More red flags for property prospects, warns Resilient

Property group Resilient, which owns shopping malls including Mall of the North, Limpopo Mall and Irene Village, is concerned about is constant increases in electricity prices, rates and other utilities, at a time when the property sector is in need of a reprieve to deal with challenges faced by retail.

Analysts say Resilient has one of the most defensive property portfolios among retail focused real estate investment trust (REIT) in South Africa. However, during the announcement of its interim results for the six months ended in December, Resilient too said it was concerned about developments affecting property sector in SA.

"The Board is concerned about the continued above-inflation increases in administered prices, particularly utilities and rates, in the current subdued economic environment. Resilient's strategy is to continue increasing its offshore exposure, while maintaining its conservative gearing and hedging policies," said the group in the commentary accompanying its financial statements.

Fueling offshore expansion

Resilient announced late last year that it was looking to sell six South African assets, and on Friday reaffirmed that it is now in negotiations with third parties. But the outlook for local property seems to have been made worse by the return of load shedding late in 2019. Resilient said it had to foot the bill for increased unbudgeted repairs and maintenance of electrical equipment because of the repeated interruptions in power supply.

Keillen Ndlovu, head of listed property funds at Stanlib, said increasing offshore portfolios made sense for Resilient and other retail focused REITs in general, given that there are limited retail growth opportunities in SA.

"We believe the local retail sector, on average, will continue to face challenges. What concerns us is that we are oversupplied with retail space and it’s likely to take time to see GDP growth come through. This will negatively impact consumer spending.  

"So, we may see some retailers rationalise, downsize or close some of their stores over time. Recent examples include Edcon and Dion Wired," said Ndlovu.

Richard Cheesman, senior analyst at Protea Capital Management, said other local property companies will probably continue looking offshore given how successful Resilient’s investments in Eastern Europe have been.

"But heightened levels of competition mean that new entrants need to tread carefully," said Cheesman, adding that Resilient had done many hard yards to tap into these more attractive economies.

Resilient despite circumstances

Resilient’s financial results, however, showed that the company swam against the tide in an industry where some of its peers are battling with high vacancy rates and have secured lower rental prices on lease reviews to keep tenants.

Resilient said its retail centres achieved comparable sales growth of 4.2%, which was ahead of the 3.9% inflation rate for the period. Combined, its 28 retail centres in SA had a vacancy rate of 1.8%, a marginal change from 1.9% in December 2018, and the group said it expects this number to remain below 2% for the remainder of the financial year. Expiring leases with tenants were renewed with 0.9% rental price increases on average, while leases concluded with new tenants were 5.8% higher than the rentals of the outgoing tenants. In Nigeria, vacancies in malls decreased to 4.5% from 8.1% a year earlier.

"Resilient’s performance was good given the conditions currently faced by South Africa’s property sector. The group owns quality retail destinations which achieved comparable growth of 4.2%, ahead of inflation during the period. This would have been higher if Mams Mall, which was under construction during the prior period, had been included," said Cheesman.

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