I think most of the participants have been let into the meeting. So maybe I think, let's kick it off. Good afternoon, everybody, and welcome to all participants. Special welcome to the Growthpoint team. As you can see, we have almost the entire management team online, waiting to answer questions. This is the call for the operational update for the quarter ended September 2024. The SENS announcement, containing all the detail and the performance year to date was released this morning on SENS. It has been taken as read, so that we're not going to be going through the announcement in this presentation or in this discussion, and we'll therefore head straight into Q&A. Maybe just a note to all participants, if you'd like to ask a question, kindly post it in the Q&A tab. Alternatively, you can raise your hand, and I can ask the question.
Oh, and we'll open up the line, and you can ask the question directly to the team. I think I will start off the Q&A. The first question from my side is, in my view, a positive operational performance that has materialized during the first quarter from a vacancy trend in reversions, et cetera, that have materialized. The question is, I mean, I know it's only been three months, but if you sort of look forward, given your line of sight in terms of the leases that are coming up for renewal or expiring, can this operational momentum be maintained? Norbert, maybe I'll hand over to you.
Yeah. So yeah, let me, let me have a go at a high level, and then maybe, you know, the individual asset managers for retail, office, industrial, maybe even Neil as head of asset management can offer us some views. My view is certainly from my sort of high-level perspective; it's clear that, you know, the whole of South Africa's, I guess, feeling a lot better about life post the elections and the Government of National Unity coming into being. You know, no load shedding, interest rates coming down. Yeah, we've got a couple of big global macro issues playing out as well. I guess, you know, the U.S. election and the wars on two fronts. But at a domestic level on the ground, there's no doubt that from, you know, what we can see, there's a much more positive sentiment.
I think there was even the confidence index, one of the business confidence indices or something the other day, which came out, which also suggested, you know, business confidence is, you know, certainly on the up. And, you know, so it's, we've got, you know, we're certainly very hopeful that, you know, that this momentum can continue. There's a lot of rhetoric about improved economic growth coming through. In fact, we had some presentations as part of our board process this last week from external third parties suggesting, you know, South Africa could be on a path to perhaps achieving even 3% GDP growth, maybe not quite in 2025, but as we head out of 2025. So all of those messages, you know, certainly are positive. We had S&P, I think it was as well, you know, upgrade South Africa's rating from neutral to positive.
So yes, I think, there's a general sense of positivity and optimism. Interest rate cycle has turned, valuations have bottomed out, LTVs have probably topped out. So, generally speaking, you know, yeah, much more positive. And, yeah, happy to, you know, for any of the guys on retail office and industrial, or Neil to chip in in terms of what they're seeing and feeling on the ground.
Maybe, Gavin, if you want to chat a little bit about the retail just on the market. Is Gavin on? Or did we drop you?
It was earlier.
David, you go.
Yeah, I can chat, and I think, you know, I just want to reiterate what Norbert had said. We have seen definitely since the elections quite an increase in activity. It did, you know, drop off a little bit in I think it was October, but very definitely heightened levels of activity across the three sectors. Definitely on a letting from a letting point of view across the three sectors as well as transactional activity around disposals, so that's obviously been very encouraging. I think there was obviously some pent-up or paused activity waiting on the outcome of the elections, but yeah, very definitely we do foresee the operational, the positive operational movements to continue into the future. We've obviously had large corrections on a number of our, on all three sectors.
So, you know, in some instances, it is off a relatively low base, but very definitely, we believe it to be sustainable.
Now, maybe given that you have the mic, I mean, what stood out to me, and you can correct me if I'm wrong, is that there's been, there appears to have been, an increase in the run rate of trading density growth across your SA portfolio. Maybe if you can unpack that a bit in terms of providing some color, in terms of where the pockets of growth, sort of are originating from or what's driving that?
Yeah. So, so absolutely. And, and I think it's worth stating that we've had fairly consistent trading density growth over the last couple of years. So, you know, we're quite, we're quite satisfied with that. What we have seen is we're still seeing Western Cape growing at better levels than inland in Gauteng. We have seen the regional shopping centers, which, small and large regional, which is mostly what our portfolio is made up of, making a comeback. So on a geographical, from a geographical point of view, Western Cape continues to lead, but the regional centers have started to, or, or have been recovering consistently over the last couple of reporting periods. In fact, quicker than we've seen, better growth coming out of those than out of the smaller format centers in our portfolio.
And then, you know, typically we're still seeing the trading density growth being led by the likes of the essential traders. So your needs and essentials, until such time as the benefits of the, you know, economic growth and the lower interest rates, you know, actually start to materially impact positively the consumer's pocket, you know, you will continue to see those type of retailers leading the way. I think that there was quite a bit of emphasis put on the impact that the two-pot system would have and the release of those funds. You know, we're waiting to see if there is a material impact on our trading density and turnover figures, in relation to that. And then obviously, you know, November is Black Friday. Tomorrow's obviously a big day, but there's obviously been quite a lot of activity.
