The first half of the financial year was incredibly challenging, specifically due to the impacts of the second wave of Covid-19 infections and the stricter lockdown measures that were introduced in response. After it subsided, and not withstanding ongoing volatility, there was a period of stability and a growing climate of positivity, until government once again introduced tighter restrictions in response to a third wave of Covid-19 cases at the end of FY21.

The declining economy, which was already weakened before Covid-19, had the most influence on the sector during FY21. However, business activity increased as the financial year drew to a close. One of the major drivers of positive performance in the sector was the ongoing trade of essential goods and services. Additionally, the growth in demand for online shopping played in favour of logistics, especially among those companies that service e-commerce.

Performance

The industrial sector proved to be the most resilient sector in FY21, outperforming office and retail. It has not, however, delivered a stellar performance. Businesses failures nudged up vacancies and elevated arrears creating a downward cycle that could lead to further business failures and result, in turn, in greater unemployment, less money spent, depression in consumer and business confidence and a slump in industrial activity.

Within the sector, logistics and warehousing property sub-types performed better than the manufacturing and assembly types, which are experiencing a slower recovery. Eskom's constrained ability to provide stable power to business has contributed to the impact on manufacturers and smelters causing a backlog in structural steel and metal components. As a result, manufacturers were forced to look to overseas markets for materials, their costs increased and they have subsequently found themselves squeezed between the negative impacts of lower demand and higher prices.

The increase in vacancies can be attributed to a spike in liquidations and mothballed businesses. We worked very hard to minimise voids, making diligent efforts to retain our existing clients and to attract new tenants. We managed arrears over an extended period as effectively as possible, considering the constraints on liquidity in the business sector, but the marked increase reflects the tough and uncertain times we are in – including the impact of the various and changing lockdown rules that have hurt most businesses. While retaining tenants in this environment is less costly than having vacancies, there is a trade-off. We have had to restructure leases, ultimately sacrificing revenue in the short term for occupation in the longer term. With many businesses failing or downsizing, market supply outstripped demand and this led to decreasing rentals and escalations.

We have worked closely with our marketing team to create leasing and retention initiatives and adapted tactics to heighten our ability to attract tenants in a competitive market.

Portfolio highlights

Structural trends within the sector and its performance relative to the other sectors resulted in opportunities for smaller investors to acquire industrial assets. This created demand for non-core assets we wished to dispose of and we have capitalised on this. We identified about 40 non-core properties for disposal and of those, we have sold six, which were in various stages of transfer at year end. The disposal aspect of our asset management rebalancing strategy has, however, faced challenges, especially as potential investors find it difficult to access funding.

Developments

Preserving liquidity in the business also meant putting a pin in several planned developments until the final quarter of FY21. Our developments are strictly demand-driven in this environment. However, development highlights include commencing the construction of a bigger facility of 5 700m² for our existing client Beckman Coulter at Centralpoint Innovation District, which will be completed by December 2021. We also completed several value-adding projects, such as refurbishing a unit in Growthpoint Business Park in Midrand, where Penguin Books has consolidated its warehouse and office operations in a single 3 650m² facility.

Developments and refurbishments

Environmental

Restraints on liquidity temporarily constrained our greening initiatives during FY21, but we will invest some R30m on installing solar PV at several of our properties in the coming year. Installing solar systems at multi-user facilities is our current focus as it is a financially feasible way to reduce reliance on South Africa's electricity grid, thus reducing our dependency on fossil fuel energy-producing systems. Solar energy also appeals to our environmentally conscious tenants and aligns with Growthpoint's sustainability strategy. In addition, we have associated strategies such as introducing more energy-efficient lighting and making use of greener materials during construction.

Triple-net leases have long been the order of the day in the industrial sector, but we have moved away from this hands-off approach to ensure our building structures are better maintained by our own skilled property management teams. Growthpoint has high standards for the quality of our assets and their environmental impact and with our in-house expertise and resources, we are usually best positioned to protect and extend our buildings' lifecycles and ensure their efficient operation.

There is increasing demand from tenants, especially international businesses, for green buildings with net-zero carbon impact and we work closely with them to achieve their environmental objectives.

