CEO: RSA Overview
Our industrial properties held up the best out of the three portfolios, and we kept close to our tenants in the sector to service our client base.
Estienne de Klerk
Our South African business is focused on investment, property funds management, development and property administration services. The business is predominantly dedicated to the asset management and operation of our retail, office and industrial property portfolios.
As a property owner that manages its own properties, Growthpoint South Africa is a substantial operation. It is an active business, providing services to clients and delivering bespoke property solutions. These include some development and trading activity, which is primarily for our own balance sheet but does also include some minor activity for third parties, as detailed in our strategic thrusts.
A difficult economy, weak property fundamentals and extremely competitive conditions defined our operating environment for most of the year. Letting was impacted by weak market demand due to low business confidence and more corporate failures. In a generally difficult environment, vacancies and arrears crept higher. Despite this, we were tracking our expected performance in all three South African property sectors and, before the Covid-19 pandemic, were optimistic that we would deliver on our stated prospects for FY20.
We made good progress on our operating processes and systems and increased our focus on our clients. We have become genuinely customer-obsessed and proactive in managing client relationships. Business failures, downsizing and consolidation are among the factors putting tenant retention under pressure. However, even in these market conditions, we want to make sure that our clients have a positive experience of our buildings and our service. Not only do we work hard to provide our clients with quality space and back this up by being a valuable business partner, but in this tough environment if a client is facing the prospect of business failure, we also strive to respond swiftly to avoid inefficient and expensive legal processes, especially in our industrial and office portfolios.
We take a slightly different approach in our retail portfolio, where we prioritise flexibility without vacancy creep. This sector faced particularly thorny dynamics in FY20, as seen in Massmart closing down its Dion stores and Edcon’s continued struggles. We reduced our exposure to Edcon brands, but our remaining 88 680m2 is predominantly in Edgars stores, rather than the smaller format Jet stores. The Foschini Group’s proposed purchase of all the Jet stores and Retailability’s purchase of the top-performing Edgars stores will be good news for Growthpoint. Six Edcon stores in our portfolio will still close and beyond the potential impact on our immediate portfolio, store closures generally are giving rise now to extensive surplus retail space across South Africa.
The surplus of offices in the market, and the decline in business overall due to persistent economic weakness is the greatest influence on our office portfolio. We are pleased, however, that we were able to conclude some excellent deals with first-class tenants which will fill key properties in the first half of FY21. These include Anglo American’s lease at the sizeable 144 Oxford, the Altron and DRA Global leases in Woodmead, Johannesburg, and the Department of Public Works lease in the 1 North Wharf Square building on the Cape Town foreshore.
Our industrial properties held up the best out of the three portfolios and we kept close to our tenants in the sector to service our client base and scout the market for good deals.
We made progress in streamlining and optimising our South African portfolio by disposing of 13 non-core assets for a total of R582m. We would like to have disposed of more but market forces worked against this, with poor liquidity in capital markets. We continue to manage and maintain those 68 further assets that we have identified for sale.
We invested R277.2m in five small properties that are strategic to Growthpoint’s existing portfolio, with future development potential.
Overall, there has been a marked reduction in our trading and development activity and our focus has shifted even further towards improving our existing products in the Growthpoint portfolio and away from new development for our balance sheet and third parties. The final projects in our pipeline of new developments were either completed or substantially completed during the year.
Our development team completed R445bn of projects in FY20, focusing on demand-driven developments for Growthpoint, which are detailed within each sector’s report. In our office portfolio, we are particularly pleased with the strong demand for our 144 Oxford development in Rosebank, which was fully let to quality tenants at feasible rents just before the Covid-19 lockdown. We are also proud that our development for Exxaro in Centurion was awarded Africa’s first WELL certification for advancing health and wellbeing in the building.
The team also completed speculative industrial developments for our portfolio, which did introduce a small amount of additional vacancies. Unfortunately, letting was slower than initially expected, partially due to the pandemic. However, these are excellent properties and we are confident they will be fully let in due course.
