Redefine Properties: Sticking by South Africa

During uncertain economic and political times, the resilience of corporate strategies will be tested.

And in a country like South Africa, which is facing bruising double downgrades to junk on its credit rating and anaemic economic growth, it’s business as usual for Redefine Properties.

“We believe that we are well poised to weather the coming storm. We are once again forced to reset our strategy as the rating downgrades have become a reality,” said CEO Andrew König (Pictured).

This doesn’t mean that the JSE’s fourth-largest real estate company by market capitalisation (R60 billion) will ditch its home market and redirect investments offshore. However, the focus will be on rolling out property developments worth R7.1 billion in South Africa.

Redefine unveiled its future strategic focus on Monday during its results presentation for the six months to February 2017, in which the value of its property assets grew by R11.4 billion to R84.1 billion. Investors were rewarded with a 7.5% dividend growth per share to 44.82 cents.

Redefine’s commitment to South Africa is the antithesis of Sibanye Gold and Pioneer Foods – with the latter seeing the collapse of its sizable deal and the former vowing not to invest in new projects due to the junk downgrades.

S&P Global Ratings cut the foreign currency credit rating to sub-investment grade (or junk) while Fitch cut both foreign and local currency credit rating to junk following president Jacob Zuma’s wide cabinet reshuffle. Moody’s will publish its rating in June.

In a downgrade era, foreign investors would (in theory) become sellers of local bonds resulting in a flight of capital out of South Africa. The inflation rate would accelerate on the back of rand weakness – eroding the wealth of many investors.

König said the volatility in markets and the flurry of listings on the JSE’s more than R750 billion real estate sector has resulted in property companies competing for the same limited pool of capital. “Capital in this environment is becoming scarce and expensive.”

During the reporting period, Redefine invested R15 billion, which was spread between the takeover of property developer Pivotal and other property developments in its portfolio of retail, office and industrial properties.

Redefine has grown its offshore footprint over the last six years, diversifying its income stream in Germany and the UK through a 29.8% stake in Redefine International, Australia (through a 25.4% stake in Cromwell Property Group), and the rest of Africa via an 11.8% stake in Mara Delta. In 2016, it invested R4 billion for a 39.5% stake in Poland-focused Echo Polska Properties, bolstering its rand-hedge earnings.

About 80% of the value of its property assets (R84.1 billion) is based in South Africa and the balance is in offshore markets.

Said director of Meago Asset Managers Jay Padayatchi on Redefine’s substantial acquisitions: “This activity is clearly in line with the broader strategy to grow the local portfolio while targeting a diversified earnings stream that sees exposure to the UK, Germany, Poland and Australia.”

Redefine improved the quality of its property portfolio through refurbishments and disposals of underperforming properties after wide criticism by asset managers for the poor quality. This has partly paid off. Its tenant retention rate grew to 86% from 83% and occupancy rate was 94.5% with vacancies rising by 0.6%.

Its loan-to-value (LTV) grew from 38.5% to 39.8%, which Padayatchi said is “creeping up to a less comfortable level”. He added that Redefine’s plans to dispose of properties and use the proceeds to bring down debt should bring its LTV to more comfortable levels.

Dividend outlook

Redefine expects a full-year 2017 dividend growth per share of 7% to 8%, which Stanlib’s property analyst Ahmed Motara said it’s marginally below the 7.5% to 8.5% target that was initially set in August 2016.

“This is reflective of the many moving parts within Redefine (listed holdings, fee income, currencies) and the weak South Africa operating environment highlighted in low renewal rental growth achieved.

“The company is well positioned to meet its stated distributable income per share guidance for 2017 and to achieve market expectations in a difficult operating environment,” said Motara.

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