Covid-19

Despite this altered environment being less suited to collaboration, more demanding and more stressful, the team has performed well. The first half of the year was particularly challenging as we had to navigate our way through a new and convoluted process to manage the influx of rental relief requests from tenants. This included engaging in difficult discussions and motivating our recommendations to our clients.

The business has been sensitive to the impact of Covid-19 making it necessary for individuals in our teams to work remotely, although most are now looking forward to getting back to a more familiar work environment.

Having no blueprint for the challenging operating environment resulting from the pandemic, we had to devise new structures and responses on the run. However, we did come to understand our tenants' businesses a lot better and additionally had the opportunity to communicate with the vast majority of our tenants more frequently. Our client-centric way of doing business was thereby enhanced.

We respected the lease agreements that were in place and weighed the necessity of retaining income against our priority of retaining tenants. In spite of the impact that Covid-19 had on our business, we were able to help sustain many of our tenants' businesses with interest-free rental deferments and discounts. Our assessments of these requests were, nonetheless, meticulous, in line with the responsibilities we have to our shareholders and other stakeholders.

Through this experience we have learned important lessons about understanding our tenants well – the size, risk and creditworthiness of each business – and we will take these lessons with us. Furthermore, the electronic documentation system that was implemented has added speed and efficiency to our service, and we will continue to use this and other helpful electronic ways of doing business.

Still, with the third wave of Covid-19 swelling as FY21 closed, it was clear that the negative effects of the pandemic, and its impact on the already ailing South African economy, would be felt for years to come. Now only a swift and successful vaccination rollout will improve sentiment and confidence so that we can pick ourselves up and start running again.

Outlook for FY22

Portfolio metrics are likely to improve and our performance is expected to hold steady in FY22. Among the challenges ahead are the aftershocks of the severe lockdown restrictions on the food and beverage sector, including the alcohol trade, which impacts both manufacturing and logistics tenancies.

Vehicle sales and services have taken a huge knock, and this creates a challenge for our motor industry and occupiers of dealership and workshop properties. On the upside, when businesses can start growing again, we foresee improved confidence and increased employment, which will lead to more people being able to spend more money.

Tenant retention remains our top priority. We will also continue the excellent progress made on our disposal strategy and use it as a critical tool to rebalance our portfolio towards long-term sustainable income. The focus will, however, be more on warehouse and logistics type properties than on assembly and manufacturing plants. Even with the immediate disposals and the shift of our portfolio composition towards modern logistics warehousing, we will still seek to grow the portfolio to the extent that liquidity allows in the current market. We will also continue to roll out solar PV, greening and sustainability initiatives at our properties.

Top 10 industrial tenants by gross rental contribution as at 30 June 2021

Industrial properties top five by value

Growthpoint Business Park Growthpoint Business Park is a mixed-use facility in central Midrand with highway exposure to the N1. Set in a tranquil estate with a number of national and international clients. There is some bulk available for future development.   Midrand     416   3.36%     68 261m2   3.02%		Hilltop Industrial Park With superb highway frontage and access, Hilltop Industrial Park encompasses some of the most functional industrial premises in South Africa. This B-grade industrial park has undergone a major upgrade.   Germiston     393   3.18%     76 283m2   3.37%		Montague Business Park – (25%) Growthpoint has 25% joint ownership of this A-grade industrial park in the sought-after Montague node. It is home to 18 businesses, which include leading brands such as Takealot.com, Supergroup, ABB SA and The Radiant Group. There is high demand for further development of the park's available bulk.   Cape Town     393   3.18%     44 810m2   1.98%
Adcock Ingram – Midrand A single pharmaceutical temperature-controlled warehouse with office facilities and within easy access to the N1.   Midrand     292   2.35%     22 455m2   0.99%		Wadestone Industrial Park Wadestone Industrial Park is in a manufacturing node offering easy access to rail and road. The warehouse component has natural light and height. The property has large privately fenced yards and there are numerous gantry options. The park is currently about 50% developed with the potential to further develop another 25 000m2.   Germiston     237   1.92%     26 929m2   1.197%