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Retail: Retail Slump Dents SA Corporate Income


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A distribution of 14,45 cents per unit for the half year, against 14,50 cents per unit in 2008, was declared.

Len van Niekerk, the fund’s newly appointed managing director, pointed out that the Fund has clear investment strategy to reshape the portfolio to improve its quality and earnings.

He said the fund’s new management, appointed by Old Mutual Investment Group Property Investments, had continued with the disposal strategy announced last October, and plans to sell at least R1,4 billion in assets (some 15% of the portfolio), which would reduce the portfolio number of properties from 183 to 125.

“Several sale agreements have already been concluded, some of which are now unconditional with others pending the fulfilment of suspensive conditions. Disposing of many of the smaller properties together with other non-core assets will improve focus and manageability. The fund's investment philosophy will place an emphasis on the dominance and lettability of each asset in strong nodes and growing markets.”

Van Niekerk said SA Corporate’s rental income (R410 million) grew by 6% and property expenses by 26% (R159 million) contributing to the 3% rise in net property income (366 million). Net industrial property income improved to R137,1 million (from R125 million) and net income from the office sector increased to R37,2 million (from R26,8 million).

“The retail portfolio comprises 56% of the total portfolio value of R8,98 billion and smaller retail centres make up more than two thirds of that retail value,” said Van Niekerk.

“Tough retail conditions in the difficult economic environment influenced the demand for space, causing a slower take up of vacancies and curtailing market rental growth. While the rental levels achieved on renewals were up by an average of 10% on closing rentals, vacancies increased to 8% of the retail lettable space against 6% last year.” While letting conditions have deteriorated in the economy, it is pleasing to see that the Fund was still able to achieve higher rentals on renewal.

Van Niekerk said SA Corporate’s industrial portfolio, 35% of total portfolio value, performed well and continued to enjoy excellent occupancy levels.

“However space that has become available is remaining unlet for longer periods. The vacancy at the end of June increased to 3% of total lettable space from 1% in June 2008. The increase is mainly due to some unlet space in the new high tech park in Paarden Eiland, Cape Town. The overall vacancy position remains positive and continues to reflect the quality of the industrial portfolio. Inroads into reducing industrial vacancies post June have already been achieved.

“Average rentals of leases renewed during the six months are 18% higher than the closing rentals.”

Van Niekerk said rentals in terms of renewed office leases grew by an average of 6%.

“However the vacancy factor has increased to 11% of lettable office space and most of that is as a result of vacant offices in retail centres.”

He said the rental growth from escalations and positive lease reversions had been diluted by the increase in vacancies, mainly within the retail portfolio, the effect of bad debts and an increase in the impairment of trade receivables.

“The overall vacancy factor at 30 June is 6% of total lettable space, up from 4% at the end of December 2008. The total annualised lost rental income for this six month period attributable to these vacancies amounts to R34 million and is a key area of management focus.”

During the period, bad debts of R1,4 million were written off and the impairment of debtors increased from R16,1million to R29,4million, equating to 69% of arrear rentals, in line with a revised management policy.

Looking ahead, Van Niekerk said maintaining 2008 distributions in the current year will be a challenge.

“Necessary capital expenditure to maintain the condition and lettability of the properties will be income dilutive in the short term, but will significantly improve the quality and sustainability of future income growth. Asset disposals are expected to be greater than capital expenditure on retained assets and selective acquisitions, which together with the unit price trading at a significant discount to NAV, will see the fund continue to pursue unit buybacks and alternative debt structures.

“The implementation of the Fund strategy in addition to expected recovery in the economy and more effective leasing and debt collections is likely to bear fruit, the full impact of which is not expected to be felt in the current year. To maintain 2008 distributions in the current year will be a challenge.”

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