Yeah, goes good.
You've been muted. To unmute yourself, press star six. This meeting is being recorded and/or transcribed.
I'm calling with Joanne and myself and the Growthpoint management team for this evening so that everyone has kind of gone through all the reading materials with good detail since this morning. I'm not going to hold the evening up. We can kind of jump straight into questions, but just to be very clear, use the chat function on the side of the screen to type in your question, and I'll just read it verbatim to the management team for them to answer. Or alternatively, you can put your camera on like Evan and then ask a question and go straight ahead. You can keep things off, right? I mean.
You don't want to see me?
Yeah, that's.
You prefer to see me, Evan.
Yeah.
Regret you're on your [drawings].
Evan, if you'd like to kick things off, if you have some questions, you can go ahead.
I'm good, thanks. Go ahead. Go ahead.
Okay, cool. So just jumping straight to the sort of view on FY 2025 and FY 2026. I mean, I know there's no guidance for that yet, but I'd like to get into the idea of the finance cost expectations and maybe changes there. So this year, for FY 2025, there are a couple of foreign swaps that are going to be expiring. So I was trying to get a sense of what increases on the cost of debt can we expect there. So sort of the first part and the second bit is the bulk of those swaps going to take place in the first half or the second half of FY 2025? So get an idea of what to expect for the next two years.
I t's Norbert. I know that [Asha's] in the room in a sense. I mean, at a maybe at a very high level, I can just comment on the fact that I think looking forward into FY 2025, we undoubtedly do still see upward pressure on funding costs, not only in South Africa and the South African business, but I guess in particular as it relates to the cross-currency interest rate swap refinancing. Obviously, there's an expectation now in South Africa that interest rates will come down. In some of the latest numbers we've been looking at is some up to 125-odd basis point drop over the next 12 - 18 months. Clearly, that we see as being positive on the unhedged portion of our book.
But again, it will be very important as to the timing of those decreases to the extent they're only coming in after December. The impact's obviously dramatically reduced if it's only 25 or 50 basis points for half a year. So we look forward to that interest rate drop cycle commencing, and we should see some upside and benefit from that coming through. In relation to existing swaps rolling up and whether we rehedge those, I guess there's a whole plethora of them. I'd say [Asha] might give a bit more color, but it's fair to say that there will be some swaps that we could probably renew at fairly similar levels to where they're expiring at.
We do, however, also have a couple of older swaps that were, let's call it, entered into at lower rates where there will still be some increases as we put new swaps in place. The big thing or the noise is the CCIRS. There's in the order of ZAR 3.5 billion worth of CCIRSs that need to be refinanced, and there's a big delta there. The current cost is 1%-odd % on those, and it's probably going to be at a 4%-odd %. Exact timing, I don't know. [Asha] if you've got some of that color that you could maybe just add to the question.
Thanks, Norbert. I can. So I mean, quite correct. It's split between from a debt interest rate hedging perspective, like Norbert says, those pretty much mature through the year. So I think there's a consistent mix throughout the year. And those we don't anticipate, depending on where the swap rates end up being over the next financial year. Hopefully, those are not too far away from where we can potentially rehedge. Like Norbert says, the cross-currency interest rate swaps, specifically on the AUDs, those we really match in terms of when the dividends are received from Growthpoint Australia. So those are twice a year. So half of them will be around September, August, or August, September, and about the other half around March of next year. Those were, not to mention the number. We showed it in our interim results presentation.
They expire at about an average rate of about 1.18. We know that the Australian rates haven't really come down over the last couple of months. That's where we really see European interest rates. Those have started coming down a little bit, but we've only got one hedge that matures in FY 2025 years. Not too much kind of noise coming from a European perspective, but it's mostly from the AUD perspective.
Yes, that's definitely going to take some impact as well.
Sorry, it's Norbert here again. If I could just add, also, one needs to look through to some of the underlying investments. Fair to say that there was a very significant refinance within Globalworth in May, June, with that bond exchange that took place. And the high, I mean, that was refinanced at 6.25%, where the expiry rate was 3%. So that will impact, let's call it, the distributable income, I guess, that one could expect from Globalworth. And then Aussie printed pretty nasty-looking inflation number yesterday, I think, had a four handle on it, where the market was expecting it to come down and be in the low 3s.
So I do think there's quite a lot of noise in the system in Aussie around potentially an interest rate increase rather than decreases, which we're seeing within the euro environment. We've seen the first drop. UK was put on hold earlier this week. So there's generally still, let's call it, upward pressure in relation to funding costs.
And then I don't think I've mentioned there needs to be any sort of top-up as well for the renewal of those Aussie dollar cross-currency swaps.
There will be Australian dollar ones. There will be some top-up.
There's an idea of a quantum?
I haven't got that number for the next year or for the next financial year.