We'll wait and see how that, you know, what that transpires in terms of actual trading performance. But typically what we've seen over the last couple of years on the Black Friday impact is that it has set in the trolley loads in terms of needs and necessities. We're starting to, you know, we have over the past seen the likes of your supermarket chains benefiting most from the Black Friday specials, just because of the nature of the economy and the pressure on the consumer.
Thank you, Neil. I suppose another question that's top of mind specifically in the retail sector is, and I'll ask it now as it's going to come, is it just the question on the Pick n Pay performance. I mean, how's that trending, in terms of, are you seeing an improvement in trade? I suppose it's perhaps still some way to go in terms of closing the gap from a trading density or competitive trading density perspective. But are you starting to see those operational improvements come through in the trade stats across your portfolio?
I think it's too early, and definitely we is probably too early in our portfolio to see marked improvement in that. What we can say is that we are engaging with them at multiple levels, in terms of optimizing their space. Part of the problem that they have in our, or part of the challenge that they have in our portfolio, which is not unique to our portfolio, is that they're probably quite baggy from a space point of view and a number of the premises. So in order to right-size them, that requires us taking some space back, being able to lease that. But at the same time, it requires some CapEx not only from us, but from them as well. And I think that that's, you know, part of the challenge up until now.
We have engaged with them on a couple of stores that we would like to take back, and those engagements are ongoing, and we obviously have takers for the space where we are engaging with them in terms of, you know, taking space back.
I mean, there has been a very successful, I would say, recapitalization, sort of recently concluded. I mean, just your take on the CapEx requirement from a Pick n Pay perspective, I mean, are you willing to chip in, and sort of help put that CapEx bill, given that there's been an underspend for some time? I mean, how do you think about CapEx when it comes to Pick n Pay specifically going forward?
I think we'll look at each store individually. We'll look at how it relates to the market that the center serves. We'll look at what the tenant mix requires in terms of that shopping center, and we'll look at what the optimum size is for that store. We have in the past contributed CapEx to certain supermarket chains, but it's been on agreed commercial terms, which both parties were satisfied with. And that's what we'll have to look at and evaluate in terms of you know decision-making going forward.
Thank you. Maybe just moving on to the office sector. There's a couple of questions that have come through, and I sort of, yeah, an interesting observation when you look at the narrative around the office sector is that tenants are not asking to reduce space in the office sector. I must say that was quite surprising and encouraging at the same time to see. Is there net in demand coming through, i.e., tenants looking for more space to grow, or is it sort of too soon for that, but if that is occurring, which specific commercial sectors, in your view, do you see as sort of growing sectors? And the question asks about sort of renewable energy, infrastructure, financials, et cetera?
Maybe we can just add some color to, sort of where you've seen the optimization stop and where you're starting to see sort of growth materializing?
Yeah, sure. Yeah, sure. So, so what we've seen is that occupancy has gone up, not only in terms of letting more space, but if a company lets space, their occupancy of that space has improved. And on the back of that, people are giving up less space. There's still one or two tenants who are looking at their space requirements, but it's not a trend in as much as it has been in the last couple of years. We are seeing tenants grow, but I think cautiously. I think where we see the growth, there's a lot of BPOs are established themselves tentatively in Gauteng, three specifically, and one of them is looking to grow at the moment. And we see that as a growth area.
I think BPOs have almost maxed out their space in KZN and Cape Town in that there aren't huge pockets of space available to let in those nodes. And they now are looking at Johannesburg. There's quite an active BPO organization in Gauteng, which is looking specifically at American BPOs and trying to help them set up here. In terms of nodes, it's pretty widespread. So in fact, even in the first three months of the year, because we got very little vacancy in the coastal regions, the reduction came in Gauteng. And we do see that trend continuing, but probably not at the same speed or the same rate that we saw last year. So last year, last financial year, we had a huge reduction in vacancy. Then it slowed a bit.
It's still on a downward trajectory, but it'll be a little bit more bumpy, as a lot of the good space is let. I think tenants are still feel that they can get a good deal. So they are looking at incentives. They're looking at trying to push down the rate. And we haven't seen rentals recover. So we're still, although we're letting space, it's you have to be competitive in terms of rental and incentives. I'm saying that, of course, in the coastal regions, yeah, there we've seen actually rental growth, right?
We have.
We have.
Thanks. Just another question relating to offices. Can provide detail on the improvement in office sector vacancies? Was any of this due to sales that have occurred in the period?
Not in the three months. In fact, the sales that kind of we did last year and only happened in June, July, or July this year, that reduction in vacancy was already taken into account because we'd given occupation. So in the numbers in the quarter, nothing relates to sales really.
Then Paul, taking all of this, what you've said into account, I mean, the improvement in vacancies, yes, the market is still challenging. You're still expecting negative reversions to materialize for the remainder of the incentives, still, I suppose top of mind from a tenant perspective. So if you take that all into account, I mean, if we look back to your FY 24 results, there was still a negative NPI result on a like-for-like basis in the office sector. Do you think we are sort of at the point where we can trend positively for this financial year? Or is it still sort of, are we still likely to end in negative territory? I mean, what's your sense of it?
