Growthpoint performed admirably during FY21 under inconceivably harsh circumstances that were unlike any previously experienced.

We continued to operate successfully in these circumstances and, in line with our responsibilities to our staff and clients, adapted our business processes, both internally and externally. Some of these changes will be permanent.

Notwithstanding the challenges, we generated R5bn of distributable income, successfully improved our loan-to-value (LTV) ratio, secured a strong liquidity position and limited arrears despite significantly weakening property trends.

Refining our strategies and implementing them in a capital-constrained environment is a noteworthy achievement. We also did exceptionally well in retaining jobs and awarding increases to all our staff, save for 20% of our highest-earning staff who did not receive any increases in July 2020.

Balance sheet strength was the overriding theme for the year and accordingly, we spent much of our efforts in the first half of the financial year working on this.

The economic climate we are in, and have been in for a few years now, has left us with negative property fundamentals and rising yields, leading to the likelihood of property values decreasing. In May 2020 we estimated that commercial property values in South Africa would fall by between 10% and 20% in the following 18 to 24 months, and our property values have fallen by 16.2% since, although the rate of decline is now slowing, with valuations decreasing 8.8% at end-June 2020, 5% at end-December 2020, and 2.4% at year end. Since June 2019, the value of Growthpoint’s South African portfolio has been written down by more than R12.5bn.

In the absence of a meaningful economic accelerator to improve property fundamentals, continued downward pressure on valuations is likely, and should bond yields trend upwards, they will increase this pressure. However, assuming no further deterioration in the South African economy, stabilisation of the operating environment and a return to growth – albeit off the low base following a 7% decline in 2020 – we expect a further moderation of valuation write-downs to flat or only marginally negative over the next 12 to 18 months.

A consequence of falling property values is rising LTV ratios. When these exceed a certain threshold, funders become concerned, which affects both the cost and availability of funding and can lead to a liquidity crunch. To avoid this possibility and given our conservative and prudent business management approach, we strengthened our balance sheet in FY21 with an equity raise, a dividend re-investment plan (DRIP), asset sales and the retention of funds as a result of the 80% dividend pay-out ratio, creating R6.3bn worth of liquidity that was used primarily to reduce debt.

By adjusting our pay-out ratio to retain capital, we restructured our business towards a more sustainable funding model which is further supported by asset sales and DRIPs, and we will be managing our capital spend within that framework because we feel it is essential to contain the business within these parameters at this time.

Growthpoint’s global credit rating from Moody’s is linked to the sovereign rating and although it was again downgraded during the year (from Ba1 to Ba), this has had no impact on our ability to borrow or on our cost of borrowing. The national credit scale rating was maintained at Aa1.za.

The sustainability of the REIT model has never been more challenged than during this period under Covid-19, and while the SA REIT structure has proven to be resilient, 100% pay-out ratios are not. Rather, pay-out ratios closer to the 75% minimum are to be expected going forward, based on the sector’s outlook. Even if the market should normalise, the return to 100% pay-out ratios is unlikely – and imprudent, because it leads to a constant cycle of capital raising and debt funding. Investors within the sector seem to have shifted their focus from income to total return expectations – which highlight capital growth as well as income – and this is healthier for all. Retained earnings should reflect in net asset value (NAV). All of this will serve to enhance the sustainability of the SA REIT model and our own business model.

We are reluctant in the current environment to consider markets other than those we already know well, so we remain committed to our existing international investments.

It would be fair to say that during the course of FY21, the executive spent more time analysing and communicating our strategy than in any other year to date. We remained faithful to the way we operate within existing, approved strategies.

With the support of the Board, Growthpoint has grown its funds management business, and by doing so, has adopted an increasingly equity-light strategy. We have always preferred to own 100% of the assets on our balance sheet but in the current capital-constrained environment, which is set to persist for some time, raising equity is unfavourable when our shares are trading at a discount to NAV, and debt funding is equally unappealing in the light of its impact on our LTV ratio, which we aim to keep below 40%. Co-investing with third-party investors requires some additional capital, but the amounts are relatively modest compared to the sole-ownership model.

This growth strategy aims to increase assets under management rather than the assets on our balance sheet, and creates new income streams by raising asset management and property management fees.

Managing assets for others leverages Growthpoint’s multi-skilled South African-based platform, which consists of a strong team with expertise across the entire real estate field – funds management, financial, asset, development property management, leasing, marketing and facilities management.

Using in-house resources, we continued to build our successful funds management business in FY21. This business started with the African fund, Lango Real Estate, followed by our healthcare fund, and will soon be further expanded by our purpose-built student accommodation fund. Our successes have already enabled us to grow critical mass and earn further credibility as property fund managers.