Okay, understood. It does seem as though there'll be an impact for just 2025 and 2026 just for the finance cost as well.
Correct.
Yeah. We can move on to some deal activity, right? I mean, there's been a bit of noise around Capital & Regional and the interest from NewRiver REIT. Can you give us a sense as to how you guys are thinking about the Capital & Regional investments right now and maybe what the future or outlook for that is?
Yeah. I t's difficult to answer that one. We're in the realm of a public company with U.K. panel rules, very prevalent and very limiting and restrictive on what we can say. And in a sense, I guess we've been quite deliberately vague in our announcement, in the SENS announcement, which just refers investors to the comments from CNR, or the announcement that CNR have put out. I think it's fair to say that the U.K. economy is also struggling. It's really hard and difficult to find growth and growth opportunities. And the strategy, I guess, from our side is to look to optimize these offshore investments of ours.
I guess, depending on the outcome of discussions with the interested parties at the moment and other interested parties, we would be making a decision on whether we potentially consider disposing of that interest if the level of pricing isn't appropriate and clearly we would not sell sort of at any cost or at any price. It would need to make sense for it would need to make sense for us.
Okay. Excellent. Just a reminder to all the listeners, of course, you guys can still send in a question there on the chat, and also feel free to raise your hand, and you'll give me the microphone to speak. Just touching on now, the operations. It does seem as though things are moving in the right direction as we're seeing a decrease in your overseas vacancy rates, and a little bit of spend coming through here. But something that we've just picked up on, and not necessarily just for Growthpoint, right, because it's still prevalent, is that we've seen office reversions are a lot more steep since lockdown, of course. That's because of the slightly longer tails there. It does seem as though that very negative reversionary cycle is dragging on for a bit longer than maybe we first expected.
Can you give us a sense for maybe how much longer you still expect to see very high office vacancies before things abate?
Yeah. I'll give that a crack. Sure. Thank you very much. Yes, so obviously, the office market, I think generally we're feeling a little bit more positive on the sector. Sorry about that. I think I've just gone off mute. Thanks, man. Sorry about that. So we are feeling a little bit more positive on it. I mean, the transaction volumes have picked up quite significantly. And I think just big picture, you have to separate our coastal investments from the Gauteng investments. So for a starter, if we look at the Natal area, we are seeing quite a reasonable market there. In fact, all our properties are predominantly full, and the pricing power is moving towards the landlord in those markets. The reality is it's still a reasonably competitive market, and to try and drive the rentals excessively, it isn't really in that space yet.
But we are starting to see the negative reversions in those markets, specifically Cape Town and Durban, or in Umhlanga, specifically in our case, improve quite significantly. So that's, I don't know, about a third or 30% of the portfolio. The balance is in Gauteng, and in Gauteng, we have a scenario that specifically Sandton, where we have 360,000-odd sq m of office space. We had a very, very high vacancy factor at one stage, and the teams we've got dedicated teams. I know that a lot of folks believe that we sit back and watch the properties and hope they fix themselves, but every portfolio has a very, very dedicated team, dedicated asset management, and the guys are trying to solve every problem at property use-by-use sort of level. And we have done over just short of 115,000 sq m of letting.
In Sandton, we've done close to 40,000 square meters of letting. We've brought down those vacancies quite considerably. But given the, let's call it, competitive market and the oversupply still in Sandton, the market is pretty competitive, and you are still seeing negative reversions. And one has to probably contextualize that many of the leases that if you're in a renewal cycle, those leases have been in place for three to five years just on average, and they're escalating at roughly 7.5%. So if you come to a renewal, we are still seeing a reversion because of the fact that they're escalating at that level, where the market, given the dynamic that you have in Sandton specifically, isn't seeing that growth rate.
But I think overall, the one other positive thing if we have to think about offers is that there's very little new development, and there has been some of the stock that is coming out of the market through two ways. One is alternative use, and then the other through effectively redundancy. So there are office buildings in the market that really aren't fit for purpose anymore and don't really come onto the prospective tenants' radar. And then there's properties that have been taken out of the market. So that does help a little bit. And then in new development, the costs of developing new quality office has gone up by more than 50%.
So that means if you're looking at rental levels, you're probably in and around ZAR 260-ZAR 320 as a range for a new office space, whereas in the markets that we're operating in now, those rentals are significantly below that. And we're starting to see some tenants that historically would have just committed to the coast, they're actually starting to look at Sandton specifically, and we've done a few really nice deals in the BPO market because the cost of rentals relative now to the coast is quite materially different, and we've been able to attract on it too regards to that market. I hope that answers sort of broadly the question. In terms of timing of that negative reversion, it's quite difficult for me to really be able to crystal ball that one.