I got you is that we've certainly bottomed out, that we are not gonna be negative and we hope to see some growth going forward. It won't be massive growth, but we are looking at positive, we're in positive territory.
Thank you.
Certainly, if you look at the coastal regions, we're mentioning that those two areas, you started to see real rental growth. And because of the cost of new developments, the new developments that are coming to the market are at significantly higher rates. So that leaves quite a margin to improve rentals. And certainly, you know, we are significantly more on the front foot. So I'm talking about Cape Town and then obviously the Umhlanga Ridge more specifically. So, you know, I think that rental growth is probably set to continue for some time, you know, until you start seeing significant development come in, and even there you've got this gap and that's gonna drive quite good growth in the sector specifically.
The problem in Gauteng is just you've still got surplus supply and you don't have the economic growth here, to, to soak up all that supply very quickly. But it's coming slowly, but surely.
Thank you. Before we move on to the industrial sector, there's another question on Pick n Pay specifically, and Neil, maybe you can sort of address this question. Sorry, I'm just trying to get to it. Yeah. Have you contributed CapEx towards Pick n Pay's refurbs on condition of relaxing the exclusivity agreements? How has the Pick n Pay store traded post the inclusion of a Shoprite or Checkers in a particular mall?
So, to answer the first question, we haven't yet contributed CapEx, but we are in negotiations with Pick n Pay, around, you know, one or two deals which would include the relaxation or the waiving of the exclusivity. And I'm just trying to think in terms, it's too early to say we've just now opened a shoprite in Watercrest, where there was already a Checkers. But no, that won't be impacted, sorry, because that has a SPAR. No, we don't have any anecdotal turnover commentary on that because we haven't actually done that yet.
Thank you. That's fine. Errol, just moving over to the industrial sector, again, a sort of positive outcome in terms of the KPIs for the three months. My question is again, can this be sustained for the remainder of the year, specifically the sort of outcome that you had from a reversion, sort of, outcome for the three months? You don't provide guidance in the notes. So maybe just some insight in terms of what your expectations are for the remainder of the year?
Certainly. I hope you can hear me. It seems as though Mike, Mike is off.
Can you hear you?
Great stuff. So without a doubt, as discussed earlier, the coastal regions are definitely blossoming. And so certainly in those two sort of nodes, Cape Town, Durban, we can expect to see continuance of the positive growth going forward. Johannesburg and surrounds, unfortunately still is lagging slightly. But as long as the growth in the coastal regions continues on the same vein as it is, it does give us a bit of a positive slant going forward.
And then just in terms of the reversion outcome, Errol, I mean, what's driving that? Is it, sort of, the tension that's being created because of, I would say, less available space, or is it as a consequence of construction costs having increased and market rentals sort of moving up? I mean, if you can provide some color or insight into that, please.
So definitely a combination of factors. Without a doubt, it's a question of demand outstripping supply. New construction hasn't sort of materialized as we have historically enjoyed. We're very fortunate ourselves. We have been able to bring quite a number of new builds to market. And I think our timing in this regard was pretty fortuitous. So we were able to capitalize on that sort of component. And so yeah, certainly build costs have without a doubt inhibited new builds happening, coupled with the fact that interest rates were substantially high and therefore cost of build was a lot more than under normal circumstances. And that coupled in the coastal regions with demand exceeding supply, given the sort of micro or local economic conditions in those areas, giving the industry a bit of a boost.
Thank you. Just touching on load shedding. I mean, given that we've had a stable period more than 200 days without load shedding, maybe you can provide some color in terms of the positive impact that it's had, both operationally and financially. If you can provide any insight on that?
Absolutely, you know, there's nothing more disheartening if you're a manufacturer or a person who's assembling materials and you're needing power to do this work, and then you know you have load shedding for three, four, five hours sometimes. Your staff are totally handicapped and your production process is hampered, especially if you have any sort of heating elements associated with your manufacturing component, which just drives up your electricity costs at the end of the day, adding more sort of demand on the grid, which is already under pressure. So without having these interferences in the past seven months, without a doubt, I think that has created an opportunity for businesses to thrive in this particular environment, and long may it continue.
And then Estienne, maybe from a group perspective, any insight into that, the impact of load shedding or lack of load shedding?
Yeah. So obviously, I mean, you know, the diesel cost bill is a little bit less. The reality is, we still have a diesel cost bill because you are providing diesel to all your generators, the tanks that have to be kept full. And that diesel has a limited lifespan. So there is still, you know, cost of this inefficiency in the system, but I mean, significant savings from that point of view. But I mean, just taking it broader to our kind of energy strategy, if you'd like, you know, we have made very good progress with rolling out solar across the portfolio. Every year we set specific targets. There are certain capacity constraints as to what you can do in a specific period.
It's quite complex and nuanced in a way, in that every property has its unique attributes. I think one of the biggest, I would say, frustrations from our industry perspective is the fact that we don't have wheeling properly right throughout the country. To give you an idea of what implication that has is that, you know, we can't capacitate all the roof space on our industrial properties as example, because you can't wheel the surplus power that you would have from an industrial facility to even the next door neighbor property if you want, or wheel it through the system to our other properties. You know, that in itself creates a challenge. Our strategy for office isn't really to put solar on the roof. It doesn't make sense. That's where we've entered into this power purchase agreement with Etana.
