A walking tour of JSE-listed Octodec’s buildings in Tshwane shows the group’s first and foremost strategic objective to promote urban renewal in the CBDs of Tshwane and Johannesburg is paying off.
With rapid urbanisation, demand for residential accommodation continues to outstrip supply. The Real Estate Investment Trust (Reit) is well-positioned to take advantage of this trend. In the past 20 years it has purchased office buildings in the CBDs at low cost for residential conversion in close proximity to one another. It also engages in greenfield residential developments. The student offering at its mixed-use development The Fields in Hatfield is but one example, so too Centre Forum (pictured) in the Tshwane CBD. The latter will be completed in 2017.
Retail has followed residential redevelopment. The group reports that “increased demand from national retailers continues, with many of the well-known brands in fast food, fast-moving consumer goods, fashion, food and convenience returning to these areas.”
According to its latest integrated report “growth opportunities in CBD retail exceed traditional malls and have the added benefit of lower tenant costs, including common area cleaning and air-conditioning requirements. With more residential interest in the CBD, shopping footfall is increasing, supported by convenient and lower-cost transport options compared to outlying malls.”
In the words of Octodec’s managing director Jeffrey Wapnick: “We believe that urban renewal in the cities of Tshwane and Johannesburg is at a tipping point – a cycle we have observed in many parts of the world – where the momentum brought about by congruent stakeholder interest and concentration of investment brings about true value creation and sustainable demand.”
Rental income from Octodec’s R11,6 billion property portfolio, which comprises 330 properties and has over 13 000 tenants, derives from 30,9% residential, 28,9% retail shops, 21,9% offices, 10% shopping centres and 8,3% industrial. Its shopping centres include the flagship Killarney Mall and Woodmead Value Mart in Johannesburg.
In the Tshwane CBD, Octodec owns 125 properties compared to some 56 in the Johannesburg CBD. The balance of its properties is situated in outlying areas of these two cities.
The Reit prides itself on unlocking value by redeveloping and refurbishing underperforming properties. An example of this is the quality high street retail opportunities on the ground floors of buildings, in walkways and in arcades where the group has invested in upgrades to contemporary retail standards.
The asset and property management functions of Octodec are contracted to City Property Administration Pty Ltd (City Property), owned by the Wapnick family.
The rental and other income received from Octodec’s property portfolio, including the distributable income received from equity-accounted investments, less net operating costs, interest on debt and normal taxation, is distributed to shareholders biannually. Octodec does not distribute capital profits.
In its overview of the operating environment in which it is engaged, Octodec says it expects the retail sector, driven by demand from national retailers, to deliver relatively high returns in the short term. Growth in the aspirant lower to middle class consumer group is driving an increase in development in South African CBDs. High street retail in the CBDs continues to show growth.
The residential market continues experiencing high demand. Densification is one of several key trends as households move to economic nodes located in proximity to public transport corridors to avoid traffic congestion and young professionals gravitate towards city centres. Octodec plans to grow its share of residential from 30% to 35% of its portfolio.
Profitability in the office market remains concerning due to oversupply in certain key nodes. Development activity in the sector remains concentrated, with strong CBD office nodes accounting for the bulk of new office development. Octodec says inner city vacancies remain lower than they were 10 years ago, partly due to structural changes in the market brought about by the conversion of offices into residential units.
The industrial sector’s base rental continues growing above inflation in well-located areas, which provide quality offerings, but smaller industrial properties are starting to come under pressure.
Average distribution growth for domestic Reits to November 2015 was between 7% and 8% while Octodec’s was 7,7% for the year ended 31 August 2015. At the time of its annual results, the group had an overall vacancy factor of 14,8% and a core vacancy of 8,8%. Core vacancies are defined as excluding lettable area of properties that are held for development or properties that are currently being developed.
Urbanisation continues to support Octodec’s growth with resilient rental growth being achieved in spite of a difficult and challenging economic environment.