So it doesn't look industrial and retail, we can sort of say we're very close to actually starting to see positive reversions, but the office, I think in the Gauteng area, certainly, I think we've still got a little bit of time to go there.
And I'll just add into that on the timing. I think one needs to look at, there's a very strong correlation clearly between vacancies and these reversions. And if you look at the trajectory of the vacancies in the industrial portfolio and the retail portfolio, they have come down quite nicely as have the reversions. So we're hopeful that those negative reversions in retail and industrial can come to an end. But with office vacancies both nationally and within our portfolio still being in double-digit, even middle double-digit, I don't know, let's call it 15% as our number, it's very difficult to believe that you're going to be turning around into positive reversions anytime soon. To my mind, you need to get that vacancy factor to below, certainly below 10% into the mid single-digit kind of numbers before the pricing power reverts back to the landlord.
Yeah. Thank you.
That was my thinking, right, that your sort of mid-teen reversions were kind of linked to sort of post-COVID environments where office has taken a hit a bit and probably normalized closer to sort of mid-single-digit, I suppose.
That's true. Yeah.
Office I think you can see the improvement there in that slide, right? Office has come down from -20- -14. Again, I think a good outcome would be for that to start coming into single digit territory as vacancies equally start dropping into the sort of either low single digit or high, certainly low double digit or high single digit levels.
Yeah. Look, I think the thing is from our perspective is that if you look at your full book, you've got, let's say, roughly about half of the book is growing at the escalation rate, so our number is, let's say, 7%. Then you've got the vacancy, okay, which is a bit of a drag, and then you've got your renewals. And those are in retail and industrial, only marginally dragging back the earnings, whereas in office, it still has a bit of an impact. But at least now we're sort of getting to a point where that negative drag isn't pulling the total portfolio into a negative territory. So in other words, where the total portfolio has a negative outcome.
We're starting to move to a point where the office portfolio earnings is actually growing, and some of the selective disposals that we have made will have quite a positive impact in terms of the answer. So it is the most difficult area to dispose of properties, and it also doesn't really make sense to just sell the property at a very low price to a competitor who's going to undercut you. So we've been quite strategic in thinking about those disposals, and generally, we've been selling either for alternative use or to an actual owner-tenant where they were going to buy a building anyway, so we're happy to sell them the building they're going to occupy it.
But yeah, it doesn't really make sense to sell all those assets to competitors per se because you're just undermining and undercutting your own market really, given our scale. I think there are some positives to be taken out of that.
Awesome. So we'll take a question from the chat. First one from Fayyaz Mottiar from Sanlam. He's asked, on the network of office space, what rental levels are these deals being done at?
Yeah. So I think that's a very long, unknown piece of string. I'm going to answer it at a high level just in the interest of time. So when doing a deal, it's really about the building, it's about the space, and it's about the relative market it is in. So let's go to the extremes. If you're doing a deal here in the V&A, we make the price, and in fact, tenants are prepared to pay pretty much anything that we ask for because they want to be there. If you're going to be ZAR 270, you're going to be paying at ZAR 280 at the moment here in the V&A, right? So if you want to come to the V&A, you're at ZAR 280 without it, and if we're going to build you something new, you're going to be at ZAR 320, okay?
In a, let's call it, secondary market or in Gauteng, broader, if we're on the fringes of the main nodes, rentals are dropping off to, say, ZAR 120 gross, roughly. So it is, it's pretty ugly there still. If you've got a secondary quality property, then you are on the back foot. But just to understand, it is very much deal by deal and transaction by transaction. So that's office. Rental levels in retail, it's a very wide spread, and I think there was a question around how do they compare to markets. And I mean, I think if you look at the rental reversions, it just kind of gives you, because of the volume, it does give you quite a good insight as to how much we are above market. So it does reflect on industrial and retail. We're pretty much at market.
On office, we're probably 10%-15% still above market in the current environment in Gauteng in that book. So I think hopefully that answers those two questions.
Yeah. Thanks. Moving on to Nesi's question from Standard. He says, "Yeah, the benchmarking vacancies from 19% to 15%. Will the next 4%-5% drop in office vacancies prove more challenging? Is it too optimistic to get back to 10% even with less developments coming online?
Yeah. So I mean, I'll be a little bit cynical and say, if Nesi can tell me what the economic growth will be, then I'll be able to answer that quite a bit more accurately because there's a correlation. The biggest correlation with office occupancy is the economic environment. And once again, I'll refer you to a Cape Town or a Umhlanga Ridge sort of environment, right? So the vacancies in Cape Town where we're having good economic growth, it's pretty much a parity now. So 5%-7% sort of a normalized vacancy in my mind. Clearly, in Umhlanga, where you've got no vacancy, that's reasonably abnormal, but it's quite a unique environment there. So I think when you're seeing reasonable economic growth, then those vacancies do tend to plummet.
