Equites hit by 21% UK portfolio devaluation

JSE-listed logistics real estate counter Equites Property Fund has seen its United Kingdom portfolio taking a massive 21% devaluation for its 2023 financial year, as spiking interest rates take a toll on the country’s commercial property market.

The group, which also has an extensive logistics property portfolio in SA, confirmed to Moneyweb on Tuesday that the devaluation represents a write-down of £75 million (over R1.6 billion in current exchange rate terms) on a like-for-like (LFL) basis.

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The devaluation knocked the group’s financial performance, with distributable income per share for the full year growing by just 4.1%.

Equites’s share price fell to a 52-week low on the JSE on Tuesday, after its shares saw a slide of over 6% on the day, to close at R14.36 a piece.

According to an emailed response to Moneyweb, issued by the group’s treasury manager Justin Snitcher, the UK portfolio was valued at £348 million in FY2022 – excluding the group’s EVRi site which was recently completed.

“In the current [FY2023] period, the total value of the UK portfolio was £358m. This does however include EVRi, which had a fair value of £85m at year end. When we strip EVRi out of our comparison, we get to a portfolio value of £273m for FY2023. This is the figure that was used to get the LFL movement [devaluation] for the period,” Snitcher explained.

Equites’s results presentation reveals that the group’s Tesco Facility in the UK’s Hinckley area saw the largest single asset write-down, with the property’s value dropping by over 40% to £25.6 million, from £45.7 million in FY2022.

“The facility was negatively impacted by the short lease length (the lease expires in December 2023). Formal lease negotiations have commenced with the tenant, which Equites believes will improve the value of the property once concluded,” the group explained.

Asset disposal

Rapidly rising interest rates in the UK (and across the world) have contributed to substantial cap rate expansion in the logistics property market there, shifting prime logistics yields outwards by 175 basis points to 5%.

According to the First National Realty Partners website, cap rate expansion “describes the relationship between a property’s net operating income and its market value”. Poor market conditions can lead to the increase of cap rates, resulting in the fall of property values.

As such, this decline in the UK property market has led Equites to re-evaluate its asset base.

With the release of its latest financial results, the group informed investors of its plans to now dispose of R3.3 billion worth of ‘non-core assets’ both in South Africa and the UK. The move is part of a plan to “free up capital for growth” and to reduce its loan-to-value (LTV) ratio to more conservative levels.

An amount of R2 billion has already been realised in the post year-end period and the recently revealed target – which is set to be achieved by the end of FY2024 – will bring property sales to around R5 billion.

The disposals are meant to fund the group’s development plans without the group needing access to equity markets.

Equites noted that the disposals will also significantly lower its LTV or gearing ratio to below 35% and improve its portfolio quality by recycling older properties.

For FY2023, its LTV ratio increased to the top end of its 30-40% target range, coming in at 39.7%. This is significantly up from 31.5% for its prior financial year.

“Equites understands the importance of a strong capital position and conservative LTV ratio to create ample headroom to participate in a quantum of development opportunities,” the group said.

ENGL disposal

First on the group’s disposal list is the possible disposal of its 60% shareholding in the UK-based ENGL Development Platform.

In 2020, Equites partnered with Newlands Developments to build scale in the top end of the UK logistics market “by developing properties at a discount to open market values”.

Since then, ENGL has completed several developments that have unlocked profit, including developments for Amazon and EVRi. As it stands however, undertaking large-scale developments in the region provides little benefit for the group.

“Globally, capital market conditions have changed considerably since June 2022, with a surge in inflation causing central banks to respond by increasing interest rates. The changing macroeconomic landscape impacted the UK investment market, which experienced substantial repricing in asset values during 2022,” Equites said.

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“As the Group decided to no longer undertake large-scale developments in the UK, Equites has appointed Rothschild & Co to advise on strategies to unlock value from its shareholding in ENGL.”

The final decision on whether to dispose of the property remains with the board. It will assess whether the transaction will offer maximum value for the shareholder, the group said.

If not sold, Equites says it will consider “forward-funded transactions in the short to medium term, which will create additional development profits, whilst allocating limited capital to the platform”.

Not the time to sell

FNB Wealth and Investments portfolio manager Wayne McCurrie tells Moneyweb that the current property market – both in South Africa and abroad – does not provide the necessary conditions for Equites’s disposal strategy and the group’s decision to do so signals that it could be doing so unwillingly.

“To be honest, now is not the time to sell property … I can only assume that they are either getting a good price or it doesn’t form part of their overall strategic direction, or they’ve got to pay down debt, or a combination of all three,” he said.

“You don’t sell property in this environment unless you are a little pushed to do so for whatever reason.”

SA growth

Unlike the European market, the group’s South African business operations saw a positive rise in valuation with LFL property valuations rising by 4.3%. This came as the local market registers market rental growth which the group is experiencing in both “lease renewal negotiations and lease agreements for new builds”.

“We are pleased with the resilient set of operational and financial results in a tough environment,” says Equites CEO Andrea Taverna-Turisan.

“Equites’ strategic focus on long-term leases with A-grade tenants and low vacancy continues to provide a high degree of income certainty over a sustained period.”

The group says it will be exploring growth in the local market, which is experiencing high demand for warehousing space.

“Given the change in market fundamentals in the UK, Equites has noted that its primary geographic focus for acquisitions and developments will shift to South Africa where it continues to witness unabating demand for warehousing space, driven by national retailers and third-party logistics companies optimising their supply chain networks,” the group said.

“The group experienced rental growth of approximately 20% for A-grade warehousing space during the period, driven by a record-low national vacancy rate for modern distribution facilities, an increase in construction cost inflation and substantial warehousing requirements across various types of occupiers.”

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