Nick Wilson

Property Editor

PROPERTY unit trust SA Corporate Real Estate Fund has blamed a difficult retail property market and higher cost of debt funding for its distribution for its first half to June falling 14,7% to 14,5c a unit year on year.

However, CEO Craig Ewin said yesterday that last year’s interim distribution of 17c a unit included a once off contribution of 2,4c a unit from the acquisition of SA Retail Properties.

If this once-off contribution was stripped out, last year’s first-half distribution would have been 14,6c a unit, and the distribution reduction for this year’s first half only 1%.

Ewin said the results of SA Corporate — one of the largest listed property funds on the JSE with a property portfolio worth R9bn — were in line with management’s expectations for the first half.

“The industrial property market has performed solidly, but there has been weakness in the retail sector, which has been particularly apparent in the smaller retail properties, of which SA Corporate has an overweight exposure,” he said.

SA Corporate’s total exposure to retail property was 57%, most of which consisted of centres smaller than 35000m² while industrial property made up 34%.

Ewin said it was the smaller retail centres that were feeling the effects of the negative retail environment the most.

He said the other contributing factor behind the decline in distributions was the higher cost of debt funding.

Ewin said the industrial property portfolio had not a single vacancy.

He said the overall vacancies on June 30 were 2,4% of lettable space and 4% of total income. These figures were much in line with those at the end of last year.

But vacancies in the retail portfolio stood at 4,1% of the retail lettable space, and made up more than 80% of lost income caused by portfolio vacancies.

The fund said that although serious attention was being given to improving the situation, “management were being forced to revise their original expectations as to the rate of successful take-up of space given current conditions”.

Mariette Warner, MD of Corovest Property Fund Managers, said SA Corporate had been a “chronic underperformer and it appears this is set to continue”.

On average, the listed property sector has been reporting double-digit distribution growth for the August financial reporting season.

Kundayi Munzara, head of research at Investec Property, said SA Corporate had delivered a “disappointing set of results which fell short of our very conservative forecasts”.

“The retail portfolio has dragged performance down significantly. The high proportion of neighbourhood or community centres in the portfolio is also concerning from an income-stability point of view,” said Munzara.

He said that although short-term dilution had been avoided in recent acquisitions, management had implemented R700m worth of stepped funding, which would result in muted income growth.

Stepped funding refers to a loan with an incremental interest rate, which is initially low and then rises towards maturity of the loan.

“We are not clear on the short to medium term prospects for SA Corporate, but expect the effects of dilutive acquisitions in 2007 and structured acquisitions to have a negative effect on growth,” said Munzara.

Source: Business Day