Given the inflation in construction costs, I think you can see an aggressive reduction in vacancies if you get the economic growth. If we don't get economic growth, then it's going to be a real fight, which it has been and continues to be in, say, Gauteng. But as I mentioned earlier, we're starting to attract clients that used to come to these coastal areas, big clients, into the Sandton market. And the reality is that those are quality assets, and they present well.
So the reality is we can attract those clients, and we do think that if you get a bit of economic growth, and if the sort of trend continues around the sort of coastal markets being pretty nearly, I wouldn't say overtraded, but where you've seen a lot of space being taken out of the market through letting and other, I think you'll find Gauteng actually probably drops off a little bit quicker than you think.
I'll just add to that as well to Nesi's question. Nesi, you also need to just consider disposals, right? So in this reduction that we're showing, there was some disposal, I think 15,000 squares of a vacancy was taken out through disposals. Now, getting that next 5% could be easier or more easily achieved if there were to be a meaningful disposal of an asset that's got a big vacancy, I guess, relatively. The reality is the letting market's still very tough, guys, and the very few corporates are out there beating the drum on growth and expansion and employing, adding headcount. Overall, I'd say step one in all of that is confidence. There's no doubt in my mind that there is, whilst there's still a lot of uncertainty, there's quite a bit more confidence in the market post-elections of all the potential outcomes we could have got.
The one we've actually got is probably one of the better scenarios that we could have wished for, and that immediately translates into some confidence, and immediately translates into corporates taking longer views on the future and propensity to sign longer leases and propensity to be more aggressive on growing and expanding their business and adding headcount. So that's the first ingredient almost to my mind. Add to that reduced load shedding; we're only load shedding now for, goodness, who knows, three months almost. Who knows what's around the corner, both in terms of the political dispensation and the good news, but also in terms of load shedding. But these are very key ingredients to getting some positivity and some economic growth going. So those will be key factors in answering that question of yours, Nesi.
Maybe one other message is you can't just sell your vacancies because, I mean, your property's on average 85% full, right? It makes it quite difficult to sell. There will be properties with slightly more vacancy and slightly less, but on average, they're just only 15% vacant or 85% full.
Okay. Thanks for that. Next question from Paolo from Clarence Capital. There's, in the update, you mentioned the capital strategy has been refocused on optimizing our international investments. Could you provide some further thoughts on this? Is this just a CapEx comment or more broad?
So yeah, I would say it's more broad than just Capital & Regional. We referred to the Globalworth announcement as well and the fact that we continue to engage with and support the management team there. They certainly have been through a pretty rough time sorting out the debt refinance. I'd say the last 18 months to two years was almost preoccupation with sorting out the bonds. After following the bond exchange, we've now extended those bonds to 2029 and 2030. So any real risk around refinancing and liquidity issues have materially been addressed and reduced, enabling the company to be and the management team to be a bit more focused on finding growth opportunities, finding solutions for potentially some of the ongoing challenges within the portfolio. But yeah, I'd say it's more broad than just a Capital & Regional statement or reference to Capital & Regional.
Okay. So you can't give any indication of maybe which regions or areas you guys are quite interested in?
It's across all of the investments. I mean, we're looking at maximizing or let's say optimizing the position with regards to all of those international investments.
Yeah. No problem. Question from Rukayah Nyide. She says, "I have a question regarding your view on the GOZ book. What is the outlook on the performance of the book from a vacancy and reversion perspective for FY 2024?
If that means fall, what book are we referring to specifically?
I'm assuming besides the direct asset, I'm assuming on GOZ.
The direct asset, that's the first over there. Yeah.
Okay.
Look, I mean, the company's put out its own guidance, right? And so we don't want to delve into too much there given that the information that the company feels relevant has been put out to the market already. Fair to say, and I mean, this goes across pretty much all the jurisdictions, growth is just hard to find. Whether you're in Poland, whether you're in Romania, whether you're in Sydney, Melbourne, or Brisbane, whether you're in London or in Johannesburg, Sandton or Cape Town, for that matter, growth is just flipping hard to find. So the portfolio in Aussie is very well lit. There are a couple of vacancies. It's in one or two buildings, and it is, it's a very vibrant, very competitive market.
But I think the space we're in with our sort of more suburban portfolio there, it's actually doing slightly better on average than the CBDs, which was confirmed by some of the numbers we looked at earlier in the week with the board meeting. One of the challenges, I guess, remains funding costs there as well. So you saw a 6.8% valuation drop in the office portfolio off the back of higher rates and higher cap rates. Industrial was just low. Single digits, 1.0% down. With, as I said, yesterday's print on inflation in Australia was not good. I think the market yesterday was down. Certainly, GOZ share price, I think yesterday was down something like 6% off the back of this negative print. It wasn't just GOZ, but all the listed property REITs or REITs and listed property stocks came under pressure.
