The property group balances South African retail, industrial and office plays with more exposure in Poland, using refurbishments and developments to unlock capital upside and protect dividends.
A Capital Markets’ Day is a wonderful part of the fabric of our market. At these events, listed company management teams give you a detailed look at their future plans. For obvious reasons, the market pays a lot of attention.
Over 12 months the Redefine Properties share price is up 22%. If you include dividends to take a total return view, then the return is 32%. Either way, shareholders have nothing to complain about there.
“Buildings do not create value, people do.” That’s one of the proclamations made by Redefine in the Capital Markets’ Day presentation deck, with a comment further on that active asset management is the principal source of value creation. In other words, you can’t just sit back and make money from property in South Africa – the economy is too tricky.
To help them, Redefine describes South Africa as having a “young talent pool that is resourceful and adaptable.” We can all get behind that messaging!
But despite some bullish undertones on South Africa, the group is looking to increase its relative exposure to Poland. They intend to allocate 40% of capital to Poland, a very different approach to the capital allocation we’ve seen over the past three years (R2.5-billion on acquisitions in South Africa vs R0.6-billion in Poland). The capital expenditure on existing assets has also been strongly tilted towards South Africa, sitting at R4.2-billion spent on local developments vs R1.4-billion in Poland.
There’s nothing wrong with the group amending its capital allocation strategy, particularly since they are changing the recipe rather than baking an entirely new cake. Also, Poland is a region that South African property investors have become very comfortable with.
The average income yield on assets in Poland is only 150 basis points lower than in South Africa (6.3% vs 7.8%), so there’s an argument to be made that Poland offers a better risk/reward trade-off at the moment. To further justify the strategy, Redefine quotes a statistic that the GDP per capita in Poland is expected to exceed the UK by 2030 – an astonishing outcome if it happens.
This means that the international contribution to distributable income looks set to increase even further, having already moved up from 25% to 28% over the past three years. But South Africa is still where the bulk of the income sits, so we need to dig deeper into those assets.
Redefine describes the South African retail sector as the strongest operating sector. This is a nod to the dependability of the underlying yields and the reversions that can be achieved. I must note that The Foschini Group is looking increasingly like the next systemic risk for landlords, since that group is underperforming at present and is the single-largest exposure for retail REITs in South Africa. But for now at least, the retail sector has been kind to investors, with Redefine operating across 52 properties with an average value per property of R585.9-million.
The domestic industrial market offers the best growth in terms of positive reversions, mainly because these assets are still scarce. It’s not easy to find suitable sites to build new warehouses and logistics nodes. With ever-increasing adoption of e-commerce, the properties further back in the consumer supply chain are becoming more interesting. Put differently, warehouses have become just as strategic as shopfronts. Redefine has a well-diversified portfolio of 82 properties ranging from warehousing to heavy grade industrial.
The local office sector remains a tough story (other than in Cape Town thanks to the BPO sector underpin), but at least vacancies are expected to improve to single digits by FY27. The vacancy rates by office type are quite something to behold, with only 5.1% of P-grade offices sitting vacant vs a whopping 28.1% of secondary grade. Thankfully, only 4% of Redefine’s portfolio sits in the secondary grade offices that nobody wants, whereas 58% is in P-grade and 38% is in A-grade.
Interestingly, Redefine isn’t shy to own more office assets, with P-grade in Gauteng identified as one of their capital allocation priorities. This is based on the potential for Gauteng to improve, with Redefine willing to assume a three-year stabilisation period in its model and meaningful capital upside potential.
Rural and township retail assets are also flagged as a priority, but these assets have become hard to find at attractive prices due to the sheer quantum of capital that is chasing these opportunities. Even a great asset becomes a poor investment at the wrong price.
Other local capital allocation opportunities include energy investments in South Africa, with strong yields but negative capital returns over time. Industrial assets also feature, with Redefine noting them as lower-risk opportunities.
In Poland, the focus is on self-storage and mini units, where the capital uplift potential is very strong. This speaks directly to Redefine’s comments about active asset management being the driver of value. They are playing a role in developing a new asset class in Poland, rather than merely looking for acquisitions of existing properties.
And of course, Redefine always has the option to allocate capital to share buybacks or debt repayments. Such is the level of interest rates in South Africa that these opportunities offer similar yields!
Overall, Redefine is on track to achieve the upper end of guided growth (6.5% to 7.0%) in distributable income per share this year. The balance sheet is at healthy levels and Redefine has done a great job of spreading its funding risk over recent years.
It all looks promising, with perhaps the biggest underlying risk being the state of South African consumers. I can’t say for sure, but I wouldn’t be surprised if this was the major driver behind the decision to allocate relatively more capital to Poland than before. DM
