More funding options for developers

2012-09-02 16:30

Johannesburg – Property developments worth billions will spring up countrywide over the next couple of years, thanks to favourable funding conditions.

These days listed property companies are less dependent on bank finance and can use alternative sources, such as the capital market, to obtain finance for expanding and overhauling their portfolio.

In the current economic climate the issuing of corporate bonds is certainly cheaper than bank finance.

Growthpoint, the country’s biggest listed property company, achieves great success through the issue of short- and long-term bonds, which are strongly supported by investors.

In the year to end-June it expanded its bond programme by R1.5bn, increasing its unsecured debt to 39% of its South African debt.

Chief executive Norbert Sasse says that in the past year Growthpoint was more active on the development side than on the acquisition side, because South African property is expensive compared with the cost of finance.

He says a property can be bought for a revenue return of about 8%, while a new development can produce income of 9% or 10%. He says the gap has widened with the run in listed unit prices and last month’s 0.5 percentage point cut in interest rates.

In the year to end-June Growthpoint’s unit price rose from R18.31 to R23. It has since climbed to a high of R26.99 per linked unit on August 29.

The company has a R1.6bn development plan which largely focuses on areas in the vicinity of Gautrain stations. “That’s where we see big demand for office space,” he says.

This includes a green office development with 6 700m² of space across from the Gautrain station in Midrand, where the biggest tenant will be the Gautrain management company.

It will form part of Grand Central Office Park, together with Growthpoint’s adjoining building, which houses pharmaceutical group Sanofi. The Gautrain Management Agency, a provincial legal entity, will take up 2 500m² of this office space.

Development costs run to R105m and the anticipated completion date is the end of May next year.

Growthpoint also has a development site in Rosebank with rights for 35 000m² of office space. Sasse says the development will be tenant-driven and the estimated cost of development is around R700m.

Through its subsidiary, Growthpoint Properties Australia (Goz), in which it has a 64.5% stake, the company has for the past year been busy with developments in Australia.

Sasse says that unlike in South Africa capital markets Down Under are inadequate and private developers are struggling to get finance from banks. Growthpoint can supply finance to developers and thus acquire the properties.

Such developments include the Energex building in Brisbane and the Fox Sport building in Sydney.

Although there is no shortage of tenants in Australia, they also provide tenant guarantees.

Anton de Goede, property portfolio manager at Coronation, says it's important for a large proportion of new office space to be let ahead of time because tenant demand is still on a knife’s edge.

He says according to the latest office vacancy report by the SA Property Owners Association (Sapoa), 649 970m² of office space was under construction in the second quarter. That’s 4.3% of the 15m-odd square metres of total office space in the large metropolitan areas countrywide.

Although this is 4 000m² less than in the previous quarter, unlet space remained relatively constant at between 52% and 53%, says De Goede.

“Port Elizabeth is the metropolitan area with the largest proportion (21.3%) of office space under construction.”

Almost 70% of the development space is concentrated in seven of 49 nodes, namely Sandton, Rosebank, Cape Town city centre, Centurion, Menlyn, the eastern suburbs of Pretoria and Umhlanga, he says.

- Sake24

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