There's even talk of an interest rate increase still in Aussie. So the pressure there is, again, would be largely attributable to the outlook for funding costs and, yeah, I mean, potentially still some further valuation drops looking through to December. Martin, worth just saying on the property fundamentals, the market for industrial is pretty fully let. I think it's moved from circa 2% to, it's an average of about 3% across Australia in industrial being vacant. So you're still seeing pretty strong rental growth there between 15%-20%. But in the Aussie market, you have to watch the incentive sort of percentages quite carefully. So we are seeing it's becoming more competitive and to attract tenants, you're seeing those incentives roll up a little bit.
On the office side, that market with high interest rates, the confidence and the economy is slowing down and demand is dropping off a little bit there, albeit that the economy is still growing and relatively better than ours here. I think the suburban market, as Norbert has mentioned, has performed relatively better than the office market in the CBDs. And we have managed to maintain relatively high occupancy. I mean, we have had an occupancy rate of circa 95% - 5% vacancy. And there are a couple of tenants that are coming out of the portfolio, so that will deteriorate a little bit. But our team is working hard on filling up that space. So hopefully by the next year, we'll be able to maintain those vacancy levels at sort of that level, which is actually sort of an equilibrium, reasonable vacancy sort of level.
Okay. Awesome. Norbert, I did take that talk around office valuations and GOZ in general. That's quite topical, but we'll jump back to that just now. Warren has a question about the V&A. He says, "Please can you talk more to the statement, 'We seek a long-term sustainable solution to the ongoing capital requirements of the V&A, which is predicted to show significant growth in the next three to five years.' What options are you considering?" Yeah, I know they can take that up, that question. Are we ready?
If you're going to be able to do it, yeah, you respond to that.
Okay. Let's give them a bit of time.
Maybe to Mark for waiting for them to come back on. We had asked the question on how much liquidity would be the price. So it really depends on where you anticipate the Australian dollar/rand exchange rate to be. So I mean, if you're assuming 12.15, then it's approximately ZAR 200 million rands that we're going to need. At around 12.50, that goes up to about ZAR 300 million. Between ZAR 200 million and ZAR 300 million, I think, or just about ZAR 300 million is the estimation that we have.
No worries. I've got a question about CapEx, Moneyweb .
Yeah.
Okay. So I mean, [private market] has asked, "How much are the earnings that are being retained through the payout ratio? Do you believe it's too much for CapEx and too much etc.? And do you have a sense when you were required to retain less on the new earnings?
I'll maybe take that one for you . I think in terms of the payout ratio, I mean, we've indicated that the sort of days of 100% payout ratio are sort of gone. So in terms of what we're retaining, we look to ultimately match our CapEx requirements and obviously together with disposals. So I think if you look at the CapEx requirements going forward, we've indicated what that pipeline looks like. So I don't believe that we would be looking to move to a higher payout ratio in the short term. Norbert, I don't know. I see that back. I don't know if you want to comment there.
Yes. Yeah. I'm happy to add to that . I do love the gist of the question. I would say that even if we were to scale back a bit on some of the CapEx programs, which we showed, I think in the announcement, there's about ZAR 4 billion worth of development in CapEx over the next, let's say, 2024-2025 period. Given where LTVs are, it's very unlikely that we're going to be rushing to increase the payout ratio. If we don't have enough CapEx programs to spend, if you want some of the money retained, we'd look to reduce debt payouts a little bit instead of considering increasing the payout ratio.
Maybe if we can move back to the V&A answer.
You want to go back to the V&A question?
Over to you, Norbert.
Okay. So yeah, I sort of, well, I did know when we put that comment in the announcement that it would probably sort of raise a question or two. But in answering it, I want to maybe just spend two minutes elaborating a little bit on the waterfront and what's going on here. It continues to be a very positive story: real growth here in terms of the underlying property net income, rental income, operating income from a very diversified portfolio. More and more, the waterfront is tending to take operating-type risk with some of the hotel investments and some of, even the Time Out Market and the wheel and the aquarium and all sorts of things. Effectively, operating-type businesses, and you're not limited to getting a rental escalation on a lease.
So that obviously can work for and against you depending on the environment and the cycle that you're in. But we certainly have seen some very strong overall dynamics here in terms of growth in footfall, growth in turnover spend at the waterfront. We just had a meeting earlier, interesting, with some of the data that we are able to get from the retailers. We can see the mix of international spend versus local spend. And from my memory, as we're looking at those numbers, about half the spend in the waterfront is actually, and it changes depending on the seasons. But pretty much half the spend is actually from international visitors. And the way in which we accumulate or get this data is by reference to the actual credit card spend.
