Equites Property Fund is the only specialist logistics Real Estate Investment Trust (REIT) listed on the JSE Securities Exchange, with a healthy track record of owning, developing and operating world-class properties in South Africa and the UK.
We unpack Equites’ promising prospects, focusing on evolving supply chains and the impact of global e-commerce developments.
Superior asset base attracts quality tenants
Equites develops property assets according to client specifications, with a view to either rent the property to the client on a long-term basis or, in some cases, develop it for the client – profiting from the difference between the actual cost of the development and the agreed price.
Since listing in 2014, the company has grown its portfolio value from R1 billion to over R16 billion – R10 billion of which is based in South Africa. The remaining value is in the UK portfolio, which is currently growing faster than South Africa’s.
Equites’ well located, modern and recently built warehouses have attracted top-quality tenants including large retailers, consumer and industrial goods companies, and logistics service providers. Their tenants include: Amazon, DSV, DHL, Pick n Pay, Tesco, Foschini, Medtronic, Cummins, Imperial and Puma.
Longest leases in town
Equites currently boasts the longest weighted average lease expiry (WALE) profile among South African-listed property companies. This provides an indication of the future security of income streams to investors by measuring the average time period over which leases in a property portfolio will expire. A longer WALE indicates lower risk and this results in lower cost of capital from banks and other funders. The WALE across Equites’ entire portfolio is in excess of 10 years, biased towards longer dated lease expiries in the UK. This contrasts an average WALE of approximately four years for South African cohorts.
Equites’ leasing strategy is a key component of the business. Tenants are signed on triple net leases, whereby the tenant pledges to pay for all property-related expenses (ie taxes, insurance and building maintenance costs) over and above the rental amount. By shifting the responsibility of property maintenance to the tenant, cash flow for this does not need to be factored in when determining annual distributions. This enhances Equites’ ability to pay out distributable earnings to shareholders relative to other REITs and they are able to target close to a 100% payout ratio.
Key facility requirements of modern logistics
Traditionally, industrial properties were characterised by large, empty warehouse spaces used predominantly for storage. It is difficult and often impossible to convert traditional warehouses to the modern specifications required by tenants today. Equites is therefore able to attract tenants from old-style warehouses and accommodate new tenants who will only occupy a modern space. Being one of the few REITs who have in-house development capabilities, Equites can tailor warehouses according to the tenant’s needs, resulting in them becoming a preferred developer and landlord.
Modern logistics warehouse specifications incorporate:
• Automation has become central to each build. The left picture below illustrates a general build by Equites, where emphasis is placed on the height of the building (increased storage capacity), the yard space (more efficient entry/exit and parking of delivery vehicles) and automation systems such as those used for storage and retrieval. Typically, these systems comprise of automated forklifts, conveyors and pallets that work together with warehouse management software to store and retrieve goods as desired (right picture below).
• Environmental considerations are very important to businesses today and the incorporation of solar roof panels, water storage tanks and electric vehicle (EV) charging stations in modern warehouses is increasingly commonplace. Equites recently signed a deal with Amazon to develop a 14 000 m2 warehouse in the UK, which will include a multi-story parking facility comprising hundreds of EV charging stations, accommodating the UK’s urgent move away from internal combustion driven transport.
• Location is an essential consideration in logistics planning to optimise supply chain efficiency. Equites’ warehouses are typically surrounded by excellent transport infrastructure, predominantly located in areas that have easy access to highways and main roads. This allows for greater efficiency in transporting goods in and out of storage, and better working capital management.
Evolving supply chains for retailers
Supply chain management involves the movement, storage and end-to-end order fulfilment of raw materials, work-in-progress inventory and finished goods. Mastering this is an integral part of gaining a competitive edge and optimising returns on capital for all companies distributing products.
For retailers, stock would traditionally be stored at the back of a store, easily retrievable when needed. The shortcomings of this approach include having to carry considerably more stock as a whole to prevent outages, and the costly movement of stock from store to store. Consequently, retailers are progressively using a more centralised supply chain model, where less stock overall sits in a single warehouse and is distributed to various stores as demand dictates.
Era of e-commerce
‘Last mile delivery’ refers to the final journey that goods embark on to get to the end customer. As online retailing grows, retailers are increasingly offering the service of goods delivery directly to the customer, removing the need for in-store shopping or collection – another reason for retailers to move to a centralised supply chain management system. Landlords and operators of logistics assets in particular, benefit from this shift, in the UK and progressively in South Africa. Consequently, the demand for logistics warehouses that was originally driven by logistics companies, is now also buoyed by traditional retailers offering online shopping, and pure online retailers.
Despite double-digit growth for many years, online sales in South Africa (as a percentage of total retail turnover) still lags many parts of the world at 2%, whereas the UK boasts the third highest levels of global e-commerce penetration at 18%. Recent experience during pandemic lockdowns has been materially higher too.
Established online retailers such as Amazon and Takealot are highly dependent on the logistics sector for the fulfilment of orders and the provision of warehouses as centralised storage and distribution centres. They are increasingly building their own distribution networks and renting their own modern logistics facilities.
Growth is best served organically
Equites have displayed a tendency to manage their balance sheet conservatively, often favouring equity capital funding over debt. This is evidenced in the chart below, which shows that the company has the second lowest loan-to-value (LTV) ratio across the South African listed property sector. A lower LTV ratio is a key indicator of lower financial risk and greater financial flexibility. It is particularly important in tougher economic times when receipts from tenants may decline.
Equites recently teamed up with experienced UK logistics developers, Newlands Property Developers, to form the Equites Newlands Group. Equites are majority shareholders in this joint venture, allowing them to determine the end-use of the development (ie develop for a client at a profit or retain and let). Equites provides the capital, while Newlands sources the land and tenants. Profit is shared, with Newlands required to reinvest a portion of the profit back into the venture. Recent deals concluded with Amazon and Hermes are early evidence of a promising future for this joint venture.
Solid footing presents sound growth potential
Equites offers pure exposure to a high potential, niche property sector in logistics, in an environment where many of the listed South African REITs are struggling with excess inventory and reduced demand for space. They have a robust portfolio with a long WALE and low LTV. The portfolio is expanding apace through the addition of well-positioned, high-quality property assets that include excellent lease agreements with established, big-brand tenants. Equites’ assets offer geographical diversification and exposure to the logistics property market that is set to thrive in the medium to long term, locally and in the UK.
