HomeTimes interviews Octodec Investments Limited financial director Anthony Stein about the size and nature of the real estate investment trust (REIT). The REIT has a history of unlocking value by redeveloping and refurbishing underperforming properties. The portfolio includes shopping centres, a substantial amount of inner-city retail and residential properties (blocks of flats), a range of large and small industrial properties, a number of office buildings and limited vacant land. Octodec is one of the single largest owners in the Tshwane and Johannesburg CBDs. Its portfolio of properties is managed by City Property.
Could Octodec please give us an overview of demand for rental accommodation currently in the country and in its portfolio. We imagine that with the risk of South Africa entering a recession, demand for rental accommodation would have increased/is increasing. Is this is the experience of Octodec and is it evident in waiting lists perhaps for rental units? What, conversely, are the vacancy rates in its various buildings?
Population growth and urbanisation together with the growth of the emerging middle class has seen demand for residential accommodation increase. However, tough economic conditions and rising inflation has impacted affordability of rental accommodation and the ability to secure bonds to purchase properties. Our residential portfolio is focused on the Johannesburg and Tshwane CBDs and surrounding areas, and we are well placed to offer secure, quality and affordable accommodation for rental to persons who want to live in the CBD. Our CBD model, which offers mainly mixed-use buildings with ground-floor retail and offices or residential on the upper levels, is perfected to suit the live, work and play philosophy.
We process on average two new leases per day which is in addition to leases processed as a result of churn within the existing tenant base.
On average, vacancy levels within our residential portfolio are between 1% and 2%.
What are the rental (price) ranges in Octodec’s various buildings and where is it finding the greatest demand? In what price brackets?
Our rentals vary per property but on average rentals per month are R3,200 for a bachelor unit, R4,100 for a one-bedroom unit and R5,000 for a two-bedroom unit. Currently we see the most demand for two-bedroom units.
According to our systems, the average gross income per unit is R27,000 which if you consider the theory implemented by banks that the amount paid for accommodation should make up about 25% of your gross income, there is definitely room for growth in our rental rates. As this is an average, the upper end of this scale earn significantly more than R27,000 per month and hence our decision to develop 1 on Mutual, a more upmarket offering in Tshwane.
Does Octodec plan to acquire more buildings for rental this year? Is its stock of new developments coming on stream in 2016 for rental only or for sale as well?
Octodec started acquiring an extensive property portfolio in the Tshwane CBD in the early 1990s and a decade later in the Johannesburg CBD when institutional property owners were keen to sell their CBD properties and follow corporates and retailers to what were then considered to be more attractive areas. Today, these properties offer scale and location that enable us to create value by means of refurbishments and/or redevelopments without having to pay exorbitant prices that such properties are sold for today. We therefore have a significant pipeline of development opportunities to extract value from our existing portfolio of buildings and landholdings. We do, however, strategically acquire buildings if they are well-priced and/or located in or near to our specific nodes in the CBDs.
Our new developments coming on stream in 2016, including our exciting developments 1 on Mutual and Centre Forum, will be offered for rental.
Are there developments coming on to the market for sale that Octodec is interested in acquiring? We guess this question revolves around who are ultimately Octodec’s suppliers in the rental market (chain) besides its own developers and who the likely suppliers will be this year. We’re thinking about developers such as Renprop.
We continue to look for opportunities in the CBDs of Tshwane and Johannesburg. Octodec has large land holdings where there is development opportunity for the future. Our main focus will be to unlock this potential in existing land holdings. We will however partner with other reputable developers if an attractive opportunity arises as is demonstrated by our recent 50/50 joint venture with Renprop and other strategic partners to develop The Manhattan, a residential block in Sunninghill.
What is Octodec’s overview of the market in 2015, and what is the prognosis for 2016?
Although the economy is expected to remain tough in 2016, our opportunities for the year are underpinned by strong demand for CBD accommodation and we remain positive about the CBDs. We are in an economic environment where interest rates are expected to increase, however Octodec has managed this risk as it has locked in 94% of its exposure to rising interest rates.
Is Octodec planning to expand into other cities and towns in South Africa this year/foreseeable future?
Our model has always been to remain in areas where we have expertise and that are near to our management offices to enable more effective management. We will, however, depart from this should we find an attractive opportunity to partner with a reputable company that has expertise in a specific area, as is demonstrated by our recent 50/50 joint venture with Renprop and other strategic partners to develop The Manhattan, a residential block in Sunninghill.
What is Octodec’s biggest rental market? Civil servants? (How resilient is the emerging middle class?)
We have about 14,000 tenants in the Octodec portfolio, which is well diversified across the various sectors. In the Tshwane CBD, we have a large amount of council and government office workers. Johannesburg has a number of banks and larger corporates whose employees are housed in our buildings. National food and clothing retailers make up a large percentage of our retail portfolio. Many of our tenants are from the emerging middle class, which is a resilient and growing market.
Is Octodec seeing signs in the market/among its tenants of belt-tightening and how is this manifesting itself?
Our tenants have become more price-sensitive, which has put a bit of pressure on the rental increases that we are able to achieve. However, due to the fact that we offer superior quality accommodation and corresponding services, our bad debt write-offs and provisions are consistently low and currently around 0.5% of total tenant income.