You can tell by reference to the credit cards whether the individual is an American, a Brit, a German, a Swedish, a Dutch, somebody else. And so that analysis is fascinating. And so there's currently, in order of just under ZAR 5 billion worth of existing development, including the completion of the likes of Investec on the upper side. But in terms of new and existing projects, roughly ZAR 4.8 billion, ZAR 4.7 billion, let's call it round numbers. I'm going to give you round numbers, ZAR 5 billion worth of future development capital required here.
Big chunk of that, sort of ZAR 900 million, is broadly speaking infrastructure, refurbishments, planning, drainage-advanced planning, spending in anticipation of getting the additional rights. So that's about ZAR 900 million. We're just short of ZAR 3 billion on residential and hotel development taking place. And then there's just around about ZAR 1 billion on the office and retail. The big chunk of that is the Investec one at about ZAR 600 million. So clearly, the waterfront remains a very capital-hungry animal. But having said that, the fundamentals support the level of investment.
Now, we have commenced funding the waterfront expansion through the usage of third-party debt. There are ZAR 2 billion of facilities in place. Gearing is still pretty low. We haven't quite drawn down on the full ZAR 2 billion. I think there's about ZAR 800 million still remaining or undrawn. And that is on an asset base of circa ZAR 23 billion. So there's fair bit of capacity still to gear. But what we're starting to think about is, for the next three to five years, we clearly can't only consider debt and gearing as options. We need to start thinking more broadly. We haven't narrowed things down yet in terms of what it might look like.
But further equity, further all sorts of different options, I guess, are being considered at the moment. But it's just needing to take a longer-term view on this extreme level of the investment, bearing in mind, should we get the additional rights we've applied for from the city, which is an order of 440,000 square meters of bulk, there's at least another 10 to 15 years' worth of future development here requiring ZAR 20 billion-ZAR 30 billion worth of future capital. And that'll be tricky too, certainly, for maybe the PIC can stump up their halves, but it'll be a bit tricky for us at this particular point in time anyway to consider stumping up our halves. So these are just some of the things we're starting to think about at this time.
Okay. Thanks, Norbert. And that's really jumped to your question just now. I'd just like to maybe speak a little bit about the LTVs quickly. And maybe just as a broader statement, it does seem as though in this current environment, we've got a very high interest rate relative to sort of longer-term average. It's quite difficult to get a lot of valuation growth without there being a significant increase on your actual NOI line. So sort of with that in mind, this is now a Polish question. Following the 4.5% decline in GOZ's values and the subsequent LTV impact on Group, are the management and board comfortable with the current LTV levels? And maybe can you actually tell us what the current LTV levels are at this stage?
So I'm assuming you're talking more about Group, the growth in Group as opposed to GOZ in particular. I mean, GOZ, we'll put out their results soon, I guess, but they did a performance. I think they put a performance out the other day, wasn't it? About 40%. I think they said LTVs will be at about 40% for GOZ. And so look, I think, again, the covenants for GOZ, I think it's 60%, if I'm not mistaken. Interest cover there is still pretty solid. It is at the midpoint of, let's call it, the range that the GOZ board are comfortable with, which is 35%-45%. Should it go much beyond the 40%, I'd say certainly the board would start getting a little bit more uncomfortable. But at the sort of 40-odd level, still fine.
In relation to Group Consolidated, we did indicate at the half year that the trajectory for LTVs is still to be going up. I don't know where our final number will come out at. I want to preempt that. It does feel, though, that the SA valuations are relatively stable and certainly not seeing decreases to the same extent to what we've seen in GOZ. Eastern Europe equally is probably a bit more stable. Maybe there's a bit of downward pressure there, but not to the same extent as we've seen in GOZ. And then CNR, I'd say, is pretty flat as well. Waterfront, we've seen a nice uptick, actually. Waterfront saw pretty strong valuation increases off the back of very strong operating results and revenue growth.
So all things considered, we are at the 40 north of 40 does cause us to be cautious, not alarmed. And I think some of the initiatives in relation to especially the disposal trajectory that we've put out there, targeting ZAR 4 billion of disposals in the next 2024, 2025. The bulk of that is obviously going to be used to fund the development CapEx, etc. But that shouldn't lead to further rises in LTV. The bulk of the increase in Group LTV is actually coming from offshore investments in the main GOZ, actually.
I think the local balance sheet is quite conservatively geared still. So I think the board is quite comfortable given how conservatively geared the local balance sheet is.
Yeah. It's kind of been one of our views as well that I think the overall LTV level of the sector is not in a necessarily panic stage at this point. We've seen very significant write-downs on the valuations to be in a position where we're breaching covenants. That said, from an interest cover ratio perspective, I think that trend has been very sort of steep downward trajectory for a while. And of course, a lot of companies have a bit more room for increase on their finance costs. How are you guys thinking about your current ICR?