The idea there is to buy wholesale cheaper green power and wheel that through the system predominantly to our Sandton properties. We can also wheel to several of the municipalities where they have now approved wheeling. There is a lot of plumbing that is still going in to ensure that once that comes up and running, everything runs smoothly. It will be a huge benefit for Growthpoint clients. We believe it will make our buildings more attractive and more sticky ultimately from a tenancy perspective.
Thank you. For us, there was a question that you had on the sort of energy initiatives and cost impacts for tenants. I'm assuming that that sort of kind of answered your question. If not, yeah, kindly revert or raise your hand and then you can sort of ask the question in a more direct manner if you wish. There's another related question from Mauricio. Hi team. Apologies if it's been asked already. Please elaborate on the e-CO2 initiative. It sounds quite interesting given that offices have typically lagged on the upside from solar. Mauricio, again, if you would like to ask the question directly, just sort of raise your hand and we can open up the line for you. But team, yeah, I don't know if you have any insight into that question, please.
Yeah. I might have to sit and look at that, unfortunately.
I can just cover that question. So the e-CO2, in essence, we call it e-CO2, initiative is actually a benefit scheme, very similar to some of our other benefit schemes like SmartMove, et cetera. What we're trying to do is we actually trying to use this power purchase agreement that we signed, with Etana and use that benefit to reduce vacant space. So, although the power purchase agreement in essence aims to wheel to 85-86 buildings, we earmarked 10 buildings in Sandton where there was relatively higher vacancies. We launched this e-CO2 initiative for only those 10 buildings. Now, what does it entail? It entails two things. The one is that we look at a cost benefit.
The variable component of the tenant's electricity cost and the component that we wheel to the tenant, we can actually fix at a 7% escalation rate. That difference every year between the escalation of, of Eskom or NERSA and the tenant's escalation, that difference we pay then back to the tenant as a credit on his, on his invoice. That is where the green benefit then comes in. We don't tamper with the utility bill, but that is actually feedback as a credit on this invoice every month. That's the one predominant big benefit. You can just imagine the compounding effect over a couple of years. After, say, a five-year lease term, you know, that benefit can become quite big and it actually grants a stickiness to the tenant.
The tenant then, you know, will rather stay in. That's what we hope that the tenant will rather stay in our premises rather than moving to a competitor due to this benefit that grew over the years. The second benefit of the e-CO2 is also where we pass on environmental benefits. They call that renewable energy certificates. That's a component where they verify that renewable energy was actually passed through to the tenant. You can actually trade renewable energy certificates. What we will do is we generate or get those renewable energy certificates from Etana, contractually. We then pass that onto the tenant. We integrate that into our ERP system. The tenant then can decide if he wants to redeem that certificate or he can trade it.
So what it means like if he redeems it, he actually then certifies that the renewable energy can, you know, to his premises and he can reduce his Scope 2 emissions. So for larger tenants, and big corporates, that will be very beneficial to show that they actually reduce their Scope 2 emissions. However, for a smaller tenant, you probably want to just put it back into the blockchain and be traded there. So we cater for both smaller tenants where it's not really applicable, and bigger tenants that will probably buy it up from the smaller tenants. So that's quite an innovative solution. But in essence, what we try to do is reduce vacant space and create a stickiness for tenants to, in essence, hedge their operational costs going forward.
Thank you. That's a very comprehensive answer, Mauricio. I'm sure that, sort of answers your question there. Maybe just moving on to the V&A. There's a question that has come through from François Du Toit. How much of the 20% EBIT growth in the Waterfront came from new developments? And the second part of the question, what was the like-for-like NPI growth for the period? Yeah, if you can provide it.
Yeah, I don't know for a detailed question. I'll try and have a go. I mean, that's 20% obviously over the comparable period, right? Or that was for the, I think the three-month period in 2023 versus the same three-month period in 2024 now. I think the only additional or the new non-like-for-like would have been the inclusion of Investec potentially, and yes, I don't know if you've got additional.
Give me two seconds. I'm frantically paging just to get that bit of information. Look, we don't do like-for-like, François, for quarterly. Okay. So maybe just as a start, but in this quarterly number, there was Time Out Market, there was Investec. I'm just going on. Maybe there's one more that impacted the additional, you know, would have been that would have added to the growth in the V&A for this period. But predominantly it did come from the hotel and retail turnover number. So our operational term, I think, for the market to understand is that increasingly at the V&A, we're taking operational exposure. So what that means is, you know, the hotels are under management contract rather than lease. So you're effectively paying a management fee and you're getting a straight-up exposure to the underlying trade of that hotel.
And then the second thing is, you know, there's things like the big wheel, there's the Time Out Market itself, where you're actually getting operational exposure and you're paying management fees for an operator to run it. But if the thing does well, then you do really well. Clearly if you have another COVID, then you're very exposed because then, you know, you're gonna wear that exposure. But the reality is that component of our income is just short of 15% now, in that period, you know. So it gives you an idea that we're getting more leverage in that income.
