South African real estate investment trust Growthpoint Properties expects its international investments to contribute most of its growth in the 2019 financial year.

Reporting on its results for the six months ended December 31, 2018, the company said property fundamentals in South Africa “remain weak and are worsening”.

Little to no growth is expected from the South African portfolio, which includes the V&A Waterfront. Although the V&A Waterfront benefits from local and international tourism, and is positioned to deliver growth, Growthpoint highlights that “it is not immune to the erosion in the domestic economy”, with turnover rentals having declined in the interim period, despite the Cape Town water crisis now being under control.

The V&A Waterfront is building its own desalination plant to take the property entirely off the water grid, Growthpoint said.

With most of the 2019 financial year growth expected to come from international investments, Growthpoint highlights that Growthpoint Properties Australia (GOZ), in which Growthpoint holds a 66% interest, is expected to remain strong and deliver on its guidance.

GOZ owns 59 properties valued at R38.3-billion, and accounts for 2.9% of Growthpoint’s distributable income.

As Growthpoint’s “star performer”, Growthpoint group CEO Norbert Sasse highlighted GOZ’s share price, which continued on its upward growth trajectory, as well as GOZ’s dividend, which grew by 3.6% for the half-year. The same growth was expected to be achieved for the full-year.

Investments from Growthpoint’s third-party trading and development for the six months totalled R49-million and contributed 1.5% to the growth in distributable income.

Growthpoint’s funds management business, which comprises the Growthpoint Investec African Properties and Growthpoint Healthcare Property Holdings, was on track to reach its target of R15-billion in assets in the next three to five years, Sasse said.

Multiple projects are anticipated to come to fruition in 2019 and 2020 under the fund management business umbrella.

Touching on Growthpoint’s South African property portfolio, Sasse lamented that the portfolio had contributed a negative 2.1% to distributable income growth in the six months under review, on the back of South Africa’s macroeconomy and worsening property fundamentals.

These fundamentals, he explained, put pressure on occupancies, rental and costs.

Trading densities in Growthpoint’s South Africa portfolio increased by 1.5% and core vacancies increased from 2.2% to 2.4% over the period, with its renewal success rate improving from 82% to 85%, despite rental growth coming in negatively at 3.3%.

Commenting on South Africa’s economic prospects, Sasse and Growthpoint South Africa CEO Estienne de Klerk believe conditions will continue to worsen, especially in view of the South African business confidence level falling to its lowest in almost two years in the first quarter of 2019.

They told the media last week that the South African government, which is financially distressed, could not be expected to be a catalyst for economic change, but instead said that this responsibility would fall onto the shoulders of foreign direct investment and the private sector.

However, these parties were calling the country’s business case into question, while uncertainty surrounding the political environment and policy, such as land expropriation, remained rife.

Despite low economic growth, weak demand and oversupply continued to plague the office sector in South Africa, which, together with property disposals, pushed South African office vacancies from 8.6% in the period to 10.2%.

Growthpoint’s office renewal success rate increased to 62.6%, from 54.5%, with renewal growth at negative 8.9%.

The industrial segment in the South African portfolio was the only one to achieve positive renewal growth at a rate of 1.5%.

Meanwhile, additional offshore growth would come from Growthpoint’s Central and Eastern Europe investments in Globalworth Real Estate Investments, in which it had a 28.96% stake, and in Globalworth Poland Real Estate, in which it had a 21.6% stake.

These, Growthpoint said, enhanced the Growthpoint portfolio’s diversity and defensiveness.

Assuming no further deterioration in the South African business environment, Growthpoint said it expected dividend growth per share for the financial year ending June 30, 2019, to remain at 4.5% for the full financial year, in line with the company’s guidance.

However, this 4.5% guidance for the financial year could be affected by macroeconomic factors, particularly those stemming from the embattled South African construction industry.

Distributable income in the first half grew by 5.9%, allowing Growthpoint to increase its interim dividend by 4.5% to 105.8c a share.

Sasse attributed this positive performance to the strong contributions from its newer strategies, particularly those underpinning its internationalisation drive.

About 31.3% of Growthpoint’s assets were now offshore and contributed 22.5% of its earnings before interest and taxation (Ebit).

Sasse last week confirmed to the media that Growthpoint was “making good progress” in meeting its 30% offshore exposure objective in terms of both asset value and Ebit. However, the company was considering raising this target.

He was unable to comment by how much the target would likely be increased or when.

Of Growthpoint’s 5.9% distributable income, the company’s investments in Central and Eastern Europe made up 2.4%.