OFFICE

Our premier office portfolio comprises 184 properties valued at R33,0 billion, which includes properties from the Acucap and Sycom portfolios incorporated during FY15

MARKET ENVIRONMENT

Challenging market conditions in recent years have resulted in both sustained vacancies and slowing rental growth in the office sector. The SAPOA Office Vacancy Survey reports overall vacancies of 11.2% at Q1:2015. This is in line with office vacancies during 2014, which ranged between 11.2% and 11.6%. This confirms office vacancies are not improving. Asking rentals across the market achieved growth of 6.0%, which is flat in real terms.

Vacancy levels are closely linked to property grade. P- and A-grade properties reflected vacancies of 6.3% and 9.2% respectively for Q1:2015, according to the SAPOA survey. In contrast, B- and C-grade properties reported vacancies of 13.7% and 15.7%. This supports Growthpoint’s strategy to invest in premium office properties. This trend has also spurred a flurry of office refurbishments in the market, to improve asset quality.

Development remains robust at 4.5% of the existing supply. The pre-let portion of developments in the sector has been steadily increasing and stands at 69% overall, reflecting caution among financiers and developers. Importantly, most activity is taking place in Sandton.

The Sandton node still dominates the supply of top-end space in the country, with 45% of the P-grade market, and 10% of the A-grade market. Although 80% of development in Sandton is pre-let, tenants moving into these new buildings will vacate their existing premises, leaving gaps that exacerbate vacancies in older properties.

The cost of occupancy for office tenants continues to rise given the ever-increasing cost of electricity and assessment rates. This places pressure on rentals and results in highly competitive leasing drives.

INTEGRATION OF ACUCAP AND SYCOM PORTFOLIOS

The office component of the Acucap and Sycom portfolios, acquired by Growthpoint during 2015, comprises 26 properties, introducing a further
321 593m² of lettable space to our portfolio, with a value of R6,8 billion at FY15. They have had a positive impact on the vacancy levels in the office portfolio as a whole, and their management teams are being integrated into our office division.

PERFORMANCE

Growthpoint’s office portfolio upheld performance, increasing year-on-year net property income on a like-for-like basis by 5.6% to R1,2 billion. For the total portfolio, we increased net property income by 33.5% to R2,1 billion, of which R129,6 million was contributed by the newly acquired Acucap and Sycom properties.

Growthpoint’s office portfolio won the 2015 IPD Direct Property Investment Award for the highest annualised direct property total return on capital employed over three years to 31 December 2014, measured by leading provider of research-based indexes and analytics worldwide, MSCI. The Growthpoint office portfolio delivered a 16.7% total return over the three years, outperforming the IPD office benchmark of 13.0%.

Gross rental per square metre has increased since 2006 as follows:

Year	Gross rental/m² R		Increase %
2006 – 2007	67
2007 – 2008	79		17.9
2008 – 2009	92		16.5
2009 – 2010	103		12.0
2010 – 2011	109		5.8
2011 – 2012	115		5.5
2012 – 2013	123		7.0
2013 – 2014	132		7.3
2014 – 2015	142		7.6

Through proactive cost control we reduced our property expense-to-income ratio slightly from 23.8% in FY14 to 23.1% in FY15 despite significant increases in assessment rates and utilities. We make every effort to reduce property expenses on vacant offices, but it isn’t always possible to keep expense ratios at the levels achieved in times of full occupancy.

Our increased portfolio GLA totalled 1 790 428m² by the end of FY15 and, despite its significant growth in size, our vacancy level was maintained at 8.0%. Our renewal success rate was impacted by difficult market conditions. At 62.0% it was 1% lower than the prior year. Growth in renewal rental has dropped slightly during the year, from 1.6% to 1.5%, with our focus being firmly on retaining clients.

Arrears for the portfolio excluding the Acucap acquisition were on par with the arrears recorded at FY14, a low 3.5% of collectables. The difficult economic climate is putting clients’ ability to pay under pressure but we are confident, with our proactive credit control strategies, our arrears will be well controlled.

During the year we sold nine properties which no longer met our investment criteria. Proceeds from these disposals totalled R430,5 million, achieving a capital profit of R136,5 million. This was used to invest in new developments and acquisitions. We have entered into agreements to sell further property for R469,3 million.

We acquired property in Wierda Valley and signed an acquisition agreement for a further property in the same area. This furthers our strategy to increase our holdings in the area adjacent to the Discovery Development.

