Attacq embarks on strategy to recycle capital

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Attacq CEO Morné Wilken discusses full-year results from the mall developer which reports 20.6% growth in net asset value for shareholders.

BDTV: Attacq embarks on strategy to recycle capital

In an interview with BDTV conducted on Tuesday‚ September 22‚ Attacq CEO Morné Wilken discusses full-year results from the mall developer which reports 20.6% growth in net asset value for shareholders for 12-month period:

BUSINESS DAY TV: Property fund Attacq today posted a 20.6% growth in net asset value for shareholders for the full year‚ while adjusted net asset value per share came in 17.9% higher. Morné Wilken who is Attacq’s CEO joins me now in the News Leader studio to take a closer look at what the company’s chasing next to sustain this kind of growth.

Morné...Attacq’s delivery of the Waterfall pipeline of developments in Gauteng is the key driver of your South African growth‚ talk us through the kind of traction you’ve made there where despite a slowing growth environment in South Africa‚ the upper income bracket of consumers seems to be quite resilient for now and residential developments aside‚ that precinct putting quite a compelling business case on the table as well?

MORNÉ WILKEN: That’s right...in terms of Waterfall our big competitive advantage at the moment is given the central location‚ it makes it ideal for corporates to consolidate in Waterfall and given the weak outlook on the South African economy‚ it makes sense for corporates to consolidate‚ it brings their costs down‚ predominantly because the efficiencies of the buildings are so much better.

They are green buildings‚ so operational costs get better and there’s a big advantage in terms of culture‚ of bringing the consolidation and Waterfall is specifically ideal for that.

BDTV: So that is on the business side of things what about on the residential side

MW: The residential...we’ve got some residential in what we call Waterfall City. That’s the new CBD for Waterfall but that has not yet started...that construction specifically but there would be a big demand for that if we do start. You’ve got a lot of corporates coming into Waterfall...and they will demand some residential to accommodate them.

BDTV: What’s the pace at which you are managing to fill vacancies there because there was quite bit of scepticism around finding tenants in a low growth environment?

MW: Actually we’ve got a lot of enquiries and we’re working on a lot of them. It takes a little bit longer to convert them into leases given it’s a bit of a difficult decision for a lot of corporates to decide to stick with a new transaction for 10 years‚ so it takes longer to convert them‚ but we still have a lot of activity.

BDTV: So a lot of activity there...having said that‚ to what extent are you growing outside of South Africa right now? With businesses under pressure one assumes that it’s becoming increasingly difficult to secure tenants.

MW: You’re quite right and that’s why we do have supply. We go into developed markets as you know‚ we’ve got a big stake in a company called MAS Real Estate‚ it’s dual-listed on Luxembourg and the JSE. That company is doing very well‚ it’s predominantly in Western Europe... Switzerland‚ UK and Germany are the investments and that mitigates some of our risk.

Then we also have an investment in a company called AttAfrica‚ that’s part of our emerging market strategy and we do see growth in those markets given the fact they come off a low base‚ although the whole Chinese economy does put pressure on the African economies at this point in time.

BDTV: You talk about diversification as a risk mitigator‚ what about innovation because your release today highlighting that 80.2% is green in terms of your building energy efficient business space‚ so how much of a premium is that able to attract right now?

MW: A lot of times the tenant pays for it up front in their rental but the operational costs come down so there’s actually a saving for them. So I don’t think it’s really a premium they pay for that but the capital costs for building these buildings are much higher than your normal costs.

BDTV: Right now‚ what’s your criteria for investment because you boosted your asset value‚ having grown 26.2% to R23.3bn and the size of your portfolio has grown by 45% as well...what’s the criteria for your investments?

MW: Our criteria for our investments is to get at least a minimum hurdle return we set for ourselves and we normally go into new developments.

We don’t really buy existing mature assets. The focus is really on finding those new developments that we can actually develop ourselves‚ or we will buy properties with some upside potential. Where the economy is going now‚ there could be a potential for some buying opportunities as well. And even if you look in the African markets‚ there would be downward pressure on values of properties and maybe it’s a good time to buy.

BDTV: When it comes to funding those opportunities‚ you’ve made some shifts in the management of your funding. You’ve diversified your funders‚ overall your gearing’s increased marginally to 36%‚ how much higher can you go on that before it starts becoming uncomfortable?

MW: The main thing that drives our gearing is really our cash flow‚ given all our investments are not providing cash flow. One of the big ones is MAS but they are on track to meet their 6% income growth in terms of 2016 and as soon as that income comes in‚ we will potentially be able to gear higher on our portfolio.

BDTV: You seem to be pretty wary about where interest rates are headed in South Africa though‚ because your level of fixed interest rate debt has increased significantly to 75% from 63%?

MW: That’s correct‚ we don’t want to take any market risk in terms of interest rates therefore we have hedged out 75% of our committed facilities...that’s not even drawn down. That is for all facilities we still have to draw down‚ so we forward hedged a lot of that risk as well.

BDTV: Okay so on that part of it you also speak of embarking on a strategic programme to recycle capital so talk us through that and what’s happening...

MW: Really what I mean by that is when you look at our mature assets‚ sometimes it makes more sense to go and sell those assets‚ redeploy that capital into new developments rather than sticking it out with that investment. Sometimes you’re tied to that investment but maybe it makes more sense to get rid of it.

BDTV: Do those opportunities sit more so outside of South Africa right now?

MW: There is more growth outside of South Africa but we believe that with Waterfall we still have a competitive edge.

BDTV: Okay so let’s talk through some of the opportunities outside of South Africa because in Africa specifically you’re looking at low base economies right now and in those respective countries you’re targeting retail specifically.

MW: That’s right...why we focus on retail‚ I do think in these development markets the retail...and your spender is more on the retail cycle rather than getting into commercial properties. For example‚ with commercial properties you’ve got your A-grade type of tenants but you don’t have the B-grade type of tenants‚ therefore we focus on retail. I do think it’s going to be a struggle but I don’t think long term-wise...the markets will probably come back.

BDTV: Okay and when it comes to currency exposure there how do you mitigate against that risk?

MW: That risk is a difficult risk to mitigate‚ the only way you can mitigate that is to actually make the cost of occupancy for your tenant much better and to increase turnover at your shopping centres.


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