Thank you. Estienne, there's a question from Jared also on the V&A. Can you give an update on the development plans around the V&A and how this will be funded?
Yeah. So the idea of, so maybe just on the development plan. So what we have active at the moment is there's a couple of infrastructure initiatives. I'm not gonna touch on that too much, replacing hundred-year-old pipes and all sorts of things like that. And gearing up the plant, the desalination plant, getting that working. So all those kind of aspects are sort of part of it. But the real developments, we're busy with five Dock Road residential developments. That development will be completed between August and October next year. Then we are. That's about. There's about 99 luxury residential units that will systematically come into the market. We have already sold roughly about 58 of those units. 57, I think we've mentioned there. I have to remember what I split between what's the quarter and where we are now. So I can say 57.
Then the second development is we will be refurbishing the Table Bay Hotel. That hotel will be closed at the end of February next year and will be refurbished in aggregate. That's about ZAR 1 billion refurbishment on that hotel. At the same time, in front of the hotel, we'll be putting in a parking deck in front of that hotel, which will create additional parking capacity. And then we are right next to the Table Bay Hotel. We're busy with a new 142-bed hotel, luxury hotel development to an international brand. And that brand will be announced later. But that hotel is currently underway. That's also roughly at about ZAR 1 billion worth of development there. Then the last kind of major sort of development would be the expansion, or let's call it, yeah, the expansion of the luxury wing of the V&A shopping center.
That development will be completed in about October next year. So that is currently underway. It's a little bit tricky 'cause it's obviously an active mall and we're gonna go through the festive season now. So, that's a bit of a tricky development. Then, as published, we've also made application for additional 440,000 square meters of additional bulk at the V&A, which really will accommodate a development, probably about 10- to 15-year, possibly even longer development plan in the V&A, expanding it, specifically towards the Granger Bay side of things.
Let me just add, chip in there a little bit, as well, is, you know, we actually had a meeting there this morning and it's fair to say that there's about 145,000 square meters of office in the Waterfront and effectively there's no vacancy, and there's at least, you know, I'd say anywhere between three and six inquiries for office space in the Waterfront. So I think, you know, it's not inconceivable that one could even see some new office development in the Waterfront in the short to medium term. There's pretty much demand across the board with zero vacancy at the moment. On the funding side, you know, Waterfront's got an asset base of ZAR 24 billion at the moment. We've just got over ZAR 2 billion of debt there at the moment, from a consortium of banks.
Even with the additional funding requirement of what Estienne referred to earlier on the 440,000 sq m of bulk, it's fair to say that for the short to medium term, there's significant debt capacity, you know, to continue to fund any of the V&A Waterfront's capital growth requirements.
Thank you. I think that answers the question on funding that I had. Just on the Waterfront again, Estienne, you touched on Dock Road and that you've disposed of 57 out of the 99 properties, or units that are up for the development. Also, I've heard through the announcement, there appears to be more activity occurring on the trading and development side. And what sort of comes to mind is that there is potential for some sort of lumpiness to materialize in the earnings. You can correct me if I'm wrong because of the capital profits that you generate as a consequence.
Maybe if you can provide some insight or guidance in terms of how we can expect those capital profits to materialize over the next one or two years in terms of the earnings and whether you will distribute it?
Yeah, maybe I'll just give it a go and, Norbert, chip in with these, if, you know, to add to that. So look.
Sorry, Myra, just to be clear, are you asking about the Waterfront specifically or the waterfront?
So the Waterfront specifically and then also just generally in terms of T&D, there appears this, the narrative speaks to sort of more activity occurring. Yeah.
Dealing with the Waterfront, first, so at the Waterfront, there's quite a lot of moving parts in the income. You know, clearly if you take the hotel, Table Bay out from there, you know, it's got quite a material impact on the income numbers for the period that that hotel's under construction. So some of these profits will kind of, I wanna say, replace the little hole that's created in that period. So, and as I mentioned, you know, those units will be completed towards the end of next calendar year. So somewhere between August and October and hopefully transfers will be, you know, towards November, December, that kind of timing. So I think that will help, maybe keep the income sort of stable if you'd like through this period from that perspective.
Generally, T&D, you know, the reality is a lot of our T&D capacity is going into our own portfolio predominantly. And the idea has always been to see if we can generate, you know, in and around about ZAR 100 million of profit per year. In reality, that number isn't that significant and shouldn't make investors particularly nervous that they can't guess it to the last cent, you know. But the reality is that it does bring a marginal amount of variability in, and it's quite a difficult area to allocate time to. That's to be honest, you know, sitting on our side, you're busy with the transaction, it either goes super smoothly or, you know, sometimes there's a couple of hurdles and things take longer.
