Real estate investment trust Equites Property Fund has reported sustained growth in its rental portfolio over the past few years and expects this trend to continue.

In its results presentation for the 2024 financial year, where the company highlighted a dividend a share of R1.31 at a 100% payout ratio, in line with market guidance, Equites CEO Andrea Taverna-Turisan said like-for-like rental growth in South Africa for the period was 6.4%.

The weighted average lease expiry (Wale) remained stable at 13 years, and the weighted average escalation by gross leasable area (GLA) saw a slight reduction to 6.2% from 6.5%. This was owing to the inclusion of two more Shoprite assets with lease escalations of 5% on 20-year lease terms.

“Over the last couple of years, we've seen a 30% increase in rentals. There's an expectation in our sector that that will grow at about 5% this year. Ultimately, this is as a factor of constraint on existing A-grade supply, but also the fact that we've seen noticeable construction inflation,” he said on May 14.

Taverna-Turisan predicted that the national vacancy rate for high-quality, environmentally sustainable warehousing space in South Africa would remain below 1%.

This is owing to the continued demand for quality warehousing space in key logistics nodes, combined with the scarcity of appropriately zoned and serviced land.

The low vacancy rate and construction cost inflation have led to an increase in market rentals, with Equites’ base rentals on generic warehouses now starting at R85/m^₂.

This represents a 31% increase from base rentals of R60/m² for comparable warehouses in 2020 at a compound annual growth rate (CAGR) of 9%.

Meanwhile, Equites’ UK portfolio also showed a like-for-like rental growth uplift of 5% in pound terms, as a result of a single rent review concluded during the period. The UK Wale has reduced to 10.6 years from 15.8 years owing to the sale of assets with 25-year leases.

Taverna-Turisan said the logistics property market in the UK had seen an increase in take-up rates that were even higher than those before the Covid-19 pandemic. He explained that the lack of available new space had led to a consistent rise in rental prices. Nonetheless, Equites’ UK portfolio remained under-rented.

However, he pointed out that the group had recently agreed to a 39% increase in rental at the GXO property located in Coventry, resulting in a 13% valuation uplift of the property.

In addition, a rent review was conducted at the DPD site in Burgess Hill in March, which led to a 68% increase in yearly rentals. These rental uplifts, along with the expected yield compression, were anticipated to unlock value over the medium term.

He said both Equites’ South African and UK property portfolios had performed in line with expectations throughout the period, driven by robust like-for-like net property income growth, zero vacancy and an uptick in property valuations.

The South African portfolio increased by 4.2% in rand terms, while the UK portfolio increased by 2.1% in pound terms. As a result, net asset value per share grew by 3% to R17.14 over the last 12 months.

Total GLA under management increased to 1.45-million square metres at year-end.

“We divested R4.8-billion of older, noncore assets and improved the portfolio by reinvesting into [environmental, social and governance- (ESG-)] compliant logistics campuses and distribution centres, tenanted by blue-chip companies on long-term leases.

"The portfolio is fully let with a Wale of 12.6 years, demonstrating the quality and durability of the assets. Equites also continues to receive strong support in the debt capital markets, as evidenced by the very positive outcome of the debt auctions and private placements during the financial year,” Taverna-Turisan said.

The group disposed of South African assets to the value of R1.2-billion, at a 0.1% discount to its last external valuation.

The proceeds were used to repay debt and fund development activities. A further R400-million of South African assets were also classified as held-for-sale at year-end, with transfers expected to occur during the 2025 financial year, Taverna-Turisan explained.

UK property disposals amounted to R3-billion, including the first of two payments relating to the Newport Pagnell forward-funding transaction. The group concluded the sale of Newport Pagnell in January for £59.8-million, of which £30.8-million was received in January with the balance expected to be received in October 2025 upon completion of the development. The group has a further R1.8-billion of UK assets held for sale.

During the 2024 financial year, Equites initiated the sale process for the ENGL development platform in the UK. Taverna-Turisan said the company would continue to engage with Newlands and potential buyers.