Is it even in the realms of thought that you could relax covenants with banks to make sure you have a bit more room?
I don't think that's going to be necessary, would be my view. I mean, we've modeled what we think. And just taking the context, other than what Norbert mentioned, potentially we're still looking at interest rate increases in Australia, which to be honest, I don't believe will materialize. But I mean, in South Africa and other jurisdictions now, consensus is that we've sort of done with the increases and we're probably into an environment where we should start seeing, and certainly if the economy locally, we should start seeing interest rates reduce. So I would have expected interest cover ratios to deteriorate somewhat.
But hopefully, as we move forward, the counter will be true and we'll start seeing improvement of those interest cover ratios as we start seeing growth in the underlying portfolio on the one hand, and then getting the benefit of those reduced interest rates as they come through in the market. And I think our intel is that most of the financial institutions are sort of pricing between 1%-1.25% over the next 18 months. Just to add to that, I think we've done a lot of scenarios analysis. Asher and the team have run a number of scenarios. Hello?
Yeah, you still there? You still there?
Oh, we're back.
Yeah. We can't see you because the mirror is off.
Can't see you. That's why you're muted, maybe. But you can hear us, right? The camera's turned upside down. Anyway, so if you guys can hear me, I'll carry on. But Asher did run and the team ran a bunch of scenarios. And we certainly haven't got a scenario where we breach covenants in the ICR space. I mean, on the LTV side, we've got a lot of headroom. ICR is a bit tighter. We have not had any reason or cause to be talking to the banks about any relaxation of covenants or anything like that. And so yeah, we interested. We haven't only we knew this. We haven't got a scenario where we breach. It's obviously the trajectory is still a little bit down. But hopefully, as interest rates start reducing, we'll bottom out and start improving on that in the next 12 months.
Great. Great. I'll jump back to Matthew's question from Jaco, who's asked, considering the large discounted NAV that Growthpoint is trading at, what strategy is the management considering to unlock value?
Apart from getting the market to pay more for the share, which is in your hands. I think in terms of without, again, you've got to appreciate that we can't be specific on the listed investments that we have. But we continue to evaluate all the different options available to us to optimize international investments. And through that process, hopefully, some of that could lead to a closing of the gap on NAV. The reality is one of the best options at the moment, I guess, would be share buyback. But the reality at this time is that given where gearing is and the LTV levels, as we spoke about earlier, not something that we want to or can do, certainly not in volume.
For us, I think the focus is really on simplifying the business, on optimizing their retail portfolio, disposing of non-performing assets, recycling that capital into new, more modern assets, taking some of those proceeds, investing them into some of our core assets that have got long-term growth prospects but need some additional capital in the short term. And ultimately, chasing a path towards returning to growth in distributions. I think there's also a context that, I mean, I wouldn't say that we're out of line with many of the other real estate counters in terms of discounts to NAV. And that speaks to a global context where GOZ, as well as pretty much the whole Australian property sector, Europe, the U.K., and the U.S., many of the real estate stocks are trading at very comparable discounts.
Hopefully, as interest rates start coming off, there will be a bit of a closing of the gap, not only from, let's call it, from the pricing side perspective as well. We obviously saw a little bit of that in the last couple of weeks post-election. As confidence returns and an interest rate cycle starts turning, then hopefully, the gap will close due to, let's call it, technical factors in addition to some of the operational side which we're busy with.
Got a question from Gabriel who asked, what proportion of office asset sales are targeted for? What proportion of office asset sales are targeted for FY 2024 and 2025? I'm assuming 2025 and 2026.
Yeah. So we've published some [nine] numbers on the office, which was not a big proportion.
Probably 58 towards the office, too, so.
Yeah. But for the true ZAR 4 billion, you're [lying around] if you've got that.
900.
900, roughly. Can't remember exactly. Actually, Neil's probably the best person to ask. I think he is sitting there. Neil, can you remember? And I mean, the reality is that we have obviously got a list of non-strategic assets we would like to dispose of. Some of those will be office. But there's no doubt that that is the most difficult sector to dispose assets in at the moment and remains that way. It has improved lately a little bit, to be honest. We've seen a little bit more interest in the office sector. And given the significant write-downs in valuations, I think you'll see that maybe the market does improve a little bit.
Before I hand over to Neil, you might have some more to add. But just in that ZAR 4 billion, if you look at the breakdown of office within the announcement, 58 were sold and transferred in the period, with another 393 awaiting transfer and another 575 approved for disposal in FY 2025.
Just give you the other 900.
Yeah.
Of the 900, I was still listening to you.
Good.
I think really what I'll add is it's probably around about a third of the projected number. We do have a portfolio of properties that we have identified for disposal. That is slightly larger than the ZAR 4 billion. We would be able to supplement some other properties from other sectors to make up that ZAR 4 billion. Yeah. Probably as we stand now, about a third.
