Cash strapped SA businesses are cutting back on expansion plans

Posted On Sunday, 10 February 2013 21:25 Published by eProp@News
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Latest results from Capital Property Fund, the JSE’s fourth-largest real estate counter, with a market cap of R17bn, underscore the extent to which cashstrapped SA businesses are cutting back on expansion plans.

Despite ongoing efforts to aggressively market the empty space in Capital’s office portfolio at competitive rentals, the fund continues to battle with double-digit office vacancies. These are sitting at 13,6%, a level Capital MD Barry Stuhler doesn’t expect to fall much in the near future. He notes that Fourways, north of Johannesburg, remains the most challenging office market for Capital.

Says Stuhler: “Business confidence is low, which will continue to have a negative impact on the office market. With the exception of a few nodes such as the Sandton CBD, there’s little demand from existing companies to take up more space. We’re also not seeing any new businesses.”

Management has however reduced exposure to older, secondary buildings by selling a number of government-tenanted office blocks to newly listed funds Ascension Properties and Delta Property Fund for around R1,1bn. Stuhler says the strategy is not to get out of the office market but to improve the quality of the portfolio by developing more premier office stock in prime nodes. In this regard, Capital has already entered into agreements to acquire three tracts of land near the Gautrain station in Sandton.

Despite lingering high office vacancies placing pressure on rentals, Capital still managed to deliver an inflation-beating 6,3% rate of growth in income payouts for the year to December, in line with market expectations. That’s largely on the back of a solid performance from the industrial and retail portfolios, which respectively represent 55% and 14% of Capital’s asset value.

Stuhler says demand for warehousing and distribution properties in soughtafter industrial nodes like Linbro Park, Longmeadow and Raceway Industrial Park (all Gauteng) has been particularly strong. However, demand for manufacturing space continues to decline. As a result, Capital intends to dispose of industrial properties used for manufacturing purposes. “The rising cost of electricity, coupled to ongoing labour unrest, doesn’t bode well for SA’s manufacturing sector. So our focus will shift to acquiring strategically located land to develop warehousing and distribution properties instead.”

Capital has already assembled a multibillion-rand development pipeline for this purpose, including a R2bn logistics park planned for the old Clairwood Racecourse in Durban. Capital acquired the 76,6ha property last year for R430m. Another potential takeover attempt of SA Corporate Real Estate’s R8bn portfolio could also be an avenue for growth. Old Mutual Properties, which owns SA Corporate’s management company, last year rejected Capital’s initial takeover bid.

Stuhler says Capital hasn’t closed the door on a potential deal. “SA Corporate’s industrial portfolio will be a good fit for Capital. But we won’t go to war with anyone to acquire it.” Though management’s guidance for income growth for the next financial year is slightly below market expectations (4%-7%), most analysts still have a buy signal on Capital. The general view is that the stock offers value as it fell 6,6% last week, delivering a total return of 22% over the past 12 months versus the sector’s 30%.

At a current share price of 1070c, Capital offers a forward yield of 7,25%, which is attractive considering other sector heavyweights like Growthpoint Properties, Hyprop Investments and Resilient Property Income Fund are trading at yields of 60-100 basis points lower. Says Jay Padayatchi, director at Meago Asset Management: “On a relative basis, given recent price performance and anticipated growth opportunities, Capital is certainly a viable alternative to its peers.”  Padayatchi believes Capital’s industrial development pipeline sets it apart. He says the bulk of Capital’s new warehousing and logistics developments is earmarked for areas with very low single digit vacancies, which bodes well for the take-up of the new space that will be added to Capital’s portfolio over the next few years. In fact, Capital’s industrial vacancies are already set to drop markedly, from 4,5% in December to around 3% this year. “This will no doubt put upward pressure on rentals,” says Padayatchi.

Source: FM

Last modified on Sunday, 10 February 2013 21:51

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