Equites also completed a new regional hub for The Foschini Group at Equites Park Riverfields, in South Africa, at an all-in cost of R591-million. Taverna-Turisan said an external valuation of R600-million was reflective of the positive total return generated by new A-grade developments.

The group further completed two pre-let developments at Equites Park Jet Park with a total GLA of 14 784 m² and a capital value of R197-million. These facilities are both let to A-grade tenants with leases expiring in 2028 and 2032, respectively.

Equites also completed two speculative developments with a total GLA of 26 005 m², with both let within the vacancy provision period. To further capitalise on demand, Taverna-Turisan said the group started construction on three new speculative developments at Meadowview with a combined GLA of about 20 000 m², expected to reach practical completion in the fourth quarter.

Through RLF, Equites acquired and completed an R185-million extension of the Shoprite Canelands facility in KwaZulu-Natal on a lease which is coterminous with the existing Shoprite Canelands’ lease that expires in 2043.

Taverna-Turisan said that Equites’ share of the total pipeline of development and acquisition opportunities in South Africa amounted to R2.5-billion across 177 000 m² of prime logistics space.

He explained that the R600-million of capital expenditure outstanding at the reporting date would be disbursed over the next 12-month period and funded from cash on hand, undrawn debt facilities, debt raised against completed developments, and equity that would be released from property disposals.

Given the process currently under way for the ENGL platform, Taverna-Turisan said the group remained committed to funding any expenditure on progressing planning on current land parcels.

Meanwhile, Equites spent R3.2-billion on new developments during the year, funded through an asset disposal programme that culminated in a group loan-to-value (LTV) ratio at year-end of 39.6%, down from 39.7% a year prior. Equites managed to increase its debt maturity to 3.7 years and reduce the all-in cost of debt from August last year.

Meanwhile, 83% of all long-dated debt maturing after the 2025 financial year was hedged, with an overall 33% sensitivity to interest rate changes, Taverna-Turisan explained.

He further noted that all cross-currency interest rate swaps (CCIRS) were terminated this year and the net interest income received of R95-million was not included in distributable income owing to the non-recurring nature.

The termination of CCIRS benefits shareholders, as this allows investors to participate in rand weakness through improved growth in net asset value per share over time.

The group also focused on rebalancing the offshore LTV and streamlining the UK portfolio, Taverna-Turisan noted, adding that the UK LTV at year-end was 45.8%.

Equites held several listed debt auctions during the financial year, with debt raised in November last year clearing at the lowest levels for one-, three- and five-year debt to date. In February, the group raised its first seven-year listed debt at three-month Johannesburg interbank agreed rate plus 153 basis points, Taverna-Turisan explained.

He emphasised that Equites had achieved its target of certifying R500-million worth of existing buildings with Excellence in Design for Greater Efficiencies Advanced certification by 2024.

Taverna-Turisan noted that the expansion of Equites’ solar PV roll-out continued throughout the year to meet the demand for greener sources of energy and to mitigate against the impacts of loadshedding.

Equites grew its total installed solar capacity to 20.2 MW from 9.4 MW in the 2023 financial year, while the number of buildings with solar PV increased from 19 to 29.

Almost 50% of the portfolio is now supplied with solar energy, Taverna-Turisan said.

“The opportunities presented by the global shift to renewable energy have the potential to unlock significant value for the business. The group’s first energy wheeling agreement was recently concluded in the Western Cape, and this project is expected to start revenue generation in the 2025 financial year,” Taverna-Turisan explained.

He noted that the Equites board expected the distribution per share for the 2025 financial year to remain relatively in line with the 2024 financial year, within a target range of R1.30 and R1.35 a share.

“Our record of developing world-class facilities for our clients continues to unlock opportunities for the fund to grow. The R2.3-billion in cash and available facilities at year-end places the group in a favourable position to take advantage of performance-enhancing development opportunities in the coming year. The group remains confident in its ability to drive sustainable value creation for shareholders over time,” Taverna-Turisan said.