In our retail portfolio, we continued to improve and upgrade our assets countrywide in order to match changing retailer needs and shopper demands. A highlight was redeveloping critical space that has been vacant for six years at Lakeside Mall, Benoni, to introduce Pick n Pay and Dis-Chem to its retail mix. Despite the disruption of Covid-19, both tenants opened in July 2020, and this project is expected to be fundamental to the mall’s performance going forward.
In all areas of our portfolio, we remain focused on maintaining and upgrading our assets to provide a top-quality product. Even in a tight market, we continue to invest in our business to ensure our properties are modern, relevant and competitive. We do this to attract new tenants and to provide a good experience for the clients already in our buildings.
Our developments for third parties included two significant transactions, both of which would have delivered considerable profit if it were not for the business disruption of the Covid-19 lockdown. Our sale of the former Exxaro head office was delayed as a result of the Deeds Office closure and transfer only took place post our financial year end. The capital component of the development of Bakers Transport’s Durban facility was also delayed. However, the building is producing income, with the client occupying the building and paying rent in the interim.
Our property funds’ management business is now well established, with GHPH and GIAP being well invested and supported by strong local and international institutional capital providers. We now have R13.7bn of assets under management and with continued growth in this business, it will make a notable contribution to earnings in the future, while simultaneously making use of our existing skillsets and being equity-light.
Growthpoint’s business is run by an excellent team of people who are very engaged and who always go above and beyond to offer clients superior service that will deliver sustainable returns for all stakeholders in the long term. This year, their efforts were extraordinary.
We have integrated processes which prioritise transformation on every level. We performed well in line with most components of our current Transformation Strategy, which comes to an end in December 2020. We are planning the next steps, which will continue to set the course for our transformation agenda, including new objectives and timeframes. This document will be published in due course. We will keep transformation opportunities in mind as we grow our business.
As an innovative business, we keep an eye out for new trends, ideas and applications which can benefit Growthpoint. These include growing our renewable solar energy footprint and applying new technologies that support the efficient functioning of our properties.
We switched over to our new operating system in July 2020, despite many of our staff working remotely. This process-based system should make significant improvements to our operational efficiency in the future. Even at this crucial point in a major project, our IT team was able to ensure that most of the management team and senior staff were working remotely within days of the Covid-19 lockdown being announced, which was impressive.
We actively integrate Corporate Social Responsibility (CSR) into our business and continuously improve our efforts and effectiveness by intentionally driving and supporting various life-changing programmes. We have not deviated from the strategies detailed later in this report.
We have gained a better appreciation of sustainability to the extent that it forms part of the ESG considerations for executive remuneration, and for FY21 this is also included as a KPI for senior management, with clear objectives set. The reporting requirements in the ESG space have escalated, with growing detailed requirements from the various platforms and stakeholders.
Growthpoint’s ESG focus makes commercial sense and will stand us in good stead in the current competitive market and in the future. Our commitment to doing good business and our transparency make us a desirable partner for like-minded, quality businesses. Our renewable resource initiatives, including solar farms and water security projects, support our clients’ efficient functioning as well as our own environmental commitment.
Growthpoint is considered a premier brand and our marketing team remained active in helping our property business with letting and development in the way they presented our products to the market. It plays an important role in our key focus areas of tenant retention and attraction.
Our Covid-19 response in South Africa was multifaceted, but was largely directed towards making a significant contribution to the national and industry response, as well as taking action to reinforce the sustainability of our business.
Our efforts in leading the property industry’s response to Covid-19 were significant and required much time and hard work from Growthpoint senior staff. However, the gains for Growthpoint’s business were substantial and we were pleased to contribute to the benefit of the entire industry, its clients and partners.
THE PROPERTY INDUSTRY (PI) GROUP
Growthpoint played an active role in the industry’s response to Covid-19, which was actioned through the collective efforts of the PI Group and included distinct focus areas affecting our business and our sector peers.
