Johannesburg, 27 February 2024 – Real estate investment trust (REIT) Redefine Properties (JSE:RDF) stated today in its pre-close update for the half-year ending 29 February 2024 that the business has started the year on a positive note. Despite a challenging macroeconomic backdrop, operating metrics across the board are showing improvement.
CFO Ntobeko Nyawo said positive operational metrics across the company's South Africa portfolio have supported organic growth and delivered a consistent operating profit margin of 78% (FY23: 78%).
"Market recovery and demand for A- and P-grade office space in South Africa continues in select nodes as a result, office rentals are gradually recovering on the back of improved activity in key nodes like Sandton," COO Leon Kok explained. "The effect of increased asking rentals is being monitored to ensure that Redefine's rental rates remain competitive in the sector."
Demand for new industrial developments in prime locations remains high, particularly for racked warehousing. As such, Redefine is focusing on renting out rack and shelving systems to increase tenant retention and revenue.
The company's investment at Brackengate 2 Business Park, one of the Western Cape's prime business precincts, is growing with a warehousing and complementary office space development recently completed for the Herholdt's Group, a distributor of solar energy and electrical equipment.
The Massmart DC wheeling project at Brackengate is being targeted for commissioning in October this year. This is a component of Redefine's strategic investment focus on resource-efficient green initiatives and creative solutions to reduce reliance on municipality supplied services and secure a stable energy supply.
Kok added that the group is very excited about its solar PV pipeline that includes installations of 27,2MWp currently in progress and feasibility studies being undertaken on future projects that could add additional capacity of 10,7 MWp of renewable energy supply.
"We continue to incorporate ESG into every aspect of the business by embracing and encouraging stakeholder collaboration in order to broaden the scope of our environmental initiatives," Kok said.
To this end, Redefine is currently investigating ways to increase the efficiency of diesel usage and standby power system recoveries across all its retail assets.
While operational momentum is continuing across the retail portfolio, high interest rates and disposable income pressures have hindered sales growth. As such, tenant retention and vacancy reduction are key priorities for management. Redefine is in collaboration with retailers to increase exposure to essential services and value-focused brands – these occupy 37% of retail gross lettable area and are forecast to improve to 40% in the short term.
"While Redefine's improved operating metrics have been offset by higher interest rates, there is optimism that interest rates have reached the zenith of the current tightening cycle," Nyawo commented. "It is anticipated that rates will begin to ease during the second half of 2024. This would be positive for the investment return profile of our business."
Aside from interest rates, other macroeconomic challenges have also softened, such as South Africa's energy supply crisis and Poland's energy cost crisis. Meanwhile, Poland's political transition is predicted to benefit the country's economy overall and commercial real estate, in particular.
Redefine, through its Polish logistics platform European Logistics Investment (ELI) with an income generating asset platform valued at EUR966 million, is maximising investor returns through strategic portfolio management and development. This includes recycling non-core assets to fund new developments at attractive yields.
The report notes that the warehouse market in Poland is seeing green shoots of recovery after a marked slowdown in the first half of 2023, based on the expectancy of interest rate cuts in the second half of 2024.
CEO Andrew König said, "Regarding the Polish market's potential, we are still optimistic. Exposure to Polish retail and logistics provides stability to our portfolio. The retail market in Poland is at the final stage of recovery from the pandemic, including sectors that suffered most (entertainment and gastronomy), which are now finally also on a growing path."
He said, however, that there are some clouds on the horizon that could unsettle this optimism. "National and global elections, continued parastatal frailty in South Africa, and geopolitical instability are issues that we will keep our eye on. But we won’t allow these variables, which are largely out of our control, to distract us from what matters most. We simply need to remain laser-focused on the execution of our strategic priorities, to adapt to an ever-changing landscape."
Liquidity risk management is still crucial and Nyawo said that "Redefine's low risk debt maturity profile, with less than 14% of our debt maturing per year up to FY27, supports its long-term value creation prospects".
He added: "Refinancing of FY24 debt maturities is progressing well, with affirmation of support from funders and healthy liquidity levels in the debt capital markets. In Poland, we are proactively focusing on Henderson JV, which EPP owns 30%, as it has a higher loan-to-value level of c.60%."
Looking ahead, König said Redefine will remain focused on conservative balance sheet management to enable sustainable growth as market dynamics continue to evolve. "We aim to build a quality, diversified portfolio that delivers sustainable risk-adjusted returns, while investing in and transforming our human capital to enable creativity and foster innovation. In opting for the upside, the one thing we shouldn’t be surprised about is that there will be surprises in 2024 and that within each surprise lies an opportunity."
The company said it is pleased to maintain its earnings guidance DIPS range of between 48c and 52c in a challenging operating context.
