V&A Waterfront (V&A)
We made exceptional advances in growing tourist-related business as South Africa will remain an attraction for international tourists with the phenomenal value that it offers as a destination.
Bucking the negative economic trend prevailing across South Africa by strategically optimising its international tourism appeal, the V&A performed exceptionally well until March 2020, when the Covid-19 pandemic first reached South Africa and a strict lockdown was implemented to slow the spread of the virus.
At the end of February, the precinct was on track to achieve the 9% growth EBIT forecast for the financial year to end-March 2020. Indeed, it was looking at exceptional office performance, anticipated retail growth of 6%, a solid showing from marine industrial, its best occupancy levels yet for residential-to-let and excellent year-on-year occupancy growth from hotels, particularly the Radisson RED. Unfortunately, this picture changed rapidly in March, when performance plummeted.
With local and international tourism suspended, a high proportion of entertainment shut down, and shopping activity mostly confined to consumers' immediate neighbourhoods, the V&A took a triple hit as the initial level-5 lockdown began.
Fortunately, however, the office component remained strong. Offices comprise about 27% of the V&A portfolio by revenue and this sector was least impacted by the lockdown. It was defined by keen tenant interest and low vacancies and delivered a robust performance to close the year 8% up from the previous year.
The marine industrial segment also remained healthy. Our fishing and marine tenants were broadly deemed as "essential service providers" and continued to operate during lockdown.
The Cruise Terminal, which had been on an exponential growth trajectory, saw this drop off drastically in March. The decline was, however, somewhat offset by parked ships, additional calls to repatriate South African crews and berthed superyachts in the marina.
The V&A team has made exceptional advances in growing tourist-related business over the past year. We knew that the South African economy was challenging but realised that our international tourism strength could be leveraged to circumvent the local economic weakness. Unlocking the anticipated increase in cruise-liner traffic is one of the ways we saw to build on the V&A attractiveness as a food and experiential shopping destination and we have made excellent progress in this focus area. We also believe this is still a valid strategy, despite the results being delayed by the tourism ban.
Hotel occupancy growth of 8% during the first 11 months of the financial year ending March 2020 also helped to drive strong retail performance in the precinct, but this was also cut off by the lockdown, along with the buzz and activity which characterises the V&A. On a positive note, the Radisson RED has since attracted a 24/7 international insurance call centre to run from the hotel. Almost 100 multilingual, skilled people have moved in and will live and work there for several months. By applying this kind of agile thinking, the V&A team is also finding ways to repurpose currently unused spaces to solve client problems. One example is to convert events spaces to help businesses meet social distancing guidelines by spreading out their staff.
Retail sales were 36% down in the month of March, reducing growth for the 12 months to end-March from 6% to 3%. During the mid-March peak tourist season, which usually sees about 80 000 people coming through the precinct daily, the count dropped to 3 500 people daily after the lockdown started. While grocery retailers and pharmacies could trade in essential goods, their sales for March were still 60% lower year on year.
From 1 June 2020, when lockdown was lifted to alert level-2, the V&A started to see visitor numbers rise again to between 15 000 and 20 000 a week. Restaurants and takeaway outlets will be instrumental in bringing back more people. The precinct has some 80 such operations, of which about 10% opened for takeaways. We are looking at restaurants in two categories: those whose market is mainly local and those whose customers are tourists. Where restaurants have a predominantly local customer base, we provided rental relief in April and May and will phase out this relief from the time that restaurants re-open.
In terms of clothing retailers, we are acting in line with the PI Group's guidelines for the larger national retailers, and have given full rental relief to the SMMEs and markets which had no capacity to absorb the shock. For medium-sized businesses, we have given appropriate relief based on the extent to which they are dependent upon international tourism.
The emerging upswing in the development cycle has stalled and a few of our potential deals have fallen away. We have reassessed all our development plans and have put some on ice until we have a better understanding of the post-pandemic market. These include our helipad improvement project and the refurbishment and relaunch of the 25-year-old Table Bay Hotel. We believe that the current lease on the hotel can be extended for the immediate term.
Our development for Deloitte remains on track, however, and is due to welcome the tenant in November. The development of the new head office for Investec Bank should also commence later this calendar year, with Investec occupying some 6 500m2 of the building and some 2 500m2 being speculative office space.
At the Cruise Terminal, the opening of the new food emporium has been delayed until December 2020 or January 2021. We believe it will open as local customers become more comfortable with the new requirements for eating out and socialising as its design provides generous space for social distancing.
We also remain committed to building a desalination plant for the V&A and have approved the project, but the timing of this development is being reviewed. The plant will take the precinct off the city's water grid, which will be a strategic advantage.