To manage liquidity and financial risks, the PI Group sought permission from the competition authorities to liaise as a collective, which was granted. The objective in doing this was to mitigate against the systemic risk posed by knee-jerk reactions in the market, as well as uncertainty about the property sector’s capitalisation. Banks were persuaded and willing, to approach the situation with a light touch in dealing with their clients on a company-by-company basis. Representing the capital markets (the traditional fair-weather friends of the REIT sector), Association for Savings and Investment South Africa (ASISA) committed to manning its corner and assisted the engagement with institutional bondholders.
The PI Group’s focus on regulatory aspects was interlinked with tax consequences, with both being fundamental to the REIT sector. While some REITs have been able to manage and improve their liquidity, retention of capital is the only option left to many others. The JSE responded quickly but unfortunately National Treasury has been slow. Despite reaching out to Treasury in April, there was still no reply to our requests at the time of writing this report after year end. With our sector under pressure to grant relief to tenants’ businesses and reduce rent collections, we also sought avenues of potential relief for our own businesses. We turned to government to grant assistance at municipal level, for example, but our pleas fell on deaf ears, with only Cape Town, Johannesburg and Stellenbosch offering some reprieve. The crisis highlighted the ongoing, inflated increases in municipal rates and how they are levied.
In response to the Covid-19 lockdown, the retail industry generally went into a rent strike, as was the trend globally. As an industry, we rallied together and set out guidelines for a three-month retail tenant relief and assistance programme. Besides enabling landlords to respond quickly and making negotiations easier, this action also unlocked a tremendous amount of goodwill with many retailers and helped to protect and even improve, good relationships. Through our collective efforts, our industry has played a pivotal and far-reaching role in supporting small businesses across South Africa. This has saved many jobs as well as tenancies. The cumulative impact supports the overall economy and eases some of the pain that our sector faces in future.
While focused on retail, our industry efforts supported work across all three sectors and we unlocked a process of getting through the initial shock of Covid-19 in a structurally sound manner. With businesses in distress and failing, we sought to avoid protracted and expensive legal actions that did not necessarily represent practical answers to the unusual challenges faced. We also worked with retailers to accelerate the opening of shopping centres, and a particular area of success was assisting to significantly expand the government’s definition of essential goods and services.
The final workstream of the PI Group is engaging with the Department of Trade and Industry (dti) to put in place a code for the lockdown period to deal with cases where landlords and tenants cannot come to terms. We have set down codes and principles that are equitable and avoid unreasonable positions and this has been submitted.
The diversity in the property sector, and the impact it has on the lives of every South African, gave us an essential voice at the national discussion table. This response also ensured that the property industry came through the hard lockdown period intact and that it avoided protracted skirmishes with its client base, regulators and capital providers.
OUR BUSINESS AND COVID-19
Liquidity and balance sheet strength was our immediate priority in the face of the Covid-19 pandemic, with the emphasis on long-term sustainability. This affected how we used capital. We reviewed capital expenditure to prioritise projects until the market returns to equilibrium. Growthpoint tested the availability of liquidity and was pleased to find it.
To minimise the risk of spreading the virus within Growthpoint’s operations, we imposed strict measures to protect our employees. Growthpoint’s on-site operational teams rose to the challenge of a difficult situation and did a phenomenal job in re-opening properties in line with government regulations.
We invested extensively in safety and sanitation at our many properties, including the shopping centres across the country which supported essential retail, to safeguard the well-being of millions of South Africans.
With construction sites closed during the hard lockdown, our development team was required to reopen them safely, manage schedules with reduced work capacity and delayed municipal approvals, and reassess the use of any imported materials in the light of port closures.
While under immense operational pressure and in a very unnatural environment, our teams had to process a flood of tenant relief applications, which proved difficult. Despite adversity and driven by a real understanding of how our work was affecting lives, they persevered business mitigated serious disruption of our business operations.
In line with this, Growthpoint granted a total of R277.5m in discounts and R158.8m in deferrals from April to the end of June 2020. We assisted 420 small businesses that are tenants in our properties countrywide.
All Growthpoint suppliers were also paid in full during lockdown, regardless of the capacity of their service, to ensure that they could pay their staff. We further met all our obligations to capital providers and municipalities in this period.
Extending our humanitarian efforts, we continued to support our CSR partners, who are mostly focused on education in previously disadvantaged communities countrywide, to ensure that these charities and initiatives could rise to the new challenges they faced.
