During its financial year to 30 June 2008 Growthpoint concluded leasing deals valued at R2.44 billion for over 800,000m2 of space in its property portfolio.

“This reflects a highly active market, riding the crest of the wave, which generated good increases in rental levels,” says Steve Grupel, of Growthpoint’s leasing team.

Growthpoint has a diversified portfolio of high-quality retail, office and industrial properties located country-wide and integrated through superior asset and property management solutions.

Competing for the top earning sector, retail, with leasing deals valued in excess R995 million over 166,000m2 narrowly beat offices, which represented a total deal value of R926 million for 181,000m2. Industrial contributed deals valued at R516 million for some 455,000m2 of space let.

“With changes in the economy there is a slowdown creeping into the market, most notable in the retail sector, which will make these ‘super’ figures a challenge to sustain. However, this is only a slowdown and both lease and rental growths are still positive,” says Grupel.

Commercial property fundamentals remain strong, asserts Grupel, and while the higher interest rate levels will have a tapering effect on retail leasing, the lack of developable industrial land and the rise in office occupancy, the slowdown in new development as a result of the energy crisis and infrastructural limitations are all positive drivers of rental growth.

Grupel explains that annual escalation rates have moved from an average of between 7% and 8% to between 9% and 10%, as a result of a number of factors, including the direct impact of higher costs applicable to the running of properties.

External brokers, active across all sectors, accounted for 16.2%, of the total deals concluded during the financial year. “Strong relationships with brokers, retailers and South Africa’s leading corporates remain key in this competitive market,” notes Grupel.

Grupel explains that Growthpoint continues to respond to market needs and, as a result of stock shortages across all sectors, is proactively seeking suitable redevelopment opportunities to unlock value within its portfolio.

Gauteng:

Retail far outstripped its peer sectors in the Gauteng market, clocking up some R735 million worth of deal values for leases signed over 129,000m2 of space in Growthpoint’s prime retail portfolio. Offices reported some R442 million of leases concluded covering 100,000m2 while industrial leases notched up a total deal value R275 million for 237,000m2.

“In terms of retail, national tenants are ‘right-sizing’ and in some cases consolidating or reducing space to trade more effectively. This said, there is still growth with select retailers pursuing expansion plans; however this is not as aggressive as in recent years. Retail is certainly not going backwards,” points out Grupel.

Restaurants and fast foods are an area which Grupel believes could come under pressure over the next year, with consumers tightening their belts and cutting down on eating out and other luxuries first. There has also been a notable slowdown in the sales of big-ticket furniture, home and electronics purchases.

Growthpoint’s retail portfolio asset manager, Neil Schloss, believes that established, mature centres will be better equipped to weather the retail storm. In addition, “There has been a substantial increase in construction and running costs and retail rentals in new shopping centres will have to reflect this. This makes new retail development unfeasible, effectively curtailing potential competition to existing shopping centres,” says Schloss.

Growthpoint’s Gauteng retail portfolio includes Brooklyn Mall in Pretoria, Woodmead Retail Park in Sandton, Lakeside Mall (87.24% ownership) in Benoni and Kolonnade in Pretoria and Northgate in Northriding (both 50% co-owned with Sasol Pension Fund).

Tenant relationships are also important in this challenging environment and retailer retention will come into the spotlight for leasing managers.

Growthpoint has strong synergies between its retail, office, and industrial property portfolios, all of which serve the needs of retailers at different points in their operations. “We are striving to offer full solutions to retailers using an integrated approach to their different occupancies,” explains Schloss.

In the office sector, vacancies have reduced and are still decreasing. “It is encouraging that we have a number of tenants which are growing and making us a part of their growth by increasing the size of their premises. This is in addition to new lets,” says Paul Kollenberg, Growthpoint’s office portfolio asset manager. He explains that there seems to be a general trend for consolidation and growth through mergers in the current market.

Sandton continues to be the prime office market and as the number of new developments in the area slows down, it improves the desirability for the pool of existing offices. Owners with office property assets in Sandton are certainly in the best position. Companies seeking offices in Sandton specifically still want quality space.

