (@hazelwood_dave) who tweeted: “Equites. They’re not alone in this, but I believe many SA properties in REIT space are still overvalued (cap rates are too low). LTV will look very different with different values. And interest costs increasing as debt is refinanced.”
Teflon Tom (blue tick) (@Agrizzi8) tweeted: “Equites NAV down 10% due to write downs in the UK. Fortunately, the South African valuers are more compliant and the values are holding up nicely.”
PropertyWheel (@PropertyWheel) commented: “Equites is shifting its primary geographic focus for acquisitions/developments to SA due to the unabating demand for #warehousing space space.”
Equites said the recycling of assets would help fund the South African development pipeline without the need to access equity markets, a reduction in LTV (loan to value) to below 35% and an improvement in portfolio quality through the replacement of older properties with best-in-class developments,.
Taverna-Turisan said in a telephone interview that the group continued to perform “exceptionally well” in terms of the performance of the assets, collections, vacancies, cost of debt and other metrics.
Five properties with a value of R2bn had been sold post the February 28 year-end. A further portfolio of about R3.3bn was being considered for disposal in South Africa and the UK by February 2024, he said.
The distribution per share for the year increased 4.1% to 169.60 cents, in line with the group’s guidance.
He said property fundamentals in both the South African and UK markets remained strong, with supply chain optimisation propelling demand for modern logistics facilities. Both portfolios were fully occupied, except for one ancillary unit in the UK, and experienced double-digit market rental growth, he said.
In the second half, the sharp increase in interest rates in the UK had caused capitalisation rate expansion in the UK logistics property market, with prime logistics yields expanding by 175bps to 5.00%.
Rental growth cushioned a portion of the negative impact, but Equites’ UK portfolio value declined 21% on a like-for-like basis, in sterling. The South African portfolio’s value performed in line with expectations, increasing 4.3% on a like-for-like basis.
Taverna-Turisan said the reduction in the UK portfolio value, as well as development capital spent, had increased LTV to 39.7% from 31.5%, which was at the top end of their target range
The partnership with Newlands Developments in the UK had completed several developments and retained an expected development pipeline of £2bn (R44bn), over seven years.
The board had appointed Rothschild & Co as its corporate adviser to facilitate a transaction. The stake in ENGL would only be sold if the board believed the offer would maximise value for shareholders, Taverna-Turisan said.
Equites’ focus on long-term leases with A-grade tenants and low vacancy continued to provide a high degree of income certainty. Property fundamentals remained robust, with 97.8% of revenue derived from A-grade tenants.
The group experienced rental growth of about 20% for A-grade warehousing space in the period, driven by a record-low national vacancy rate for modern distribution facilities, an increase in construction cost inflation and substantial warehousing requirements across various types of occupiers.
Equites’ R3.7bn pipeline of development and acquisition opportunities in South Africa includes three development and sale and leaseback agreements with Shoprite valued at R3.3bn, with 20-year lease terms. Other developments in South Africa included the TFG development, a second facility for Cargo Compass SA, a development for Normet Africa and a development for Spar Encore, a subsidiary of Spar.
Existing land holdings in South Africa were being optimised. Over the past 12 months, the group transferred R651m of land parcels in South Africa to properties under development, unlocking the full value of these land parcels. UK land holdings were expected to be included in an ENGL disposal.
The potential disposal of the ENGL platform was still in the preliminary stages. Further to the planned restructuring of the UK platform, the group planned to replace about R1.5bn of GBP-denominated debt with ZAR debt, to rebalance the LTV ratios in the two jurisdictions.
BUSINESS REPORT