Liquidity is our primary focus and will continue to be going forward, together with the ongoing emphasis on letting and tenant retention, and using the full force of excellent client service to support our efforts and our clients.
It is too early to know exactly how the shift in behaviour due to the pandemic will affect our properties, specifically our retail and office assets. However, because we manage our own properties, we have hands-on management on the ground who can quickly recognise and report changes, and this gives us the advantage of being able to act nimbly and adapt quickly. Bringing down our clients’ operational costs with efficiency is an ongoing focus area. Crisis brings opportunity and better relationships have been a significant benefit coming from the pandemic. It has brought us closer to our clients.
At our retail centres, it is going to take some time for all the shops to re-open and trade fully. There is a big drive to help people feel safe enough to come back, and we are working with retailers to achieve this.
The future of offices has become a key topic of debate. We disagree with those who believe they will become irrelevant. There is still demand and there are still deals to be done even in this market. We are receiving requests based on innovative thinking to accommodate social distancing requirements and flexibility, and we are challenging ourselves to find new and creative approaches to meet client needs.
Despite the industrial sector being the darling of the property industry because it escaped some of the immediate negative effects of Covid-19, we expect to see more effects ripple through in FY21. Manufacturing and logistics supply chains are deeply affected by other sectors, specifically retail.
The biggest threats to our business are the very strained economic environment and the soaring rates and taxes charged by municipalities for poor service delivery. We will have to manage our business around economic pressures. Rates and taxes, on the other hand, is an area where the industry will be engaging the government.
Local government has been given unfettered licence to abuse its power and is taking advantage of this. The charges levied by municipalities are high and increasing at an alarming rate. Yet, even charging inflated costs, municipalities are increasingly ineffective and in many cases are failing entirely. This gives us no choice but to step in and provide certain municipal services ourselves, in order to keep our tenants’ businesses operating. Runaway municipal costs without delivery have to stop. It is imperative for our tenants to reduce these costs to sustain their businesses through exceedingly difficult times, just as it is essential for our own business. We will support this by optimising efficiencies at our properties to reduce tenants’ costs, ensuring that tenants are billed accurately and at the correct tariffs for municipal costs, and by putting our weight behind the property industry’s efforts to combat exploitative rates and taxes charges and increases. An industry-wide initiative aimed at correcting the misuse of municipal power and funds has commenced via the SAPOA and in collaboration with the SA REIT Association.
Corporate marketing and communication
Established as a leading brand in the property industry, Growthpoint Properties’ positioning allows us to attract and retain clients while being a valuable platform for solid relationships with our stakeholders.
Our corporate marketing and communications team, which includes events, design, content, brand and project management, as well as digital marketing, is responsible for establishing and increasing positive engagement with the Growthpoint brand on behalf of all our stakeholders.
As the landscape changed significantly over the final quarter of FY20, we had to be agile in adapting to the shift in the business’s overall strategy.
Growthpoint continued to work hard at media relations and management throughout the year. We ensured a steady stream of information and content was made available to the public via our social media channels and press releases.
Most of our events during the year were for the broker community, with brokers being an extremely important channel for our business. We held another in our series of successful Operation Destination trips for those who qualified, this time to New York. The social distancing requirements to stem the Covid-19 pandemic had a significant impact on the number of events we were able to hold during the last quarter. Events and networking opportunities contribute significantly to building our brand and are also vital opportunities to connect with our stakeholders, communities, clients and target markets. Despite these traditional touchpoints disappearing, we were able to adapt by finding new ways to continue to connect with both staff and brokers.
We took the opportunity to survey brokers about our leasing resources and engagement. The survey received an enthusiastic response and has provided valuable, qualitative insights, which will inform our broker communication in the year ahead and reinforce our good relationships.
We garnered a great deal of press coverage for two fantastic achievements – receiving Africa’s first WELL certification for our Exxaro development and Green Star rating for the Cintocare Pretoria Head and Neck Hospital, which is the first for a healthcare facility in the country. Our interim and full-year results media briefings also got extensive coverage over and above ensuring regular, direct engagement between our leadership and these important media stakeholders.
