Growthpoint: Real estate

Portfolio consists of 41 externally managed properties, with a 47:53 split between industrial and office exposure by market value. Through this portfolio, Growthpoint effectively provides more than 5.4m sq metres of retail, office and industrial space to South African and Australian businesses.

Despite a weak macroeconomic backdrop and domestic office sector conditions, Growthpoint reported solid growth in distribution per linked unit of 7.2%, to 72.7 cpu for the six-month period which ended on December 31, 2012. Underpinned by fixed rental escalations of approximately 8%, this was bolstered by a weaker exchange rate through its holdings in GOZ and lower property management costs.

Development Strategy

The fund’s low dividend yield and strong balance sheet sets it in good position to take advantage of further growth-enhancing initiatives in the near term. However, boosted by attractive funding rates and solid fundamentals, the South African commercial property market has been characterised by robust investor demand for large but tightly held prime real estate. It therefore comes as no surprise that recent portfolio expansion strategies have had an increasing bias towards GOZ, where management is chasing relatively more attractive yields.

That said, Growthpoint has a R2.5bn ($304m) acquisition and development pipeline to support its medium-term growth aspirations. The management team considers its overall portfolio to be a little underweight in retail exposure and is aggressively looking for yield-enhancing retail acquisitions.

Unlike some of Growthpoint’s South African listed counterparts, management has shown no appetite for acquisitive growth channelled towards the rest of Africa. In fact, management’s growth strategy has historically been characterised by an organic and prudent growth strategy in metropolitan areas that have a stronger and more defensive long-term rental growth profile. As a result, Growthpoint is expected to deliver solid but stable performance over the near term.

The Company

Growthpoint is the largest South African property company listed on the Johannesburg Stock Exchange (JSE). Its market capitalisation is well above R45bn ($5.4bn) and is driven by a highly regarded and experienced management team. Leading the charge to gain critical mass, achieve geographical spread, sectoral diversification and increase financial leverage, Growthpoint has grown its ( predominately) commercial property portfolio from R4.5bn ($548m) in 2003 to just over R55bn ($6.7bn) in December 2012. This includes 100% of property assets held by its listed subsidiary, Growthpoint Australia (GOZ). Growthpoint’s effective shareholding of the firm was 65.3% as of December 31, 2012. Established in 1987, Growthpoint is a property loan stock company; its capital structure comprises ordinary shares linked to unsecured variable-rate debentures. Effectively, net property income after operating costs and interest expense on debt is distributed to unit holders bi-annually. This structure is thus very similar to the internationally well-recognised Real Estate Investment Trust (REIT) model. The REITs tax laws were formally promulgated into South African law in February 2013, and Growthpoint expected to convert into a REIT effective July 1, 2013. Growthpoint acquired a 50.1% controlling shareholding in the Orchard Industrial Property Fund (now know as GOZ) in July 2009 for a cash consideration of A$56m ($54m). As well as enhanced asset and geographical diversification at relatively attractive yields, Growthpoint’s investment proposition now includes an element of currency hedge against the more volatile domestic currency, which has historically under-performed developed market currencies. Growthpoint’s South African assets comprise 390 fully integrated properties (i.e. asset and property management functions are performed internally) with good all round exposure to all sectors, i.e. 30% retail, 39% office, 22% industrial as well as 9% exposure to the V&A Waterfront (Cape Town) by income. The Australian