Cool. And then with regards to that, what is the yield on disposals? It's come from Asher. And the estimated development yield as well. What those figures?
So obviously, it varies quite substantially between the various assets. I'll maybe switch from a yield to say that we are selling pretty much at book value or marginally above, generally. I mean, all these sales, the ZAR 665 million of sales we sold pretty much at book value. So it sort of reflects the yield in line with what we've reflected in our financial statements. And on the development side of things, once again, every development is unique. Broadly speaking, we are trying to in fact, ideally, I don't want to give you that number, but we are trying to at least target around about 10%-10.5%. So it is a broad sort of reference in terms of where we're trying to get our yields to, given our cost of capital.
Okay. Great. So moving to the next. Can you give me a view on how you guys are seeing your current exposure to KZN and what you guys think in terms of sort of outlook for further investments there?
So I mean, just to contextualize, I mean, our office portfolio is literally from Umhlanga Ridge. And the industrial portfolio is spread through Durban, but pretty much benefits from the port, which happens to be the largest port in the country and still absolutely strategic from a logistic perspective. And our retail, they are very, very established shopping centers in good metropolitan residential areas. So at this point, we haven't taken a view to dispose of assets other than what we believe is not strategic and for specific reasons relative to those assets. From a regional perspective, actually, the market fundamentally has actually been strong, as I've explained earlier. And given its strategic location to the port, it remains, from an industrial perspective, an area that requires attention and continues to be attractive from an investment perspective.
Politically, the reality is that the incumbent provincial parties that have had coalition there, probably you can perceive them to be more business-friendly. Certainly, some of the noises that have come out post the coalition have been, I would say, reasonably positive. It is something we watch quite carefully. We do have strong relationships within the communities in which we operate and also we get close feedback from all the security clusters, etc. Before the election, our team had good intel on what was happening on the ground, where the risks were, etc. Clearly, we have strategies for that. We've all been through a couple of floods and a couple of, well, one very large unrest scenario. We've got hands-on experience, which is obviously invaluable in this sort of environment. But at this stage, actually, generally, intel is more positive than it is negative.
Okay. Awesome. And then just with regards to outlook, I think over the last two years, there's been talk of Norbert's maybe stepping down and then moving forward for 2026. Do you guys have any updates on that? Or is that still sort of planned as expected?
Yeah. So I think we gave that. I forget exactly when we gave the update to the market in relation to my position. Originally, I was to step down in December 2024. We have agreed with the board that I'm staying till December 2026. In relation to a replacement, the board will start a process, I guess, towards the middle of this year with a view to appointing somebody the latest, I'd say, in early part of next year. So I think at a senior management level, I think it's also important for investors to know Gerald, our current Finance Director, will be achieving retirement age in September next year. We have already commenced the process in terms of a search to find a replacement for Gerald. Both internal and external candidates will be considered.
There we hope to, again, make an appointment probably early part of next year, let's say possibly at the end of Q1 next year, as we then lead into the end of financial year, June 2025, finalization September 2025. We want somebody to be in place before that, let's call it, the next year end is done.
Okay. Great. I think we are out of time. There's maybe one or two questions left for us before we maybe can get to you guys directly. Do you guys have any closing statements so we can tie this up?
I think just one other thing on the succession. I don't think the market always gives Growthpoint credit, but it is a proper organization with a deep bench. We've got a very strong governance framework. There's proper succession plans within the organization. It's not six guys and a dog. So it's a proper business with quite an established track record. And as such, items like succession are actively discussed within our Human Resources Committee as well as in the SET Committee. And it's quite a serious part of the way we look at our business. And Fayyaz, I'm not going to tell you who's the dog.
Just again, on closing from my side, I think hopefully investors would have got a slightly more positive statement or positive sense out of this particular update. Fair to say that a lot of uncertainty in relation to both the political environment with the elections looming. Everybody's feeling a bit more positive about that. If you look at the information coming through on the SA non-office portfolio, whilst we're still seeing some negative reversions, many of the KPIs are improving. Things are looking a bit better. With the prospect of interest rates coming down in the next 12-18 months, we think that equally has a positive impact. But as I said, during the course of the call, it remains hellishly tough to find growth and hellishly tough, not only in South Africa but across all the jurisdictions that we're in and exposed to.
We still have lingering upward pressure on funding costs, in particular on the Aussie dollar cross currency swap refinance that needs to take place in FY 2025.
Okay. Thanks, Norbert. Thanks, Estienne. And to the whole team. I think we can close things off there. Thanks for your time and enjoy the rest of your week, guys.
Thanks, everybody. Have a good day.
Thanks, Richard.
Cheers, everybody. Bye-bye.
Thank you.