Retail property sector hardest hit, says Dipula CEO

Most major clothing retailers, mid-sized fashion groups and small independent stores have still not paid rent for either April or May due to trading restrictions related to the Covid-19 lockdown, Dipula Income Fund CEO Izak Petersen said on Tuesday.

Speaking during an interim results webcast presentation to analysts, Petersen raised concerns around the retail property sector, especially the non-payment of rent and worries that many SME retail tenants may go out of business.

“Retail property has been the hardest hit sector of the commercial property industry in relation to the impact of the Covid-19 lockdown…. Restrictions to retail were quite harsh at the beginning of the lockdown. For Dipula, around half (48%) of our retail space was operational, through essential service retailers operating,” he said.

Diplua Income Fund CEO, Izak Petersen. Image: Supplied

“The biggest issue for us is that many of the larger and medium retailers, not trading in essential goods [at the time], have not paid rentals,” Petersen noted, adding that Dipula has received 69% of retail rentals due for April and so far around 66% of the rent for May.

This is compared with collecting around 94% of rentals in April for office sector tenants and 73% of rentals for its overall property portfolio (retail, office, industrial and residential).

The non-payment of rent by major clothing- and other retailers during the initial lockdown period has been a major sticking point for the South African real estate investment trust (Reit) industry. Moneyweb first reported on the issue on March 30, just a few days into the lockdown.

Since then the Property Industry Group (representing listed Reits) and the Retailer Group (representing clothing retail giants Pepkor, TFG, Truworths, Mr Price and Woolworths) have been formed to come to some sort of resolution.

The Retailer Group is offering to pay 20% of rent for the initial lockdown period, while the Property Industry Group has upped its proposed rental discount to 70% for major retailers.

During Dipula’s results presentation, Petersen did not specifically mention which major retailers had not paid rent for April and May. However, he said his fund backed the Property Industry Group’s efforts.

“Things are very complex, and no deal has been secured yet, following proposals and counter proposals,” he said, after earlier bemoaning some views that “landlords have unlimited access to cash”.

He noted that a bigger issue is whether SME retail tenants, such as salons and restaurants, survive the lockdown.

“We are supportive of the Property Industry Group’s initiative to support retail tenants, especially smaller players, but will have to evaluate each tenant on a case by case basis,” he said.

Petersen warned that while Dipula had reduced overall vacancies from 8% to 5.8% for its half year to February 29, 2020, vacancies are likely to worsen due to the Covid-19 economic fallout.

“The impact could see vacancies increasing by between 3.3% and 6.2%…. This means that in our worst-case scenario, overall vacancies could double from 5.8% [at half year], to 12%.”

Responding to questions from listed property sector analysts later, he said that with the easing of the lockdown in May, clothing retailers had seen a spike in trade.

“We can’t base things on one good month of trade…. I don’t see great trading conditions going forward, but it is good that they are now trading,” he added.

Dividends deferred

Meanwhile, Dipula reported a reasonable set of half year results, with revenue and distributable earnings for the period roughly in line with the prior period, at R680 million (H1 2019: R688 million) and  R254 million (H1 2019: R258 million), respectively.

In line with similar moves by many other Reits, the fund has opted to defer paying out dividends for the interim period. It will retain the R254 million in distributable earnings to strengthen its balance sheet in the face of Covid-19 uncertainty.

Nesi Chetty, senior listed property fund manager at Stanlib, said: “Dipula has made the right decision to defer its dividend declaration until August, when there will hopefully be a lot more clarity in the market.”

He noted that the group’s share is trading at a combined 64% discount to its NAV (net asset value), adding that this “reflects a lot of the risks” relating to lower rentals and deteriorating liquidity.

“The [rental] collection cycle for retail has been tough for Dipula in the month of April and May…. In their portfolio the biggest concerns will be SME tenants and the viability of their business models. Smaller businesses will burn through cash very quick in lockdown,” he added.

“Getting to lockdown level 1 quicker will also help, with the fund likely to be in a better position to collect more rental and improve its topline,” said Chetty.

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