Growthpoint forced to accept lower rentals, as more than a fifth of its offices stand empty

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A negative reversion means that, when a lease agreement has to be renewed, the escalating rental stipulated in the contract which came to an end, has likely ended up way above current market levels.
A negative reversion means that, when a lease agreement has to be renewed, the escalating rental stipulated in the contract which came to an end, has likely ended up way above current market levels.
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  • Growthpoint, South Africa's largest real estate investment trust (REIT), is having to accept lower rentals when renewing tenants' commercial property lease agreements.
  • Growthpoint's office sector vacancies increased from 19.9% during the 2021 financial year, to 20.9% in the first quarter of the 2022 financial year.
  • The retail sector vacancy rate improved to 5.1%.

Growthpoint, South Africa's largest real estate investment trust (REIT), is having to accept lower rentals when renewing tenants' commercial property lease agreements, it said in an investor update for the three months ended 30 September.

According to Growthpoint, challenges in South Africa continue to be the effect of the Covid-19 pandemic and persistent electricity disruptions, as well as factors specific to the commercial real estate sector, such as work from home and online retail. The group expects property fundamentals in SA to remain under pressure for the rest of the 2022 financial year.

Office sector

Growthpoint's office portfolio saw a lease renewal success rate of 56.6%, with the average lease renewal term decreasing to 2.8 years from 4.4 years as tenants remain reluctant to commit amid uncertainty. The oversupply of space in the market puts pressure on occupancy levels and rental renewal growth. Rental growth on renewals has decreased for the last six years and continues to face downward pressure. It deteriorated further, from -16.1% in the 2021 financial year to -18.7% at the end of the quarter ended 30 September 2021.

Larger tenants are taking the opportunity to improve the quality of their space, at similar or lower rentals. Many are contemplating a hybrid working model with flexibility for staff. 

According to Growthpoint, the effect of the pandemic and the impact on the economy means that smaller tenants cannot afford their space and need to downsize. Others are reluctant to commit to long-term leases as they are uncertain about their future space requirements or cash flows. As a result, the office sector remains under pressure, particularly in Gauteng and in Sandton, specifically.

Growthpoint's office sector vacancies increased from 19.9% during the 2021 financial year, to 20.9% in the first quarter of the 2022 financial year. The Gauteng region is under significantly more pressure than KwaZulu-Natal and the Western Cape, where vacancies are concentrated in a few buildings. 

Retail sector

In the retail sector, restaurant, fast food and entertainment tenants are typically the hardest hit. Growthpoint's tenant retention is at a 91.9% renewal success rate. The renewals were concluded at a weighted average renewal growth of -17.7% in what the group describes as a highly competitive and challenging market, clouded by uncertainty. 

The sector has experienced negative renewal growth for the past four years. Retailers are prioritising cost containment and negotiating reduced rentals and escalations to achieve this.

Vacancies improved from 6.2% in the 2021 financial year to 5.1% at the end of the first quarter of the 2022 financial year.

Industrial sector

Growthpoint's industrial tenant rental reversions improved to -9.2% in the first quarter of the 2022 financial year compared to -10.9% during the 2021 financial year. Vacancies decreased from 9.4% to 7.4%. 

According to Growthpoint, there remains a strong appetite for industrial acquisitions by non-institutional investors seeing an opportunity to create an investment portfolio.

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