Emira Property Fund CEO James Templeton says the underlying conditions in the commercial property sector remain tough.
“Although there is demand for space across all three sectors of the portfolio – [office, retail and industrial] – it remains a tenant’s market, with landlords competing aggressively for long-term, high-quality leases. “With expected downward rental reversions in certain portions of the portfolio that are expiring, this is expected to result in muted growth in gross income,” Templeton said at a results presentation for the year ending June 30.
He pointed out that operating costs were rising – particularly municipal services, building maintenance costs and leasing charges. In addition, tenant arrears were also still increasing.
“The net effect is that property expenses rose by 14.1% and net income from properties was 3.4% higher. Excluding the increase in municipal charges, maintenance, leasing charges and bad debts, property expenses rose by only 2.3%.”
Excluding the straight line adjustments from future rental escalations, Emira’s revenue rose by 7% over the comparable period. This was largely the result of organic growth in income from the existing portfolio, the inclusion of income from several acquired properties from their effective purchase dates and the recent conclusion of several capital projects, which contributed to income for the full year.
Increased recoveries of municipal expenses played a part in buoying income. Excluding municipal recoveries, revenue growth would have been 5%.
He added that the period under review was tougher than expected. Although there still was leasing activity in all three sectors, rentals were under pressure and landlords needed to be competitive to attract or retain tenants, particularly in the office sector.
Vacancies increased from 9.2% in June 2010 to 11.5% by June 2011, with all three sectors of the portfolio experiencing tougher letting conditions. If the vacancies in the buildings that were currently either under refurbishment or pending refurbishment were removed, adjusted portfolio vacancies dropped to 10,3%.
Office vacancies rose from 16.2% to 18.4%, while retail vacancies increased from 5.3% to 7.5%.
“Despite the rising vacancies, with a substantial portion of Emira’s portfolio on long-term, escalating leases, property income continued to grow, at a lower rate,” said Templeton.
Three projects totalling R75-million have been approved by the board for refurbishments and extensions; however, this had yet to be initiated as the fund was waiting for the conclusion of certain leases before construction. These included improvements to the FNB Heerengracht building, in Cape Town, Gift Acres, in Pretoria, and Park Boulevard, in Durban.
The disposal of noncore buildings continued during the period, with five properties being transferred out of the fund. A further 15 noncore properties worth about R600-million, mainly comprising B-grade office space, remain on the disposal list.
“The disposal of these properties will significantly improve the quality of the portfolio, reduce vacancies and also allow management to focus on larger buildings, with better income growth prospects. “The proceeds from the disposals are expected to be utilised for the fund’s significant capital expenditure project pipeline.”