Growthpoint invests in prime office buildings with quality tenants and our office portfolio is concentrated in the major metropolitan centres in Gauteng, KwaZulu-Natal and the Western Cape. We strive to give our tenants great experiences in buildings that are environmentally considerate and efficiently run. Working closely with our clients and tenants enables us to anticipate and accommodate their needs and this, in turn, enables us to keep our office buildings well-occupied and to extract market-related rentals.

Office occupancies and rentals were greatly challenged by the state of the economy and the structural changes in the sector during FY21. Businesses sought to use less space to save costs, and forced work-from-home protocols led companies to reconsider their current – and possibly future – space requirements. However, the strong consensus is that office culture is essential for building business leadership and that corporate culture cannot be conveyed effectively in a purely online environment. This indicates that office space usage is changing to better accommodate tasks that cannot be done well from home, such as meetings and collaborations.

We have seen the rise of strong decentralised and secondary nodes and of access to the amenities of coffee shops and convenient retail and services – either in-building or nearby – playing a greater role in office leasing decisions. While traffic patterns are likely to remain off their pre-pandemic peaks as more people work from home, easy accessibility also remains crucial.

Performance

While we would have liked to have leased more space this year, we were still able to attract and retain tenants and conclude numerous deals, in line with our focus on tenant retention and leasing. Growthpoint's retention achievements were supported by our new incentive programme that rightly rewards the loyalty of existing tenants. The SmartStay and SmartMove initiatives are helpful tools to retain and attract tenants, respectively.

It was challenging to perform in an adverse market and although leasing enquiries were picking up before the third wave of the pandemic in June 2021, it was difficult to close deals. This was due to an oversupply of space and some areas offering prospective tenants a wide range of options, including fully furnished sub-letting. Given the uncertainties around their future office requirements, businesses remained cautious about committing and this resulted in low new letting levels. Although tenants generally seek to save costs, they are willing to make longer lease commitments in return for early renewals, and are also prepared to pay lease cancellation fees. However, while both are welcome solutions, they invariably contribute to increased vacancies because early renewals currently are often in respect of less space. Thus longer lease periods are being attained at the expense of renewal rental growth.

Growthpoint's office vacancies are at the highest levels we have seen in a long time, but are very nodally driven. Regionally, Gauteng was under significantly more pressure in FY21 than KwaZulu-Natal and the Western Cape, where vacancies are concentrated in specific buildings. There are still some nodes of good demand in Gauteng, such as Rosebank, but our most significant concentration of offices is in Sandton, where 21.1% of the total office gross lettable area is located. It is also here that we have our biggest vacancy exposure with a vacancy factor of 23.4%. Within Sandton, there are several distinct nodes with very different dynamics and some – such as the one near the Gautrain station – are doing better than others. Microlocation and node selection are therefore playing an increasingly important role in our portfolio composition.

We are still receiving requests for relief from tenants whose businesses are under pressure, although the number of such requests has reduced significantly. Furthermore, our collection of rental deferrals previously provided has been better than expected. Arrears decreased over FY21 and were well managed, with many of the persistent and larger arrears budgeted for.

Portfolio highlights

Growthpoint achieved several significant leasing deals in FY21, including a lease renewal with Absa at Alice Lane in Sandton and a new lease with Anglo American at 144 Oxford in Rosebank.

We adopted a more active asset management strategy, disposing of assets in non-key nodes and taking advantage of the buyers' market by making small, but very strategic, investments in targeted areas.

We are in the process of disposing of three non-core assets for a total of R94m, and these were in various stages of transfer at year end. It has been difficult to sell stock in business nodes we consider non-core, with the buyers in most transactions being owner-occupiers. We have also been more selective in the composition of our office portfolio. The results may not be immediately apparent, but the cumulative impact of each improvement will become evident over time.

To extract greater value and leverage our development expertise, every office asset that we identify for recycling is also considered for repurposing, such as residential conversion. Deciding factors include location, cost, and in rare cases, the realisation of our vision for a particular node.

Growthpoint's new Altron campus redevelopment at Woodmead Office Park in Sandton was completed in February 2021, and rental commenced on a long-term lease in March. We also completed a R56m public infrastructure investment programme in Woodmead to protect our strategic assets in the area, where we now own and operate about 250 000m² of office and retail space. This has a combined value of more than R4bn, and includes the offices at Woodmead Office Park, Woodmead Estate, Healthcare Park and Country Club Estate, as well as the popular Woodmead Retail Park shopping centre. Growthpoint was responsible for the design, development, construction and funding of improvements to both the M1 Highway Woodmead Interchange and the Woodmead Drive and Woodlands Drive intersection. These improvements to the public road infrastructure had become crucial to provide improved access to businesses in the area.

Covid-19

While Growthpoint and the property industry made significant efforts to sustain hard-hit small business throughout the Covid-19 lockdowns, it is clear that the situation has been most harrowing for our smaller tenants. We have very few buildings that cater for this size of business, yet the loss of start-up and creative businesses in these multi-tenanted buildings has still been a blow. Fortunately, most of our properties accommodate larger corporate tenants, financial institutions, mining houses and multinationals.

Our team has faced a barrage of relief requests from tenants and has carefully considered each case. These additional pressures have been tough and tiring.

