Texton Property Fund, which is chaired by trade-unionist-turned-businessman Marcel Golding, is feeling the pains of its older office asset base, with vacancies in its core South African portfolio more than doubling in its year to June.
The JSE-listed group, which reported its annual results on Friday, said vacancies in its core SA portfolio increased to 22.3% from 10.5%, primarily driven by the non-renewal of a lease by Transnet Ports Authority and other "single-tenanted buildings consolidating and reducing their office space".
The company also said that over the year it had been "unable to replace office tenants at the same rate at which our offices became vacant".
"The office market has changed remarkably, and our vacant offices need to be repurposed and repositioned before we are able to re-let the space in the current market."
The delay in replacing tenants as well as the sale of its UK direct property assets had resulted in earnings coming under pressure, Texton said, with distributable income slumping 44.2% to 27.40c per share to end-June.
Referring specifically to Transnet Port Authority not renewing its lease, Luqman Hamid, a portfolio manager at Ninety One, said that even if Transnet had decided to sign another agreement, it would have been at a much lower rental as the existing lease’s annual escalations would have far exceeded the average market rental growth in a weak office market.
At the same time he said Texton had an "older, lower-quality spectrum of offices" in its portfolio, which were the properties feeling "the most pain" in the South African market, said Hamid.
The office sector’s vacancy challenges follow both a trend towards more working-from-home, which gained momentum during the height of the pandemic, as well as oversupply in the market that existed even before Covid-19 arrived, stemming from rampant speculative development. A barely growing economy has also compounded the office market’s woes, with few new businesses starting up or expanding in an environment of rising interest rates and economic uncertainty.
READ| It will take years to restore the health of Sandton offices - Growthpoint SA CEO
Nevertheless Texton, which has a direct held property portfolio value of R2.6 billion, declared a total dividend of 17c, although this was less than half of the 37.47c in the previous financial year.
Overall rental collections in SA "remained at a healthy" 97%, while collections in its UK portfolio were sitting at 100%.
Green shoots for premium offices
The latest vacancy survey released last week by commercial property association South African Property Owners' Association (Sapoa), showed that while there were green shoots showing in new P (premium) and A-grade office segments, vacancies in older so-called B-grade offices were still increasing.
The Sapoa Office Vacancy Survey reported that during the third quarter of 2022, SA’s office vacancy rate improved slightly after peaking at a new high in the quarter before. The vacancy rate at quarter end was now 16.4%, down 30 basis points quarter-on-quarter.
The survey, whose sample comprised 3 065 office properties across 52 nodes and 18.9 million square metres of gross lettable area, showed that "in line with the overall improvement in the office vacancy rate, there was positive net take- up across all property grades with the exception of B-grade which saw a marginal 20bp deterioration".
Prime offices saw the largest improvement, increasing 120 basis points to 12% as "occupiers flight to quality is seemingly gaining momentum as the price differential between P and A-grade offices closed over the last few years".