Digital communication remains an essential pillar of our overall strategy. Our social media following continues to increase, with a steady rise in engagements and positive interactions. In preparation for the revamp of our corporate website, which will be a major project in FY21, we reviewed our existing site and sought feedback from internal and external stakeholders to better understand their experience of this pivotal communications platform.
During the pandemic, and specifically the hard lockdown, the marketing department played a critical role in communication with staff, clients and other stakeholders. Our primary goal was to ensure that all relevant parties stayed informed with the most accurate information available. With a large component of Growthpoint employees working remotely, it was critical to keep them feeling connected and keep the Growthpoint spirit alive. We empathised with and tried hard to be sensitive to the needs of our staff and stakeholders, and respond accordingly.
Our values guided us in our internal communication to keep people connected, motivated and aligned with the Growthpoint culture. Within this, we had to be fluid and use new tools – and existing tools in new ways – to foster connection across the business’s divisions and regions.
Marketing was a key contributor to the work of Growthpoint’s Covid-19 task team. The demand for information and communication from our internal and external stakeholders was extraordinary. All company and divisional dispatches were channelled through the marketing team to ensure consistency of messaging and tone. With the way people worked changing, how they consumed information and connected also shifted. We had to adapt our communication formats and channels to reach the intended audiences. Through exploring the ways people have embraced technology, and how the world has digitised, we identified new avenues and opportunities for the Growthpoint brand and see scope for more growth, change and innovation in our communication.
Our senior staff are recognised spokespeople for the property industry and we supported their leadership in the industry-wide response to the impact of Covid-19. It was a privilege to step up and join the collective efforts of the sector by providing the industry with additional distribution channels for their vitally important announcements. We are proud to have played a role in supporting the cutting-edge conversations and communications of the PI Group.
Fortunately, Growthpoint has built a reputation for communicating transparently, clearly and honestly and our stakeholders welcomed the continuation and intensification of this throughout the crisis.
2020 Transformation progress
||June 2018||No B-BBEE deals have been concluded at this stage. We have a slight decline in ownership with 29.02% voting rights in the hands of black people and 17.53% economic interests of black people in Growthpoint||No B-BBEE deals have been concluded at this stage. We have, however, achieved 33.84% voting rights in the hands of black people and 21.06% economic interests of black people in Growthpoint||Growthpoint is exploring opportunities to set up a broadbased structure which can include a staff scheme, current corporate social investment (CSI) initiatives and strategic partners|
|Structure net equity value||
|Disposal of assets to black-owned entities||
||June 2018||Not achieved during the period. There has been no disposal to >50% black-owned entities||Not achieved during the period. There has been no disposal to >50% black-owned entities||11% disposals to >50% black-owned entities|
|Diversify the Growthpoint Properties Board||
||June 2019||Achieved 42.86% black Board members, 14.28% black female Board members||45% black Board members, 21% black female Board members||43% black Board members, 21% black female Board appointe|
|Diversify Executive Directors||
||June 2019||25% black Executive Directors||25% black Executive Directors||25% black Executive Directors|
|Diversify executive management||
||June 2019||Achieved 25% black executive management, 10% black female executives||25% black executive managers, 10% black female executives||20% black executive management, 10% being black female executive management|
|Diversify senior management||
|Diversify middle management||
|Diversify junior management||
|Alignment of skills programmes with business needs||
||June 2018||Achieved 47% of training on B, C, D category||Achieved||A training committee has been established to align our skills development programmes to our business needs|
|Training plan aligned to succession plan||
||June 2018||Achieved 3.08%||Achieved||Achieved|
|Implement a disability learnership programme||
||June 2018||Achieved 0.51%||Achieved||Disability learnership implemented with Sparrow FET College|
|Segmentation of procurement spend||
||Ongoing||66.75% with 45.38% of suppliers on a minimum of level 4 B-BBEE rating||48.47%||96%|
|Continued support and funding of Property Point||
|Annual value of all SED contributions of Growthpoint||