I mean, it's sort of maybe moving on to the conversation around, you know, the timing of disposals 'cause it's sort of, you know, in the same sort of essence. Just generally, transactions are taking longer to complete and there are more regulatory hurdles. The banks play a role in that process, you know, they facilitate the transactions, but also their requirements delay the transactions in certain circumstances. Yeah, just given the interest rate environment that we're in at the moment, which is clearly very high, you know, it's really difficult getting some of these transactions over the line. But our development team actively continues to seek out opportunity. As I mentioned, the idea is to kind of get in and around that number, roughly per annum.
Thank you for providing that clarity. I mean, just to close off perhaps on the V&A, so you previously provided distributable income guidance of mid-single digits. You've indicated in the announcement that the V&A is performing better than expected. I mean, how do we interpret that? Is it from an operational perspective? Is it from a previous guidance that you provided in terms of mid-single digits?
So, I mean, it is performing slightly better. And I mean, that's from operational performance across the precinct, so that will benefit Growthpoint. There's no doubt that we will benefit from that. But when looking at Growthpoint today, there's a lot of moving parts. So there are things that are going better and unfortunately there's things that are going less better. So, generally we are feeling a little bit more optimistic, but yeah, this is just the first quarter. So maybe just to put a word of caution if needed.
If I can just add a bit of color to that as well, Myra. I mean, I think that statement of ours at the end of, you know, in the year-end results about mid-single-digit growth for Waterfront was essentially premised on their budgets, and it is fair to say that they are tracking, you know, better than budget at the moment, so we definitely, you know, would hope to achieve slightly better numbers than what we previously guided on that, John.
Thanks, Norbert. Errol, there's another question for you from François. Can you give an indication of the initial yield you are aiming for on the logistics development phase two or two industrial estate?
I don't know if we wanna answer that.
Yeah. François, that's IP that we can't exactly share with you. I'm sorry.
Okay.
Fair to say it's market related.
Yeah. That's a good answer. In fact, just to say, do you understand why we answered like that? It's like me giving the exact price, okay? So every competitor can then know exactly where we price it. And that's not really a good thing for the company. So maybe just to go to that, Chase.
Thanks. Just looking at your distributable earnings guidance range, 2%-5%, I mean, it's unchanged from what you provided at the year end, but the range is still wide. Maybe if you can speak to sort of the potential swing factors to position you sort of at either end of that range.
Let me have a go with that. I think, I don't know, personally, I don't think it's that wide, 3%-5%, you know, 2%-5%, but either way, it may. I think at the end of the day, the critical moving parts still remain, you know, the estate portfolio and any outcome, you know, final outcome on, you know, how the South African portfolio, you know, continues to perform and can we continue this trend of, you know, improved operational performance resulting in, let's call it improved financial performance.
There's no doubt that we are and have, you know, spent a lot of time recently looking internally at our costs, you know, so we, you know, it'll depend on, you know, the extent to which we can achieve some of the cost reductions that we are planning on achieving internally. The likes of, I guess, Australia's contribution is pretty fixed, I guess, you know, they've always delivered pretty much in terms of what they've guided. So I don't see that as being a big moving part. Globalworth is definitely, you know, one of the key factors and the final outcome of their distributable income and their dividends, and their results.
Fair to say that this particular 12-month period for them is the first period where they've got the you know most of the year impacted by the higher interest rates post the debt refinance. So, there's pressure on dividends from Globalworth. The debt refinance remains one of the key factors. You know, we've actually sort of held back a little bit on some of the rehedging on some of the hedges that have expired, both in terms of interest rate hedges and CCIRSs. The rate at which interest rates in Australia you know come down or not will definitely have an impact on the final debt cost for us.
And then Capital & Regional, clearly we, you know, the CNR transaction has been voted on and is now subject to the scheme being approved by the U.K. courts on the 6th of December. I don't foresee any challenges there. We should then have settlement of the cash and the new shares by the 10th of December. And then, you know, the final, I guess the final dividend that we might get, you know, from the NewRiver shares has got a bearing. But so those are probably some of the larger moving parts. There are one or two T&D elements as well.
We've got, you know, one particular transaction in the trading and development pot that, if it comes through, that you know clearly would guide, we could take us to the lower end, but if it doesn't come through, you know, might will result in us maybe not getting to the lower end of that guidance range. I don't know if there's anything else, Gerald, or Estienne or Lauren that you might wanna add into that explanation.
Yeah. So just on the, there's a question around the timing of disposals. So, you know, there's a very big pipeline of disposals. Obviously, if you're getting to, we've only so far got transferred about 400 here and we're targeting 2.8, so it's 2.4% by then range worth of stuff. And, yeah, varying through the next nine months, predominantly will be in the second half of the year, to be honest.
Thank you.
Just a final comment on that is the interest rates. I think, you know, we did, I think, communicate at the end of the year or end of the last financial year that we had taken into account, you know, interest rate cuts, the two that have already happened as well as another one in January or February. But if that doesn't materialize for whatever reason or even for worse, you know, we start seeing interest rate increases again, the world's very volatile at the moment in terms of outlook for interest rates. That could also, you know, clearly have a bearing.
