JSE-listed real estate investment trust Octodec Investments has increased its revenue by 5.2% to R1.06-billion for the six months to February 28, and recorded a reduction in core vacancies to 13.7%, largely driven by improved performances from its shopping centre and office portfolios.

The company reported a resilient performance across its Gauteng-based portfolio, despite a challenging market. It posted a profit for the period of R227.8-million, up from the R99-million in the comparable half-year period to end-February 2024.

Further, cash generated from operating activities before dividend payment increased by 25% to R269.4-million.

Distribution per share increased by 3.3% at 62c. Distributable income after tax increased to R221.7-million, up slightly from R219.5-million in the comparable first half of the company's 2024 financial year.

Net asset value a share increased marginally to R24.26, up from R24.11 at the end of the 2024 half-year period.

The period under review saw renewed optimism following the 2024 national elections and the formation of the Government of National Unity (GNU), as well as the 75 basis points in interest rate cuts from September 2024, which were positively received.

However, the benefits of these developments were not yet visibly felt in Octodec’s performance, which continued to be negatively impacted by South Africa’s ailing economy, particularly amid challenging trading conditions in its areas of operations, persistent poor municipal service delivery and the ongoing council repair work to Lilian Ngoyi street, in the Johannesburg central business district (CBD).

Against this backdrop, management remained focused on successfully navigating these difficulties by proactively addressing the uptick experienced in tenant activity and demand, reducing vacancies and disposing of noncore assets.

These focused actions led to an improvement in letting and a reduction in vacancies towards the end of the first half-year reporting period, with the benefit thereof yet to translate into meaningful year-on-year rental growth for Octodec.

“We are pleased to have grown our rental income and dividend despite a challenging operating environment, reflecting the stability of our portfolio and the effectiveness of our strategic initiatives. We remain committed to managing our portfolio in alignment with market demand, while supporting long-term sustainability and driving value creation,” said Octodec MD Jeffrey Wapnick on May 13.

A highlight for the period was the completion of and successful launch of Yethu City in mid-February. This redevelopment pilot project exemplifies Octodec’s ability to address market needs by introducing quality, accessible co-living accommodation to the Pretoria CBD.

The letting rate exceeded expectations, with the residential occupancy reaching 40.7% by end February and currently nearing 100%.

“We are thrilled about the successful launch of Yethu City as part of our efforts to provide well-priced, quality accommodation and unlock new opportunities for growth and enhancement of returns,” he said.

EXPENDITURE
Property expenditure continued to increase above the prevailing inflation rates at 7.1% to R582.6-million, up from R544.1-million in the six months to the end of February 2024, with increases in administered costs proving difficult to control.

Utility costs increased by 11.8% when compared to the prior year to R181.2-million, up from R162.1-million in the 2024 first half-year period and, although a large portion can be passed on to tenants as part of recoveries, it places pressure on them, affecting their sustainability, the company noted.

“On a positive note, all metrics have turned around compared to previous reporting periods, including vacancies, distribution per share and valuations, among others.

“However, it is a tough environment for the people of Gauteng, who do not have much spare cash. A roof over their heads remains a priority for our tenants, but the problem now is rental growth; although there is still scope for us to reduce vacancies,” said Wapnick.

Additionally, the bad debts expense increased by R6.9-million to R24.9-million owing to tenant failures; exposure to the Lilian Ngoyi street, which is being repaired; and one tenant that is currently under business rescue.

“Although Octodec continues to receive its rental and recoveries from that tenant, it is our policy to provide for all arrears when a tenant has entered into business rescue proceedings. Consequently, bad debts to income increased from 1.8% in the prior year to 2.3%,” the company pointed out.

Similarly, salaries and wages at building level increased by 10.2%; however, excluding certain one-off charges and the appointment of an additional resource, the increase would have been at a more acceptable level of 5.6%, he added.

Repairs and maintenance, which is one of the few significant expenditures that management can influence, reduced by 1.2% to R48.5-million, he noted.

Administration costs increased by 5.4% to R55.4-million, with the largest increase being in corporate salaries owing to the employment of the deputy CEO and CFO, offset by the reduction in the asset management fees paid to City Property as announced on January 29, 2025.

Net finance costs increased by R10.7-million to R200.9-million, mainly as a result of the maturing interest rate swaps from which Octodec benefited in the prior period, said Octodec deputy CEO and FD Riaan Erasmus.

“We remain cautious in our interest rate outlook and focused on maintaining a disciplined balance sheet. We are pursuing a more assertive disposal strategy for noncore assets, where sales proceeds will be recycled into yield-enhancing investments or used to reduce borrowings, thereby supporting income growth and strengthening our financial position.

“The early success of Yethu City underscores our strategy to reimagine underutilised assets to drive future returns,” he said.

SERVICE DELIVERY
“We are all suffering from a lack of service delivery, although the Bree street and Lillian Ngoyi street [that were impacted by a gas pipeline explosion] additionally impact us directly. Fortunately, the repairs are estimated to be completed by the end of August,” said Wapnick.

“However, a bigger concern is the general condition of the Johannesburg City Council, and there is a lot of work that must happen there to fix not only the CBD but the whole city. The Government of National Unity seems to be working reasonably well, but it has not yet filtered down to a provincial level where the problems are, although we hope a tipping point can be reached in which parties can work together.

“As a small fund, we are nimble and have built solar power systems, installed generators and drilled boreholes. We have a team looking at these aspects, which is making reasonable progress.

“The issue is, had the City Council been strong, we would not have needed to install these systems, which add costs and use management time. At many sites, we have built 'mini municipalities' in terms of water and electricity,” he highlighted.