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Octodec reports strong H1 growth, sets sights on geographic diversification

2nd May 2017

By: Megan van Wyngaardt

Creamer Media Contributing Editor Online

     

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JSE-listed real estate investment trust (Reit) Octodec achieved distribution growth of 6.5% year-on-year to 104.8c a share for the six months to February 28, despite low domestic economic growth.

FD Anthony Stein told Engineering News Online that the strong distribution growth was underpinned by the Reit managing to increase its like-for-like rental income by 5.5%, with its rental income from offices showing the strongest growth of 8.2%.

This growth was mainly attributable to the leases concluded in 2016 for the Centre Walk offices.

“We had fairly steady growth at a topline revenue level; we maintained our expense ratio at 29% to income, our finance costs came down significantly and, overall, the vacancies did not increase significantly,” Stein explained.

However, its residential portfolio showed lower growth in like-for-like rental income of 3.8%, which was mainly attributable to lower escalations of rentals in Hatfield and the Pretoria central business district (CBD), which, to date, had been strong student nodes. This trend was expected to continue for the remainder of the financial year.

With a portfolio of 316 properties, valued at R12.7-billion, the Reit aims to continue developing further properties, with four projects under construction in the Pretoria and Johannesburg CBDs.

This includes the R155-million One on Mutual mixed-use property, adjacent to Church Square, in Pretoria, which comprises 142 residential units, ground floor retail premises and parking and which was completed in February. The Reit expects to accrue a fully let yearly yield of 7.1%, exclusive of land costs, at this property.

Further, the company is expecting Sharon's Place, a large, well-located development comprising 400 residential units and 5 660 m2 of ground floor retail to be completed in July.

Anchored by Shoprite and Clicks, the R356-million project is adjacent to the new Tshwane House municipal headquarters and will yield around 7.3% when fully let.

The renovation of Midtown, an office upgrade, also adjacent to the new municipal development comprises 7 133 m² of offices, 944 m² of retail and 90 parking bays. The total cost of this project is R56.5-million at a fully let yield, inclusive of land costs, of 9.5%. The first phase of this renovation is complete, at a cost of R21-million, with the second phase planned for when a suitable office tenant is secured.

Octodec MD Jeffrey Wapnick noted that these developments would benefit from the launch of the new council building, housing over 1 500 employees.

Meanwhile, he explained that while the company focuses largely on CBDs, as it “is a place that continually holds demand from a retail perspective”, it is also seeking diversification to manage its risk.

This saw the company investing in the 180-unit The Manhattan residential development in Sunninghill, which was completed in December. The total development cost of this joint venture property amounted to R80.9-million. In due course, when fully let, the initial yield, inclusive of land costs, is expected to be 9.5%.

“What sets us apart, is our ability to upgrade our buildings at relatively low cost, but yet to a level for a sophisticated retailer to decide to hang his badge on that shop,” he said.

Vacancies in the Octodec portfolio stood at 16.8% of gross lettable area. However, with the group having 101 178 m2 of mothballed office space under development, or available for future redevelopment, or possible disposal, its core vacancies are at 10.8%.

Speaking about the wider economic environment, Wapnick said the company remained committed to investing locally, rather than abroad. “The recent downgrade of South Africa's foreign and local credit rating to below investment grade does not bode well for the people of South Africa.

“While the consequences of this downgrade are not yet clear, it will certainly impact interest rates and inflation, and is likely to push them upwards, weaken the rand and ultimately put pressure on disposable income,” Wapnick said in an earlier statement.

He added that, despite the challenges, Octodec was well-positioned owing to its sound operating fundamentals.

“We are currently considering opportunities outside our traditional focus in Gauteng that will increase our geographic diversification. While these opportunities will increase our geographic diversification, they are in market sectors in which we have extensive experience and expertise,” he said.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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