Thank you. Just given the sort of positive sentiment, the improvement operationally, the disposal of Capital & Regional, et cetera, I mean, what bearing will that have on your dividend payout ratio, going forward? Do you still view the most recent payout ratio as being appropriate or conservative, given where the business is at this point and the capital requirements? Would you feel that there is scope to perhaps revisit that and look at increasing the payout ratio?
Myra, that's not under consideration at the moment. I think we are quite happy with the ratio where it's at. You know, obviously what informs that is a number of factors, including the rate of our capital expenditure, our CapEx, just what we call our general maintenance CapEx and the maintenance CapEx programs, our development CapEx requirements, the rate of sales on the other hand, and LTVs. You know, whilst we see LTVs having peaked and foresee it coming down, say for Aussie. I think in the interim period for December half year, we do see, you know, valuations in Australia anyway still continuing to come down.
Aussie's done great work in bringing its LTV down to the 37% number now with a sale of the Dexus stake and the sale of those industrial assets and the formation of the Growthpoint Logistics partnership with TPG Angelo Gordon. You know, that good work is gonna be largely offset again with revaluation, downward valuations at the December half year. But overall, you know, we are confident that LTVs have sort of peaked and will come down. I think the other thing that we need to just throw in the mix, clearly the stronger rand, you know, will also have, you know, some impact not only on LTVs, but also probably on some of the earnings coming through. Yeah, I think, you know, that, yeah, I'll just pause there.
Given that you've touched on valuations, what's the expectation for valuations across your estate portfolio given the sort of positive momentum from an operational perspective?
Yeah. Again, I haven't had too much insight into that in the last couple of months, but it would be my expectation that valuations would increase across all three sectors. I don't foresee it being anything, you know, earth shattering or material, but I think on an overall basis, you know, certainly with interest rates coming down and with, let's say earnings or NPI sort of stabilizing and improving and vacancies coming down, rental growth assumptions, you know, should be a bit more positive than what they've been over the last couple of years, so all things considered, I would expect across the three sectors for valuations to go up, but as I said, you know, we're not talking, you know, 5% and 10% increases here. We're probably talking low single digit increases.
Thanks, Norbert. Errol, sorry, there was a follow-up question on the OT build industrial estate from Nazeem. He says, following on from François, is the development or the initial yield earnings, accretive or dilutive? And how long are the leases and what are the escalations if you can provide that detail?
Yeah. So, phase one is now fully lit. Thank goodness. The last unit was lit quite recently. And I think, you know, when we talk about a brand new development over here, so obviously, you know, from a risk return point of view, you've got a quality product and we've got quality tenants in there. And so the risk component is somewhat less compared to some of the other assets where we are getting a much higher sort of yield associated with it. So part of the rebalancing process involves substituting higher risk properties with higher returns with better quality properties and better certainty associated with the revenue that those properties are delivering for us.
So Errol, maybe just to answer the question more directly, I mean, it sounds like it is dilutive initially. Would that be a fair assumption?
Yeah, one, absolutely. It's not gonna be in line with, you know, where the rest of the portfolio is given the makeup of the entire portfolio. You know, on average, the entire portfolio is sort of more geared towards A and B type properties. And, this would be an A type property coming on board. So obviously it's going to be slightly dilutive, year one. Going forward, however, there's a huge opportunity associated with that.
Yeah. Can I just clarify there, Myra? I mean, we are talking, Errol's talking on his portfolio, I guess, where he's mixing, he's blending, an existing portfolio where he's got higher yielding assets and bringing in new product. But if you consider the yields, you know, compared to what we would consider sort of incremental cost of debt, you know, I wouldn't say it's dilutive. It's probably at best sort of, it's sort of neutral, I would say. So just to make that clear.
Yeah. Thanks for that. That's good.
So the downshifts in year one, because you obviously, as you can hear, these things, you let them up, right? They don't let 100%.
Errol, just to some color on the leases. I mean, the question was also, what's the length of lease? I guess we are not doing anything under five years, somewhere between five and seven, and your escalations ranging seven, seven and a half?
Absolutely. So, some of the leases are actually quite longer, some of them are close to 10 years, the bigger ones with, you know, some of the major sort of occupiers of the space over there, and some of them are three years at the minimum end, but averaging around about 5% and on average again between seven, seven and a half % in terms of escalations on an annual basis.
Thank you. There's a question from Faiyaz, relating to the 2026 outlook. So I'll read the question. What does positive in 2026 mean? Is there an inflation benchmark that you consider? Is it better than inflation or worse? And please unpack the assumption that get us there, I suppose, the return to positive growth.
Yeah. Look, I mean, I don't know what inflation numbers he is referring to? So where inflation last print was 2.8%. So look, guys, we are not gonna be going there. I think we are talking about positive growth. I think fundamentally we see obviously a recovery in SA. We see a bottoming out of Eastern Europe. We see a, you know, an improved outlook for, you know, for Aussie, lower interest rates, you know, all of those factors are, you know, built into that assumption. So, and having removed, I guess, a lot of the interest rate refinance issues that are still impacting this year, which is the cross currency interest rate swaps and, you know, some historic hedges that are needing to be re-hedged at higher rates.