Unfortunately, the third wave of Covid-19 infections halted the tangible increase in confidence that was evident from February to June, but we do believe it will resume when the wave subsides. Most tenants want to return to their offices but have yet to do so in the light of South Africa's delayed vaccine rollout and the arrival of the third wave.

The pandemic has emphasised the importance of outdoor spaces associated with office buildings. These don't need to be overly formal or fancy, but those that provide places of refreshment add massive value to building users.

Environmental

Growthpoint owns the biggest portfolio of Green Star-rated buildings in South Africa and we continue to identify opportunities to improve our existing buildings to achieve green certification. We also have a programme in place to ensure that our current certificates are renewed whenever necessary.

The number of enquiries we receive for efficient, sustainable green buildings informs us that such buildings are vital for many businesses, and we are continuously updating and reconfiguring our existing properties to accommodate this demand.

We have found that disclosing the environmental performance of each of our buildings puts us at an advantage in the market. It also helps us identify underperforming buildings which we earmark to adapt – or dispose of if we are not able to lighten their environmental impact. Green energy, resource efficiency, existing buildings certification and fair billing remain our focus areas. In addition, we are considering pursuing our first net carbon neutral certification for 144 Oxford in Rosebank.

The Growthpoint-owned and developed ConneXXion – Exxaro's new headquarters in Centurion – was the overall winner of the SAPOA Awards this year, taking the sustainability award and the best corporate office development award. The 21 708m² head office building has a range of features to connect occupants and enhance their health and wellbeing while also minimising its environmental footprint. ConneXXion is the first building in Africa to be rated according to the International WELL Building Institute's Core and Shell Building Standards. This rating system is the first to focus exclusively on the impact of buildings on human health and wellness. The property has also received the highest possible 6-Star Green Star rating from the GBCSA.

In Cape Town, 32 on Kloof, which was originally constructed in 1922, also delivered an outstanding performance, winning the SAPOA heritage and best refurbishment awards. Owned by Growthpoint, it was redeveloped in line with our vision of making it the attractive Kloof Street façade of the Longkloof precinct. This exciting precinct retains all its old charm but has been adapted and modernised to provide around 11 000m² of renovated office space. This architectural response marries historical and contemporary influences, conserves South Africa's heritage resources, and extends the lifecycle of the building. Growthpoint previously applied a similar approach to the refurbishment of Draper Street in Cape Town.

The property industry and its tenants are becoming increasingly aware of the carbon savings that can be made by adapting existing buildings. Buildings like 32 on Kloof represent a shift in the way we think about the assets in our portfolio, and we intend to be more astute about offering the best type of building for each node by looking at an area more holistically. This requires us to be even more sensitive to what already exists, as well as business needs, market demand and how a building relates to the street, the public and surrounding amenities.

Outlook for FY22

Growthpoint will continue to focus on owning suitable properties in the right nodes for our portfolio and ensuring that we have the best people and skills on our team.

We are ready to adapt to the changing ways of working which we believe will include offices designed to foster interaction and collaboration.

Our agility and client-centric approach means we are already well-positioned to address the needs of the market but to enhance this, we are introducing a new role to the business – that of a community manager. The role will focus on the experience in our buildings and help us to offer our tenants the services and amenities that make a difference to their specific businesses and their employees. This includes leveraging our relationship with OneCart for on-demand shopping delivery to selected office buildings.

With an oversupply of space in the market and pressure on occupancy levels, rental renewal growth will inevitably face continued downward pressure across the entire sector. For this reason, we are unlikely to pursue any new office developments unless suitable leases underpin them.

Although it has been planned for a decade, we are optimistic that the development of the Sandton bridge, linking 1 Sandton Drive and Sandton City, will go ahead soon. This will contribute positively to all who live and work in Sandton Central, as well as visitors.

Developments and refurbishments

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

Office properties top five by value

Discovery 1 & 2 (55%) The Discovery campus is prominently situated in close proximity to Sandton City and the Gautrain. The interior boasts modern state-of-the-art finishes.   Sandton     2 463   8.90%     61 127m2   3.75%		Woodlands Office Park This office park consists of a number of buildings. The buildings are situated in a low density, game park environment with free roaming blesbok, impala, springbok, and other smaller animals and bird life. The Woodlands boasts amenities such as a restaurant, a gym, a nursery school and dry cleaner. The park is on a Gautrain shuttle route and is known in the area for hosting the park run.   Woodmead     1 650   5.96%     113 703m2   6.65%		144 Oxford Road Located in a prime position at the gateway to Rosebank, this nine story office development with uniquely elastic design features of flexible spaces that can be adapted to the specific needs of businesses.   Rosebank     1 066   3.85%     37 447m2   2.19%
Constantia Office Park With a superb location benefiting from excellent N1 highway visibility and accessibility, together with amenities including a Virgin Active Gym and a Protea Express Hotel, it offers a combination of A and B-grade office space to 90 tenants, set in a lush park environment. It is let to major tenants like MTN, Afrisam and Primedia.   Roodepoort     923   3.33%     74 767m2   4.37%		Inanda Greens The office park offers easy access to major public transport routes. The park is a mix of modern and contemporary buildings that allows natural light to flow through.   Sandton     906   3.27%     40 546m2   2.37%