ENVIRONMENTAL COMMITMENT With our game-changing approach to doing business we are crafting an office portfolio that is a growing example of sustainable development and operations. Our Sustainability Strategic Framework incorporates five strands. 1. Utilities management   Better utility efficiency can only be achieved if consumption is accurately metered. Growthpoint has partnered with Remote Monitoring Solutions to ensure precise billing and metering. RMS has also developed an online tool that helps Growthpoint to forecast and budget for utilities. 2. Consumption efficiency   The uptake of the Growthpoint Green Addendum to leases has been successful and signed by over 80% of our office clients. This addendum has allowed Growthpoint to record savings on utility bills from our various green initiatives. These savings are then split equally between Growthpoint and our clients. The utility savings we have achieved are mainly the result of our light-fitting roll-out project. We’re examining several other green initiatives. GBCSA has developed the Energy and Water Performance rating tool, sponsored by Growthpoint and Eskom, to benchmark existing buildings’ performance. Growthpoint has assessed all of its office buildings using this tool. This analysis allows our sustainability team to set up various sustainable strategies to ensure increased efficiency, and better building performance. 3. Renewable energy   To ensure future energy security, contribute to the mitigation of our clients’ carbon tax risks, and meet their growing demand for sustainable space, we are exploring several alternative clean energy sources. These include solar gas to energy and waste to energy. 4. Sustainable development   Growthpoint is recognised for our growing portfolio of award-winning green-rated buildings. So far, we have achieved Green Star SA ratings for over 20 of our office buildings, with more in the pipeline. We target a minimum 4-Star Green Star SA rating for all new office developments. 5. Strategic projects   The strategic project focus area usually takes a more holistic approach over all sectors and is discussed in more detail in the Key Matters section – Environmental Considerations.

OFFICE VALUE BY TYPE		OFFICE GLA BY BUILDING GRADE

Reducing electricity consumption in our office buildings	We strive for long-term leases. Our weighted average term to lease expiry is 4.2 years, with an average in-force escalation of 7.7%
	PROSPECTS We expect continued challenging market conditions for the office sector in the coming year but are confident that, with our prime portfolio located across sought-after nodes, we are well positioned to take advantage of any increase in demand for office space. Our focus remains tenant retention and reducing vacancies and we have a number of innovative strategies to keep our vacancies below the SAPOA benchmark. These include:
Average electricity consumption for a selected sample of 41 office buildings.

Key performance areas

	FY15		FY14		Increase/ (decrease)
Gross property revenue (R’million)	2 758		2 086		672
Property expenses (R’million)	(636)		(496)		140
Net property income (R’million)	2 122		1 590		532
Property expense ratio (%)	23.1		23.8		(0.7)
Vacancies (%)	8.0		8.0		–
Arrears (R’million)	18,8		10,5		8,3
Bad debt provision (R’million)	7,4		4,1		3,3
Average gross rental (R per m2/month)	142		132		10
Forward yield (%)	8.4		8.3		0.1
Average in-force escalation (%)	7.7		8.3		(0.9)
Weighted average lease period (years)	4.2		4.2		–
Asset value (R’billion)	33,0		24,3		8,7
Number of properties	184		165		19
GLA (m2)	1 790 428		1 460 741		329 687
Value (excluding bulk) per m2 (R)	17 562		16 257		1 305
Capital expenditure (R’million)	1 003		543		460

Driven by demand and opportunity, we also acquire premium sites and develop innovative, operationally efficient and cost effective sustainable buildings for blue-chip companies

•	The Growthpoint Smartmove Campaign, which offers incentives of up to a year’s rental to tenants taking up space in specific buildings which have long-standing vacancies. This initiative has been hugely successful in particular nodes
•	Our newly initiated maintenance service desk, which seeks to enhance the quality and turnaround time of our maintenance teams
•	Our focus on sustainable buildings, as described earlier
•	The Undeposit, which allows prospective tenants to pay a one-off fee rather than putting down a deposit for their premises. This releases capital that can be better spent in client’s businesses.

Top 10 office tenants Top

	Tenant	GLA* m2		% of total office GLA
1	Investec Bank Limited	85 134		5.2
2	Deloitte (South Africa)	51 202		3.1
3	Transnet Limited	31 535		1.9
4	ABSA Bank Limited	27 516		1.7
5	Netcare Hospitals Proprietary Limited	17 867		1.1
6	Business Connexion Proprietary Limited	36 093		2.2
7	EOH Mthombo Proprietary Limited	26 906		1.6
8	Mobile Telephone Networks Proprietary Limited	20 281		1.2
9	Anglogold Ashanti Limited	19 381		1.2
10	Hatch Goba Proprietary Limited	20 167		1.2
Total of Top 10		336 082		20.4

* Ranked in terms of gross monthly rental.