You know, those are the factors that are dragging this year. If you exclude those, then, you know, we sit, you know, into 2026, then, you know, that translates into growth, but we are not at the point where we can be giving any color on whether it be inflation linked or otherwise.
Thank you. I'm sure we haven't bothered you much in terms of questions. So maybe given that we have a few more minutes left, just in terms of the announcement, you speak to the or you give a detail on the rolling of the swaps, interest rate swaps as well as the cross currency swaps. So we sort of have an idea of the increase in the funding costs. Maybe if we can just confirm the sort of capital or liquidity required for your cross currency swaps for the remainder of the year.
And then secondly, if you can give us some insight in terms of where we can expect the sort of group funding costs and if we can break it down again to sort of by currency, SA, Aussie dollar, et cetera, where we can expect that to settle.
I'll start that liquidity requirement is actually quite small at the moment. We refinance the bulk of the AUD CCRSs, which takes up quite a bit of the liquidity when we need to top that up. In the first quarter, that was, I think, about AUD 140-odd million, which is what we required for that portion. For the next lot that comes up in the first half of the first calendar quarter of next year, it's small. I think we made a number of about AUD 23-odd million, and that's on an assumption of, I think, forward into the Aussie dollar. That's where that's from a liquidity requirement perspective. And that's the CCRS; the AUD CCRSs are usually what, you know, the dollar ones are small in comparison.
From an overall cost of funding, I think Norbert covered, you know, certain aspects on that. So we did say when we guided that on an overall basis, we expect our funding cost to increase from 2024 to 2025. And that's largely because of the refinancing of, some of these maturing hedges and in particular the AUD cross currency interest rate swaps. So from a rand perspective, you can see we had a slight reduction in the first quarter because base rates have started coming down and, that resulted in the overall cost of funding for ZAR starting to come down slightly. We don't have too many hedges maturing in the first quarter. There are a few more in the next nine months. And depending on what swap rates does, you know, the reduction in base rates may offset where we kind of refinance it.
I don't see a huge differential for rand for the rest of the year. The big impact for us is really on those AUD cross currency interest rate swaps. And in particular, because their market doesn't seem to, the impact of, you know, the reducing interest rate cycle hasn't yet come through to Australia. We were initially, I think the market was expecting that should start early 2025. It's starting to get pushed out a little bit given that they still have quite a high inflation number coming out in Australia. So if that remains unchanged for the second half, you know, we have about another AUD 100 million that needs to be refinanced. And that will be, you know, those numbers were at quite low rates historically.
You know, there's almost a 3% differential on average when we refinance those interest rate swaps. That does impact the overall cost of funding. Sorry, long answer, but it will be a slight uptick on an overall basis, including foreign currency debt. There will be a slight uptick, but it won't be, you know, beyond 25. I think it will be fine because the bulk of that would've come through then.
Thank you. Maybe just one last question, just on the Capital & Regional proceeds. I mean, you indicate that an effective date, it's going to be sometime in December. Maybe just speak about the application of the cash that's coming through. Would it be applied against SA debt, foreign debt, just sort of what it's earmarked for?
Yeah, there we go. I think, maybe the intention would be to bring it, you know, to convert it into rand and bring it back and settle South African rand debt. And, yeah, I mean, essentially it just goes into the, you know, back into the overall funding pool. We've got circa ZAR 40-odd billion of debt. As was articulated earlier, we do have additional funding requirements in terms of our development program. And, on the one hand, you know, we look to fund that with, essentially with the dividends or cash we retain from the dividend withholding.
In the proceeds of sales, it's fair to say, as Estienne says, the proceeds. You know, whilst the sales have been concluded, there are you know severe challenges just in getting the actual transactions you know through the process of ComCom and conveyancing, et cetera, et cetera. So, you know, there's definitely an ongoing requirement for funding, but the intention would be to bring it back to SA to settle South African debt. It just goes into the overall funding pool.
Thank you very much. We have just run over our allocated time, so it's 5:01 P.M. I think we can call the meeting there, but maybe before I hand over to yourself, Norbert, I'd like to say thank you to the entire Growthpoint team. Thank you to all the participants for engaging and to the Growthpoint team. Thank you for allowing us the opportunity to close this pre-close, and maybe I'll just hand over to you, Norbert, for any closing remarks before we close off the session.
Yeah, thanks, Myra. Just to, yeah, I mean, not much to say other than, you know, obviously we're quite encouraged by, you know, the, where we're at at the moment with the, new positive outlook for South Africa. We had our AGM last week, or sorry, earlier this week. I'd like to thank all the shareholders for the support. We had a pretty good outcome on all the resolutions. So we look forward to, you know, to the next, to the next sort of, three months for, to, to a half year. Look, we're almost there. There's only one month left actually, but in terms of, from a reporting period, look forward to re-engaging. We are probably entering into a closed period in a couple of weeks' time, third week of December, and then to re-engage with, with half year results in March.
Thank you very much to everybody once again and enjoy your holidays.
Thanks, Myra. Likewise.
Thanks, everyone.
Thank you. Bye-bye.
Thank you.