South Africa’s Redefine says property cycle has bottomed out

By Nqobile Dludla

JOHANNESBURG (Reuters) -The property cycle has bottomed out and 2024 will be the turning point when interest rates begin to ease, South African commercial property group Redefine said on Monday as it posted a drop in full-year distributable income.

The commercial real estate sector was one of the hardest hit by the pandemic, when government-imposed lockdowns shut offices and limited shopping trips, resulting in some tenants deferring rent, hitting income and profits for the sector.

While share prices have recovered, property companies globally are facing a double whammy of sliding office occupancy and sharply higher funding costs driven by higher interest rates.

In South Africa, the central bank paused its interest rate hiking cycle in July for the first time since November 2021. Economists expect rate cuts to restart as early as the first half of 2024.

“When interest rates start to come down, it will mark a turning point for the investment real estate cycle,” Group CEO Andrew Konig told journalists.

Elevated interest rates increased Redefine’s net funding costs and were also the main driver of distributable income falling by 4.1% to 3.5 billion rand ($192 million) in the year ended Aug. 31.

While the cost of debt ticked up by 110 basis points to 7.1% from 6% in 2022 due to higher rates, the company is largely protected against rising rates and is well-hedged at 77.1% of total group debt, Chief Financial Officer Ntobeko Nyawo said.

Vacancies in its office portfolio fell to just below 12% from 14.4% as the group continued to benefit from demand for premium grade and well-located property. About 95% of its offices are A and premium grade buildings.

Bigger rival Growthpoint Properties also saw office vacancies fall, with more demand for its premium grade offices located in Cape Town and Umhlanga Ridge in KwaZulu-Natal driving occupancies.

($1 = 18.2338 rand)

(Reporting by Nqobile Dludla; Editing by Kim Coghill, Christopher Cushing and Jan Harvey)