Disposals fuelling Fortress’s spectacular development pipeline
Fortress REIT, South Africa’s largest developer of premium logistics real estate park has concluded leases for the development of over 400,000 square metres of state-of-the art logistics boxes at key nodes in Gauteng and KZN in the last 18 months. 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,” said 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 annual results in September 2021, the business had sold R1,65 billion of property assets at 2.8% premium to book values.
“A further R289 million worth of asset disposals marked as held for sale and two assets have already transferred since June 2021, netting us R129,5 million in cash. Low interest rates have certainly aided Fortress’s disposals process, presenting the largely smaller assets targeted for sale as great deals for buyers,” added Brown.
This pipeline is “supporting the trend to ecommerce and omnichannel in the best logistics locations in South Africa – despite Covid-19 disruptions and businesses looking for more secure logistics parks,” said Brown.
The scale of Fortress’s disposals is evident when one considers that the businesses’ most recent acquisitions of two logistic parks in Poland and a logistics park in Romania 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,” said 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,” assured Brown.
A few years ago, Fortress’s team of sales professionals identified a number of smaller properties for disposal, many of them acquired as part of broader M&A activity in buoyant markets. A fair number of these properties weren’t logistics nor retail assets, they were mostly 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 portfolio with the bulk of sales to date to owner-occupiers, “who often hold views very different from investors when assessing the value of real estate investment,” added Brown.
Brokers have 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,” reported Brown.