This represents year-on year growth of 12.2%. Included in the interim dividend is a one-off antecedent dividend received from IAPF. This relates to the final H2 dividend for FY2017, received on the shares subscribed for in the February 2017 rights offer. On a normalised basis, core year-on-year dividend per share (dps) growth is 7.2%.
Core growth was underpinned by the Fund’s:
- strategic focus on revenue protection, through early and pro-active client engagement;
- the defensive nature and quality of the South African-focused property portfolio;
- diversification of investments into Australia and the UK; and
- conservative balance sheet management.
Despite a very challenging market the base portfolio delivered net property income growth of 6.1%. This was below the average rental escalation of the portfolio of 7.6% due to:
- a marginal increase in vacancy voids during the period; and
- a 0.9% increase in the Fund’s cost-to-income ratio year-on-year primarily due to an increase in variable costs arising from increased letting activity as well as an increase in bad debts relating to 3 clients.
Subsequent to the period end, the overall portfolio vacancy reduced down to 1.6% through the letting of a 13400 m2 warehouse in Silverton, which remains one of the lowest portfolio vacancies in the sector.
Commenting on the performance, Investec Property Fund’s CEO Nick Riley said:
“This is a pleasing set of results in light of the economic environment. As management, we have been internally focused on securing the sustainability of revenue through proactive letting activity and early engagement with clients. This saw the leasing of 66% of space expiring during the full year at a positive reversion of 2.4%, significantly de-risking the Fund’s revenue line despite a very challenging letting environment.
In addition, the Fund continued to focus on the rollout of client services to differentiate ourselves in the local market which should further benefit the Fund’s revenue growth going forward. We are sticking to the basics. This has been a consistent message of ours to the market, and is no doubt fundamental to the Fund’s consistent income growth”
Income from the Fund’s offshore portfolio was in line with expectations and now represents 6.7% of total investment income and 7.8% of balance sheet investments. IAPF delivered 3% pre-withholding tax (WHT) in the period. The Fund’s initial investment into the UK of GBP10m has performed well, delivering a GBP income return of 7.2% during the period. The Fund has hedged 92% of FY2018 distributions from both geographies and has employed a progressive hedging policy over five years.
Through focused balance sheet and risk management, the balance sheet was further strengthened during the period with an enhanced hedge percentage (92% from 86%), swap expiry profile (4.1 years from 3.2 years) and all-in cost of funding (8.8% from 8.9%). There was limited debt refinancing risk in FY2018 due to proactive management in FY2017, with R276m of bonds repaid in April.
IPF continues to focus on ensuring that it optimises long-term shareholder returns by allocating and investing capital into value enhancing assets. The investment environment in South Africa has been very subdued, largely driven by the uncertain political and economic environment. To date the Fund’s local strategy has been to invest in “core” real estate assets. However, these assets are currently tightly priced, in scarce supply.
Commenting on the Fund’s capital allocation and strategic focus, Riley said:
“The Fund’s balance sheet is now of sufficient scale, underpinned by core real estate, to consider a more diversified asset allocation model. The Fund is targeting an allocation of 10% of its balance sheet to core plus, value add and other more specialised asset classes.
Typically, the former would be focused to quality real estate where one of the core metrics is slightly weaker or broken and through focused asset management and application of our property skill set or that of our potential partner network, presents an opportunity to extract value in excess of what an institutionalised asset will produce. These opportunities will be assessed on a very measured and risk adjusted approach.”
In addition, the Fund aims to increase its offshore exposure from 7.8% to 20% in the medium to long term. The Fund’s international strategy has, to date, been premised on investing in geographies where Investec has a team on the ground with local market and property expertise, notably Australia and the UK.
Whilst the Fund will look to maintain this approach, subject to pricing and the economics of the investments it also continues to explore opportunities to invest in other geographic locations. When assessing potential jurisdictions, the Fund assesses first and foremost the underlying property fundamentals and thereafter the ability to drive the investment returns through capital structure. On the ground expertise and knowledge will be critical to any investment decision.
The Fund has maintained its full year guidance communicated in March and expects core dividend growth of 7% – 8% for the year ending 31 March 2018.