Redefine positioned for growth as operational performance, sector confidence improves

Johannesburg, 27 August 2024 – Redefine Properties CEO Andrew König emphasised the company’s focus on mindful optimism during its Capital Markets Day 2024 in Sandton, Johannesburg, on Tuesday. He described how the business is positioned for growth as shifts in the operating environment, despite the persistence of economic and socio-political stresses, contribute to improved levels of confidence in the property sector, citing anecdotal evidence to support the company’s posturing.

Redefine’s property asset platform, currently valued at R100.4 billion, comprises key real estate assets in the retail, commercial, logistics, and industrial sectors in South Africa and Poland. Over the last five years, Redefine has transformed its property asset platform by reducing exposure to multiple risk universes through non-core asset disposals and reallocating capital to growth sectors and geographies like Central and Eastern Europe, where there is the prospect of emerging market growth at a lower risk premium.

König clarified on Tuesday that Redefine’s strategy of sectoral and geographic diversification is aimed at delivering stable returns by mitigating the cyclicality of sectors and reducing economic risks and vulnerabilities in the domestic environment, such as resource and infrastructure crises that impede growth in South Africa.

“Even though the SA environment remains challenging, we are committed to the continent’s most diversified economy, which continues to demonstrate resilience in the face of adversity. How we adapt to overcome obstacles and seize opportunities will ultimately distinguish us as the country’s best Real Estate Investment Trust.”

König said Redefine had adopted an ‘opt-for-the-upside’ approach, meaning that the company embraces opportunities within the real estate sectors it operates in, even when faced with obstacles, rather than choosing to divest. Now, Redefine is expanding its approach to all its stakeholders by inviting them to “join the upside” as the tide turns in its favour.

Encouraging improvements in operational performance

Redefine’s South African portfolio has benefited from an active asset management strategy to transform it to a defensive portfolio of high-quality assets that is well diversified, according to COO Leon Kok. He also stated that most of its operating metrics have stabilized and is well positioned to deliver organic growth.

“Take, for instance, the Western Cape’s office sector, which was engulfed in a perfect storm of oversupply, tepid economic growth, and the rise of remote work. Today, office space is in high demand and facing a stock shortage, with the city recording a 20% increase in market rentals over the past few months. This shift is driven by the growing popularity of business process outsourcing, the semigration trend, and the return of businesses to physical office settings,” Kok said.

Nationally, the number of vacancies in the office sector has decreased for eight quarters running. The most recent data from the SA Property Owners Association for the second quarter of 2024 showed a decrease to 14.2%, which is 2.5% below the high point for office vacancies and falls in line with Redefine’s vacancy rate for FY24.

National asset manager for office, Scott Thorburn, stated that the demand for quality A- and P-grade assets, which comprise the majority of Redefine’s office portfolio, has bolstered the occupancy rate to 87.8% for FY24. According to Thorburn, the rise in market rentals observed in stronger nodes in Johannesburg and Cape Town will help ensure sustainable and robust returns as the office sector recovers.

Redefine is also witnessing positive rental reversions in the retail space, indicating that the industry has turned the corner and is about to enter a growth phase. According to Redefine’s National asset manager for retail, Nashil Chotoki, the retail portfolio’s sales and overall turnover have already surpassed pre-pandemic levels. The company expects this growth to continue, driven by its expanding exposure to clothing and necessities, as well as by a potential drop in national interest rates, which would increase consumers’ disposable income.

Positive post-election developments helps business confidence

Along with the sector’s encouraging operational performance, König said that reduced political uncertainty following the formation of the Government of National Unity, a strengthening currency, and advancements made since the launch of Operation Vulindlela in 2020 to address long-standing constraints related to electricity supply and the availability of digital spectrum have all contributed to improved confidence levels in the real estate market.

“The emphasis now needs to shift to addressing the country’s inefficient freight logistics system, the deteriorating performance of local government, and ageing water infrastructure that is impacting supply networks. The new resource challenge is limited water supply, and this is a difficult matter to manage.”

With further major water outages expected due to scheduled maintenance and ongoing infrastructure issues, Redefine is planning to get ahead by executing a water resilience strategy focused not only on reducing water consumption but also on developing additional storage capacity. This strategy aims to provide up to a five-day buffer in certain buildings, increasing their water security in case of a major outage.

Electricity supply, on the other hand, has improved significantly, which König said is itself confidence-boosting and translates into significant savings for a business like Redefine, which was previously burning through hundreds of thousands of litres of diesel to supplement energy supply, with those costs having to be shared with tenants.

Strong focus on efficiency, cost reduction supports organic growth

Despite domestic headwinds and administered costs growing faster than rental income, CFO Ntobeko Nyawo said Redefine maintained positive operating leverage across key segments. Nyawo described the Group’s 75.3% net operating profit margin as a remarkable achievement given the circumstances and an excellent demonstration of the emphasis on cost containment and efficiency.

“Energy costs continue to drive up operating expenses, but the deployment of solar PV as part of our priority to maximise efficient natural resource consumption is generating cost savings. This, along with other cost-saving initiatives, such as disciplined cost containment while growing revenue, is yielding stable operating leverage,” he explained.

Redefine has made significant strides in sourcing efficient capital, as evidenced by the R15.6 billion in green funding it has raised since 2022. This has transformed the Group’s funding profile, with 35.3% of Group debt now linked to green finance. This promotes the long-term decarbonisation of buildings, which Nyawo said have become more desirable and drive higher value due to reduced operating costs and the systemic risk linked to climate change.

“The business has remained cash-generative, with collections across the Group remaining healthy in both the South African and Polish portfolios due to this efficiency drive and focus.”

Nyawo said Redefine’s balance sheet is stable and will continue to be managed conservatively to sustain growth as market dynamics evolve. The expectation that interest rates are shifting to a cutting cycle is significant, and a 25 to 50 basis point cut will lower finance costs and support share price growth, enabling the company to consider capital retention opportunities through the dividend reinvestment programme.

The Group is pleased to announce that it has maintained its earnings guidance of Distributable Income Per Share at 48 cents to 52 cents for FY24.

Looking ahead, Redefine is engaging with tenant stakeholders to broaden and expand the scope of sustainability initiatives, aiming to reduce scope 3 emissions and deepen its ESG impact. Additionally, technology capabilities are being strengthened to improve the tenant experience.