Despite the headwinds facing the South African economy and ongoing political uncertainty, real estate investment trust Redefine Properties delivered a “robust performance” in the first half of the financial year, with a distribution of 41.7c for the six months to February 29.

This was 6.9% higher year-on-year and at the top end of market guidance.

In rand terms, distributable income for the period increased by 29.3%, benefiting from a number of substantial quality acquisitions made in recent years.

Property portfolio income for the period contributed 96.6% of total revenue, but excluding insurance proceeds received, while operating costs were 34.4% of contractual rental income.

Redefine's international property investments contributed 21.2% of distributable  income.

Speaking at a presentation of the group’s results in Johannesburg on Thursday, CEO Andrew Konig noted that the bulk of Redefine’s local strategy was centred on existing properties and on servicing its significant development pipeline. Leases covering 282 070 m² were renewed at an average rental increase of 4.3%, with the retention rate at “a pleasing” 83%. 

During the review period, the company completed about R1.8-billion of projects, representing investment of R700-million for the period and outpacing acquisitions of about R400-million, Konig said.

“We have successfully recycled capital domestically to fund development, as well as new acquisitions,” he explained.

Further, disposals amounted to R1.2-billion, while new development projects with an approved value of R2.3-billion were in progress. 

A major disposal during the six-month period included the sale of a portion of Redefine’s government-tenanted office portfolio. Redefine concluded an agreement with Delta Property Fund which acquired about 60% of this portfolio, valued at R1.3-billion, in return for Delta shares. The effective date of the transaction was April 1.

Further, net arrears improved to R34-million from R42-millon as at August 31, 2015, with Redefine FD Leon Kok noting that one of the core tenets of Redefine’s business model was its prudent management of cash. “Cash management is critically important and we have also put a greater emphasis on the quality of tenants at inception of leases,” he said. 

At February 29, Redefine's diversified, local property portfolio was valued at R54.3-billion, with the group’s international real estate investments, valued at R13.5-billion, representing 19.9% of total property assets and providing geographic diversification into the UK, German and Australian property markets.

INTERNATIONAL INTERESTS
During the six months under review, the company concluded a significant transaction that broadened its offshore footprint through an initial 75% investment into a €1.2-billion high-yielding commercial platform comprising 18 properties in the rapidly expanding Polish market.

Redefine partnered with Polish-listed development fund Echo Investment, a recognised market leader in the Polish and Central and Eastern Europe commercial and residential property development and investment space, on the project.

The initial stake would reduce to 49.9% as a result of a placement of shares with co-investors. 

The Polish portfolio comprised more than 400 000 m² of office and retail space, with the latter making up 75% and including more than ten shopping centres. The balance comprised well-tenanted offices.

The deal was the largest real estate investment transaction in Poland, as well as the largest single transaction of income-generating real estate assets in Central and Eastern Europe, Engineering News Online reported in March.

Konig noted that antitrust clearance for the deal by the European Union – a key condition precedent – had been received on April 28. The company anticipated the acquisition would be fully implemented on June 1 and that it would add accretive income in the last quarter of 2016 at an additional 1c of distribution a share. 

In addition to the Polish deal, Redefine was also entering into the student accommodation market in Australia, having strategically invested in a site in Melbourne, about 200 m to 250 m from Melbourne University. The site, which held a parkade, was acquired at A$30-million and would be redeveloped at a cost of about A$130-million.

“Student accommodation . . . is in short supply all over, especially in Melbourne, and Redefine believes it has an exciting investment prospect for us and the ability for possible expansion,” Konig said.

Additionally, Redefine started the redevelopment of the landmark Northpoint property, in northern Sydney, that was held in joint venture with Cromwell Property Group. Northpoint “held exciting prospects”, Konig reiterated, highlighting that the most significant development was the extension of a metrorail system with a station located outside Northpoint bringing in additional footfall.

PROSPECTS
Konig noted that, in South Africa, challenging property fundamentals were anticipated to persist across all sectors, principally as a result of electricity tariff increases, exceptionally weak business and consumer confidence, potentially  long-term damage to the agricultural sector from the drought,  as well as major downsizing in the mining sector.

“We see little prospect of a catalyst for significant change in local business conditions in the short to medium term,” he said.

However, on the international front, the trend of lower interest rates and elusive growth were set to continue, with attractive initial yield spreads.

Konig concluded that, excluding accretive income benefits from the investment into Poland, the company maintained its guidance of 6% to 7% distribution growth for the full year on the back of its well-diversified asset base and the continuing execution of its key strategic priorities.