A-grade space is snapped up fast and B-grade space becomes easy to let if upgraded. “The recently completed The Place at 1 Sandton Drive which comprises 31,000m2 of premium office space is now fully let, and if we had another similar development, we could probably fill it straight away. Any vacancies in Growthpoint’s Gauteng office portfolio are strategic or have recently come to market,” says Kollenberg.

There is still a huge demand for industrial space, specifically for “B” and “C” grade properties. Their value propositions are their “affordable” rentals compared to “A” grade rentals which have grown exponentially over the last couple of years, reports Growthpoint’s industrial portfolio asset manager Engelbert Binedell. He explains that this is a result of general economic pressure on some industrial sectors, demonstrated in companies moving to older buildings or a lower grade of premises as it benefits their business models.

“Companies are being largely pragmatic in their industrial space choices looking for functional premises with good infrastructure. As a result we believe that within the next 18 to 24 months rentals on older industrial space will start correlating more favourably to those in newer areas as supply of this space dries up,” says Binedell.

The big challenge, explains Binedell, is to educate clients on rental market dynamics in terms of supply and demand and the cost of new space.

“We have certainly seen our deal flow increase in terms of acquisitions, with a number of potential purchases and developments being offered to us, creating the opportunity to expand the portfolio in line with strategic criteria. The good news is that the gap between unrealistically high sellers’ expectations and purchasers’ feasibility in terms of capitalisation rates, is now narrowing,” says Binedell.

Cape Town

With the number of deals concluded doubling by in square metres year-on-year and the associated deal value tripling, it is no wonder David Stoll, who heads up Growthpoint’s Cape Town office, describes the market as almost unbelievable and the leasing results highly successful

Growthpoint’s Cape Town office concluded deals on a total of 220,000m2 valued just short of R700 million.

Without a doubt, offices are the star performer in the Western Cape, accounting for R415 million in deal value over 65,000m2 of space

“New developments and acquisitions such as MontClare Place, The District and The Estuaries contributed to the superb office leasing, as well as properties from the former Paramount portfolio, which provided us with the opportunity to fill vacancies and increase rentals,” says Stoll.

While the sustainability of this performance is unlikely, with fully-let premises and a shortage of vacant space inhibiting further leasing growth, there are a number of new opportunities for Growthpoint’s leasing team in Cape Town. This includes the redevelopment of 11 Adderley in the CBD, formerly Shoprite offices, which will bring a further 22,000m2 of reasonably priced space to market.

“We maintain strong broker relationships and value the contribution that brokers make to our leasing book. Nearly 30,000m2 of deals were facilitated by external brokers. Some 190,000m2 of deals were concluded by our own strong team of brokers, who proactively optimised the positive market conditions,” says Stoll.

The performance of retail and industrial property in Cape Town was also impressive, if somewhat less astonishing than offices. R142 million of retail leasing deals were concluded over 19,000m2 of space and R 136 million worth of industrial leases were finalised over 135,000m2 of premises.

KwaZulu-Natal and the Eastern Cape

Growthpoint’s east coast leasing team reported a total of R291 million worth of deals for 114,000m2 of space, together with an effectively fully-let portfolio.

In KwaZulu-Natal, industrial property is on the rise with good rental growth on lease renewals being achieved, in some cases as high as 30%.

“This is largely due to historically low rentals for industrial property and a continuing strong demand for space which is being met with a shortage of availability,” says Greg de Klerk, who head’s up Growthpoint’s Durban office. Less than 0.5% of Growthpoint’s industrial portfolio in the area is vacant.

The value of industrial deals concluded – R104 million, covering some 81,000m2 of space – nearly equalled that of the value of retail leases signed which totalled R118 million for more than 17,000m2.

Also experiencing minimal vacancy levels, Growthpoint’s retail portfolio is 98.5% occupied. “Increased interest rates, however, have slowed down consumer spending and retail rentals are coming under pressure as retailers push hard for the best possible terms for renewals and new lets,” explains de Klerk.

Vacancy levels in the office portfolio during the financial year were maintained at less than 1%. “The majority of our office buildings are situated on La Lucia/Umhlanga Ridge, where demand remains high,” points out de Klerk. The area has been identified by most large corporates as their preferential location in the province and as a result it continues to be a growth node for new office developments. “We are still seeing good growth in rentals here.