Even amid the current uncertainty, we are also intensifying work on the master development plan for Granger Bay. Catalytic development projects like this will be essential to ensure South Africa's successful emergence from the Covid-19 crisis and to help government rebuild the country's economy.
The V&A's far-reaching waste management and recycling practices have earned its popular Victoria Wharf Shopping Centre the prestigious 5-Star Green Performance rating for existing buildings from the GBCSA. This is the highest rating of any shopping centre in South Africa.
The V&A has also achieved Diamond Status under the Heritage Environmental Management Classification, with its focus on sustainability helping to elevate it from its previous Platinum classification. The re-roofing of the Victoria Wharf is a significant investment which will enable increased solar-power generation at the waterfront.
In its effort to divert waste from landfill, the V&A team is also exploring pyrolysis, where heat is used to incinerate wet waste and, in turn, generate electricity.
The application for an alternative exit route from the precinct through Duncan Road has not yet come to fruition. We are still optimistic that it will be accepted. When it is completed it will help alleviate traffic congestion in the city. We are also exploring a range of additional congestion-easing measures including ride sharing and park-and-ride.
Covid-19 impact – staff and society
All jobs were sustained and salaries maintained in the V&A 1 000-strong team of directly employed and outsourced staff. Outsourced contractor numbers were also upheld. As a substantial and well-managed business, the V&A has the wherewithal to endure shocks and we are confident business will return to some degree of normality in the medium term. We are committed to acting responsibly and ethically.
To protect and shield our staff, much effort has gone into setting up remote-working capabilities, enabled by our robust IT system. The remaining team members have been on site to keep the precinct operating safely and they have worked in two separate groups to ensure continuity.
To protect the most vulnerable of our tenants, we have given 100 percent rent relief to almost 300 food market and Watershed traders. We are also working with them on training and development while helping them to establish what aid is available to them and providing them with the resources to apply for this assistance.
We have harnessed the waterfront neighbourhood and network to make a difference by feeding the hungry and have increased our support for the most vulnerable. We recognised that food was the most urgent need for many at the start of the lockdown and immediately diverted CSR spend to support the local shelters for adults and street children.
In parallel, we are working on food relief with the NGO Ladles of Love, using the kitchens of our hotels and restaurants, sourcing and sometimes funding produce from local suppliers, and cooking soups, stews and other hot food for people in need.
The 180 buskers who usually perform at the V&A Waterfront also lost their income with the lockdown and we are paying them a support stipend to enable them to feed their families until they can come back.
Our team has not missed a beat. They have risen to the challenge of good communication with tenants and staff. We are focused on doing the right thing and acting ethically so that our business, people, partners and communities can all survive this crisis and emerge stronger.
For its financial year to end March 2021, the V&A has revised its budget and anticipates a 25% to 40% decrease from its previous earnings expectations, which will take growth back about four years. At this stage, however, very little is really known about the timing of the return of international tourists and how deeply the recession will hit the local market.
After eight years of good growth, the challenge now is to manage in an environment where growth is tough to come by, especially with more business failures inevitable.
It is too early to talk about the "new normal", and it remains anyone's guess what the year ahead will be like, although it definitely will not be easy.
The precinct will re-open to a depressed consumer. Some restaurants will probably be mothballed until November with a nominal retaining rent applicable. Having fewer restaurants trading at the V&A will support the trade of the restaurants that are open.
We expect substantial drag from the hotel segment. We were assisting hotels with rental deferrals but there is no doubt we are going to have to share their pain – rental discounts are inevitable. The mothballing of some hotels is also a possibility. We understand that it is not viable for those businesses that are almost entirely dependent on international tourism to open without customers. However, we think some might open and re-focus on the local market.
International tourism is vital for the V&A. Our team is working closely with major tourism bodies and lobbying to encourage travel to South Africa by making it easier, adopting common standards, building suitable air bridges and making it safer. We believe that when people feel safe they will travel, and we hope international travel will open up to some extent by the end of the year. With the phenomenal value that it offers as a destination, South Africa will remain an attraction for international tourists.
V&A top 10 tenants by gross monthly rental (100%)
|1||Allan Gray (Pty) Ltd||20 357|
|2||Nedbank Group Limited||25 433|
|3||Legacy Hotels||16 226|
|4||Tourvest Holdings Limited||4 530|
|5||The Foschini Group Limited||4 409|
|7||Department of Public Works||17 323|
|9||Edcon Holdings Limited||6 550|
|10||Sun International Hotels||17 100|
|Balance of V&A||316 099|
Total for the V&A (excluding vacancies)