Top 10 office properties by value

	Property name		Location	Value Rm		% of total office portfolio		GLA* m2		% of total office GLA
1	The Woodlands Office Park		Woodmead	2 609		7.9		114 396		6.4
2	Investec		Sandton	2 338		7.1		70 945		4.0
3	Constantia Office Park		Roodepoort	1 023		3.1		72 420		4.0
4	The Place		Sandton	1 001		3.0		34 077		1.9
5	Inanda Greens		Sandton	890		2.7		40 760		2.3
6	Harrowdene Office Park		Woodmead	791		2.4		42 082		2.4
7	Growthpoint Business Park		Midrand	598		1.8		70 201		3.9
8	Tygerberg Park		Cape Town	580		1.8		28 726		1.6
9	MontClare Place		Cape Town	551		1.7		29 446		1.6
10	Turbine Hall and Square		Johannesburg	487		1.5		22 796		1.3
Total of Top 10				10 868		33.0		525 849		29.4

OFFICE PROPERTIES TOP 10 BY VALUE

1 790 428m2 total GLA

R2,8 billion total revenue

Our properties are in prime office nodes across South Africa’s major metropolitan areas. Our clients are mostly blue-chip businesses. Over 80% of our properties are P- or A-grade, making a high-quality portfolio

THE WOODLANDS OFFICE PARK WOODMEAD This office park, valued at R2,6 billion, consists of a number of buildings totalling 114 396m2 of commercial office space. The buildings are situated in a low density, game park environment with free roaming blesbok, impala, springbok, other smaller animals and bird life. The Woodlands boasts amenities such as a restaurant, a gym, a nursery school, hairdresser and dry cleaner. The park is on a Gautrain Shuttle route and is known in the area for hosting the park run.
INVESTEC SANDTON This iconic P-grade office building of 70 945m2 is a landmark at the gateway to the central Sandton banking hub. It is valued at R2,3 billion and is fully let to a single tenant, Investec, on a long-term lease.
CONSTANTIA OFFICE PARK ROODEPOORT With a superb location benefiting from excellent N1 highway visibility and accessibility, together with amenities including a Virgin Active Gym, Spur family restaurant and a Protea Express Hotel, it offers a combination of A- and B-grade office space to 90 tenants, set in a lush park environment. The 72 420m2 office park is valued at R1,0 billion and is 88% let to major tenants like MTN, Afrisam and Primedia.
THE PLACE SANDTON Situated at Sandton’s premier address, The Place comprises P-grade office space across 34 077m2. It is valued at R1,0 billion and is 90% let to major tenants, which include AON, Macquarie Africa and Growthpoint.

INANDA GREENS SANDTON This A-grade office park has 10 buildings totalling 40 760m2 valued at R890 million. It is 90% let and has 24 tenants including Fasken Martineau, Advtech and FNB.
HARROWDENE OFFICE PARK WOODMEAD This office park has 42 082m2 of commercial offices situated in landscaped gardens, and is valued at R791 million. This park is located close to the M1/Woodmead drive off ramp and is next to and integrated with The Woodlands Office Park. Harrowdene enjoys the shared amenities with The Woodlands and is also on the Gautrain Shuttle route.
GROWTHPOINT BUSINESS PARK MIDRAND This mixed-use office park is well-located and enjoys N1 highway visibility with easy access from the Allandale Road interchange. Valued at R598 million, it offers 70 201m2 of A- and B-grade office space to 28 tenants, including Continuity SA, Nashua Communications, Fresenius Kabi SA and Nike. It is 96% let.
TYGERBERG PARK CAPE TOWN This 28 726m2 office park is valued at R580 million. It is located in Plattekloof, Cape Town and has good views across the peninsula towards Table Mountain. Its proximity to the N1 enables efficient accessibility to all other major commercial nodes in Cape Town. This park is particularly convenient in respect of the residential suburbs of Plattekloof, Durbanville, Bellville, Parow, Edgemead and Panorama.
MONTCLARE PLACE CAPE TOWN This mixed use development, integrating retail, a gym and A-grade offices, totalling 29 446m2 is valued at R551 million and is fully let. It has 21 tenants including Pick n Pay Retailers, Coronation Asset Management and Kagiso Asset Management.
TURBINE HALL AND SQUARE JOHANNESBURG Fully let to three tenants, including Anglogold Ashanti and The Forum, this property comprises 22 796m2 of business space. Valued at R487 million, the building is an iconic part of Johannesburg’s history and skyline. It was originally a power station for the city in the 1920s.