The funds management strategy is one we are supporting across all the investment entities that we control. Growthpoint Properties Australia (GOZ) has already expressed interest in incorporating funds management into its model. This strategy also makes sense for the Capital & Regional platform in the UK once its financial position has been stabilised, especially given the market opportunities there.

A large amount of strategic work has been completed with the Board in order to optimise our South African portfolio by striking the right balance and degree of diversity. This is an ongoing exercise. We have always been opportunistic and will continue to optimise our portfolio with a fine-tuned refocus on the locations, sectors, and even subsectors that provide good growth opportunities.

South Africa’s property industry has been one of the most negatively affected by the economic impact of Covid-19, yet it has also been the most accommodating of other businesses, through rent concessions and deferments, in recognition of the fact that its performance is closely linked to the sustainability of tenants’ businesses. The relief given by the real estate sector – and Growthpoint – since the onset of the pandemic is unprecedented. In the absence of other avenues, we did what was expected of us and more, certainly shouldering more than our fair share of the burden.

From a strategic perspective, new dimensions such as workfrom- home structures and changes to online retailing are unfolding and need to be considered. Although these dynamics are not entirely new, both have been amplified by the tailwinds of Covid-19 and, no matter how one looks at it, work-fromhome will result in less demand for office space. Only time will reveal the extent of this, but while there are likely to be some counterbalancing factors, such as greater distancing within workspaces, the overall effect will be negative.

More concerning, however, is the general state of the no-growth South African economy and its significance for property fundamentals. Stagnant demand and a growing oversupply of space, especially within the office and retail sectors, were evident even before the pandemic. Without significant economic growth to change this, the outlook for real estate will remain muted. As we are the biggest accommodator of other businesses in South Africa, with tenants across all economic sectors, Growthpoint is a barometer for the economy, and there are limits to how much we can defy this.

Although we had hoped to do better in South Africa in FY21, we were hindered by the significant disruption in economic and social activity due to Covid-19 – long months of lockdowns, changing restrictions, and forced work-from-home. These anomalies resulted in the inability to enact even basic operations sometimes, and further highlighted non-delivery from municipalities and state-owned enterprises.

The Board has reconfirmed its desire to increase Growthpoint’s offshore exposure, even though it is acutely aware of current capital limitations. The progress we can make in the short to medium term may be limited, but we still intend to focus more deliberately on our international investment model and asset allocation.

Having said that we are reluctant in the current environment to consider markets other than those we already know well, we remain committed to our existing international investments.

Considering Australia is the market we have invested in the longest – and where we have significant knowledge, expertise and relationships – GOZ remains a natural focus for expansion. It is our biggest international platform, so it makes operational sense. In addition, while investment into Australia is expensive relative to South Africa, it is a growth market receiving more international interest than ever before.

Because there was little impact from pandemic lockdowns in Australia during FY21, GOZ continued to perform well, and all the business and portfolio metrics are in great shape. The office sector was affected more negatively than the industrial sector in GOZ’s portfolio, with higher incentives being needed to attract good quality tenants for long leases. Growthpoint earned less dividend income from GOZ, as the GOZ Board also decided to reduce the distribution payment ratio to below 80% to ensure liquidity and bolster balance sheet strength. However, the underlying currency performance and the re-valuation of assets benefited us and reflected positively on our balance sheet.

GWI also delivered a solid performance overall, notwithstanding the significant reduction in distribution to Growthpoint. We received an offer for all our shares in this business at EUR7 per share, but neither the Independent Committee of the GWI Board, nor the Growthpoint Board, was of the opinion that the price offered reflected the underlying value and future prospects of the GWI business, so we decided not to accept the offer.

Similar dynamics to those in the Australian market are evident in the office and industrial sectors in Eastern Europe, even though the region was subjected to heavier Covid-19 lockdowns. These had less impact than those in the South African market because the economies of Poland and Romania are still growing and they were thus ready to recover faster. Market forces have had a bearing on office demand and rental dynamics for GWI, and will create some pressure going forward. Another challenge is the opportunity cost associated with the EUR460m of cash on GWI’s balance sheet. Given the uncertain economic backdrop, it has been a deliberate strategy not to invest capital, but with a new controlling shareholder in place, we expect a strategy reset that will see the money being used – at the very least to settle debt.

C&R in the UK faced the most prolonged lockdown period of any of our investments during the 12 months covered by this report. The UK’s extreme lockdowns, accompanied by regulations that limited landlords’ ability to collect rent, led to equally extreme asset value write-downs and excessive gearing levels. This resulted in the company breaching some of its covenants and declaring no dividends. Its Board is considering various options to reduce debt and achieve more sustainable outcomes. Although it disappointed in FY21, we still believe that C&R is well-positioned to benefit from the UK turnaround.

