This comes despite “tougher than expected” conditions in the property market for the past 12 months with increased competition among landlords for quality tenants and existing tenants seeking more favourable lease conditions on renewing their leases.
 
Despite this, Emira PI holders enjoyed a healthy total return of 16.1% during the twelve months, comprising capital appreciation of 7.2% and an income return of 8.9%, made up of the distributions actually paid during the year.
 
Says Emira Property Fund CEO, James Templeton:
 
“The period under review was tougher than expected. Although there was still leasing activity in all three sectors – office, retail and industrial - rentals were under pressure and landlords needed to be competitive in attracting or retaining tenants, particularly in the office sector.”
 
Predictably, vacancies throughout the portfolio are rising. Vacancies rose from 9.2% in June 2010 to 11.4% in December and increased marginally to 11.5% in June 2011. However, on an adjusted basis (excluding properties under refurbishment or redevelopment), vacancies rose from 7.9% to 10.3%.
 
Office vacancies rose from 16.3% to 18.4%, retail vacancies from 5.3% to 7.5% and industrial vacancies from 5.1% to 7.2%. Nevertheless, with a substantial portion of Emira’s portfolio on long term, escalating leases, property income continued to grow during the reporting period, albeit at a lower rate than previously experienced.
 
Excluding the straight-line adjustments from future rental escalations, Emira’s revenue rose by 7.0% over the comparable period. This was largely as a result of organic growth in income from the existing portfolio, the inclusion of income from several acquired properties from their effective purchase dates and the recent conclusion of several capital projects which contributed income for the full year. Increased recoveries of municipal expenses also played a part in buoying income. Excluding municipal recoveries, revenue growth would have been 5%.
 
However, Templeton warns that operating costs are rising – particularly municipal services, building maintenance costs and leasing charges. In addition, tenant arrears are also still increasing. 
 
“The net effect is that property expenses rose by 14.1% and net income from properties was 3.4% higher. Excluding the increase in municipal charges, maintenance, leasing charges and bad debts, property expenses rose by only 2.3%.”
 
On the positive side, Emira increased its stake in Growthpoint Australia (Goz) last September acquiring, at a cost of R117m, a further 9.175m stapled securities bringing its total holding in Goz to 19.426m stapled securities. And subsequent to the year end Emira once again increased its investment in Goz acquiring a further 4.4m stapled securities for R61.1m, bringing its total holding to 23.8m stapled securities, currently valued at R328m.
 
In addition, Emira’s asset management expenses are coming down - by some 44% for the year to R20m - in line with changes approved by participatory interest holders in September 2010 to the Fund’s Trust Deed altering the service charge arrangement with the Fund managers from a monthly charge based on the enterprises’ value to the actual operating costs incurred by the Fund manger. The estimated benefit to Emira PI holders of the amendment to the trust deed was a saving in asset management fees of R23m, although this was partially offset by the issue of new PIs to fund the payment.
 
Overall, it was a busy year for the Fund. In line with its long-term strategy, management continues to improve the quality of the Emira portfolio through the acquisition of new properties; the refurbishment of existing properties as well as the disposal of those properties deemed to be non-core.
 
Some of the transactions concluded over the past year include:
 
The purchase, last year of a 50% share in a 12 500m² multi-tenanted office block with shops below at 80 Stand Street, Cape Town, for R62m on a yield of 10.4% and the purchase earlier this year of a new 13 782m² A-grade office building being developed by the Eris Property Group in Corobay Avenue, Menlyn, for R307m. The building is expected to be completed in June next year and will yield 9.1%
 
Emira has also concluded eight earnings enhancing refurbishment projects including extensions the Randridge Mall (R110m); refurbishments to the Rigel Park office development (R14m); refurbishments to Wesbank House valued at R9.8m and a number of other smaller refurbishments.
 
Some of the refurbishment projects that are currently underway include the complete redevelopment of the Podium Office Park in Menlyn with the addition of 9 239m² of prime office space for R176m; The renovation of 267 West in Centurion for R36m; the construction of a new Audi dealership and renovation of the Virgin Active gym at Cresta Corner for R32m; extensions to the Market Square Shopping Centre in Plettenberg Bay at a cost of R29m and the refurbishment of Albury Office Park, Dunkeld West, for R19m.
 
Additional refurbishments valued at R75m have been approved by the Emira Board, but require commitments from tenants prior to commencement. They include improvements to the FNB Heerengracht building, Gift Acres and Park Boulevard.
 
In addition 5 non-core properties were transferred out of the fund during the year, with a further 2 properties lodged subsequent to year-end, totaling R100.4m.  Offers have been accepted for an extra 8 properties, although these sales worth R233m are still conditional. 15 other non-core properties – mainly B Grade office buildings – valued at around R600m have been identified for disposal in the months ahead.
 
Templeton says the clean out will improve the overall quality of the portfolio, reduce vacancies and allow the Fund to focus on the acquisition and development of larger buildings with better income prospects. The proceeds from the disposals, he says, will be used to fund new the projects.
 
Looking ahead, Templeton says conditions in the property market remain tough and although there is demand for space in all categories it remains very much a “tenants’ market.”
 
Says Templeton:
 
“Landlords are competing aggressively for long term, high quality leases, resulting in lower than normal levels of tenant retention. Together with downward rental reversions in certain parts of the portfolio, this is expected to result in muted growth in gross income. In addition, costs such as municipal expenses, leasing commissions and refurbishments are expected to rise in excess of the Fund’s gross income in the coming financial year.
 
“As a result of subdued net property income growth and increasing interest costs,” he says “the level of growth in distributions from the Fund for the current financial year is expected to be below that achieved in the twelve months to 30 June 2011.”