Disposals fuelling Fortress’s spectacular development pipeline
Fortress REIT, South Africa’s largest developer of premium logistics real estate parks, has, in the last 18 months concluded leases for the development of over 300 000 square meters of state-of-the art logistics boxes at key nodes in Gauteng and KZN. This spectacular development run is evidence that Fortress’s strategy to pivot the asset weighting of the business to two-third logistics and one third convenience retail is well on track.
The big question on most minds must be, “how is Fortress funding such an impressive development run in such a challenged economy,” says Steven Brown, CEO of Fortress REIT.
Simply put, Fortress’s off-balance-sheet funding and deepening liquidity was made possible by high levels of disposals of non-core assets. Significantly, “the sale of these assets was largely achieved at a premium to book values,” says Brown. As per Fortress’s June operational update, the business had sold R1.5 billion of property assets at 3% premium to book values. A further R266 million of asset disposals marked as held for sale are likely to conclude in the coming months. Low interest rates have certainly aided Fortress’s disposals process, “presenting the largely smaller assets targeted for sale as great deals for buyers,” adds Brown.
The resulting cash on hand has seen the development of over 170 000 square meters of prime state-of-the art logistics real estate since 2020 alone. This pipeline is “supporting the trend to ecommerce and omnichannel in the best logistics locations in South Africa – despite Covid-19 disruption,” says Brown.
The scale of Fortress’s disposals is evident when one considers that the businesses’ most recent acquisition of two logistic parks in Poland was funded by Fortress’s South African disposals. “Recycling out of older low growth assets into new assets both locally and in growth markets abroad builds longevity into our real estate portfolio,” says Brown.
Fortress will continue to dispose of non-core assets “in line with our strategy to develop South Africa’s largest holding of quality, state-of-the-art logistics assets situated at key logistics growth nodes,” assures Brown.
Starting a few years ago Fortress’s team of five sales professionals identified a number of smaller properties, many of them acquired as part of broader M&A activity in buoyant markets. A fair chunk of these properties were neither logistics nor retail assets. Most were in office and some in smaller industrial sites.
The oversupply of office space in the South African market, low rentals and a highly competitive office letting environment meant that, even before Covid-19 drove employees out of offices to working from home, Fortress didn’t want a large office asset exposure. Today, office assets account for less than 5% of Fortress’s total asset portfolio. Fortress is currently focussed on disposing of this office asset portfolio with the bulk of sales to date to owner-occupiers, “who often hold views very different from investors when assessing the value of their real estate”, adds Brown.
Brokers have also been extremely effective in assisting Fortress with disposals, especially the introduction of Fortress properties to clients. “Auctions too, especially online, have been very successful in supporting disposals in the current environment,” reports Brown.