Overall, the income we received from our overseas investments was materially lower this year. In the year ahead, we expect consistent good performance from GOZ, better performance from GWI with the prudent deployment of its capital being a major contributing factor, and an improved contribution from C&R, driven by the rapid re-igniting of one of the world’s biggest economies. Each of these investments remains strategically attractive and we will continue to support them.

While write-downs associated with the C&R portfolio as well as the South African portfolio had the biggest impact on Growthpoint’s valuations, our budgeted income was most impacted by the reduction of revenue from the V&A Waterfront, which has been hard hit by the lockdowns and international travel restrictions.

The recovery of the V&A is directly linked to a rebound in international tourism and also subject to the dynamics of the local economy. Though there may well be pent-up demand for leisure and sports tourism, the return of business travel and conferencing in the wake of Covid-19 is likely to take longer, perhaps even several years. Nonetheless, just as the V&A fell further than the rest of the South African portfolio, we expect to see it recover much faster off a low base, once there is a rebound in international tourism. This will of course depend on the progress of vaccination programmes and relaxed travel restrictions.

Changes to the Board have ignited discussions on our strategy, and encouraged exploration, questioning and confirmation of our priorities. Just as it has been a priority to ensure we have the right people on our Board with relevant skillsets and the necessary time to commit to meeting our unique requirements – while also achieving diversity and transformation – our management must also be optimised to deliver on our strategy. A review of our management structure was carried out in consultation with, and approved by, the Remuneration Committee and the Board. The new structure includes appropriate resources to advance our internationalisation and funds management strategies, and strengthen our corporate finance function. It also provides for a dedicated head of development and a focus on key accounts.

A key and emerging line of questions from our investors, funders and many other stakeholders revolves around our ESG impacts. Growthpoint is committed to doing the right thing. We are also realistic about what we can achieve, both alone and in joint efforts with peers and partners. All our international investments provide reporting on their ESG efforts and impacts, some of which we have included in this report. We have originated our new funds under management with responsible sustainability priorities in their DNA. Although only three years’ old, Lango is already providing reporting on its ESG responsibility and impacts. In addition, the healthcare fund has satisfied the ESG requirements for International Finance Corporation (IFC) funding, setting a high bar indeed. In our various geographies there is a move to report in accordance with the Task Force on Climaterelated Financial Disclosure (TCFD) and align our efforts to having an impact on the United Nations Sustainable Goals most material to our business.

The Group made great strides in this area in FY21 by introducing a Board-approved ESG strategy for South Africa and adopting a new ESG position statement: With integrity, ethics and our values guiding our governance, we provide space to thrive in environmentally friendly buildings, while improving the social and material wellbeing of individuals and communities.

We are committed to ESG best practices and have a long track record of positive performance, impacts and reporting in this regard. Our efforts in these areas have been externally recognised by, for instance, our ability to raise funding through “green” bonds.

Our governance and our environmental and social commitments are areas of continuous advancement and improvement, especially as measurement and reporting in these fields is evolving. By today’s standards, we can see how some of our past efforts could have been more strategically directed. These were, however, well-intended and our new strategy aligns with the latest best practices globally while providing a clear roadmap for the next stage of our ESG actions.

The past year and a half, and the past couple of months in particular, have been exceptionally difficult, but there is cause for optimism, with FY22 presenting the prospect of stability for all our investments. It is likely to set a new base level from which we can start building again.

That said, we have entered the new financial year in South Africa with uncertainty prevailing in the health, political, social and economic spheres, which is being exacerbated by the inability to access property infrastructure due to failed municipalities and state-owned enterprises.

The consequences of the pandemic will remain the biggest challenge for businesses in the year ahead. At the moment, vaccinations are the best way to get through it, and the pace and success of the vaccination rollouts in each of our investment territories, but especially South Africa, will be significant drivers of our success. They will have a material impact on confidence levels and the desire to go shopping, to the office, to travel, and other behaviours.

Equally, a stable socio-political environment will be crucial for economic recovery and the success of our business and our tenants’ businesses. The July 2021 unrest in KwaZulu-Natal and Gauteng further devastated the economy, investment, jobs, households and families.

Whereas South Africa Inc will need to focus all its efforts on growing the economy and job creation, our ongoing priorities will be balance sheet strength and running the business sustainably. In the current environment this inhibits debt and equity raises, supports the growth of our capital-light funds management strategy and necessitates cost containment and customer acquisition and retention.

It is not going to be an easy year, but Growthpoint is strong with a robust business platform supported by the abilities of our people, who remain our greatest strength. Growthpoint will continue to be defined by our optimal and efficient use of capital, our liquidity to advance our clearly stated strategies to the fullest extent possible and the delivery of superior returns. At the same time, we will continue to use our signature conservative financial management approach to protect our balance sheet and to leverage our multi-skilled business platform to grow our business.