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Octodec and Indluplace see residential vacancies more than double

In line with SA’s overall flat vacancy rate spiking to 11%. By Suren Naidoo 19 Nov 2020

JSE-listed property funds Octodec Investments and Indluplace, which both have significant residential portfolios largely in Gauteng, have seen a major increase in flat vacancies in the face of Covid-19 and SA’s worsening recession.

Both funds reported their latest financials this week, but what stood out was residential vacancies more than doubling, which points to deteriorating overall vacancies in the flat-letting market. Octodec’s annual results (to August 31, 2020) released on Monday, show that its residential vacancies had surged from 6.7% to 17%. Indluplace on Wednesday reported a spike in residential vacancies from 5.6% to 11.3% for its financial year to the end of September.

While Indluplace is predominantly a residential-focused real estate investment trust (Reit) and has just under 9 700 units, the larger Octodec is more diversified with interests in retail, office, industrial and specialist properties assets in the hotels and healthcare space. It owns around 9 500 residential units, mainly in the Pretoria and Joburg CBDs, which contribute approximately 31% to the group’s overall rental income.

Property sector analysts and economists have warned about escalating residential vacancies exacerbated by the Covid-19 economic fallout this year, which has also resulted in record job losses.

However, the South African Reserve Bank (Sarb) slashing the repo rate by 300 basis points since the beginning of the year, as a monetary policy response to support the pandemic-hit economy, has coincidently also contributed to the rise in vacancies.

This comes as the property market sees a boom in first-time home-buying, where people who still have jobs are taking advantage of 40-year low interest rates and opting to buy rather than rent.

Property economists Rode & Associates noted in a recent research report that South Africa’s flat vacancy rate spiked to 11% in the third quarter of 2020, from 7% in the prior quarter.

While Durban and Cape Town have the worst residential vacancies (at 19.% and 16.7% respectively), Johannesburg’s vacancies stood at 11.3%. As the economic hub and SA’s most populous city, Joburg has a much larger rental stock.

Both Joburg and Cape Town saw a doubling of residential vacancies in the third quarter of 2020.

Evan Robins, portfolio manager at Old Mutual Investment Group, tells Moneyweb that the biggest worry to come out of Octodec’s latest results is the more than doubling of its residential portfolio vacancies.

“It wasn’t a terrible set of annual results for Octodec in the context of a very difficult economic environment…. However, a real concern is the rise in residential vacancies. This poses a risk going forward, unless the market makes a surprise turn or they manage to fill the vacancies quickly and benefit from the upside,” he says.

Octodec CEO Jeffrey Wapnick concedes that the group’s overall portfolio vacancy levels “saw an unusual spike” but notes that the issue is “receiving urgent attention”.

In its annual results media statement, the group notes that occupancy levels declined by 4.4% during the period, with core vacancies (excluding properties held for development or sale) at 15.8%.

“The residential sector was most affected, with an increase in competition adding to its pressure and creating a temporary imbalance between supply and demand.

“This sector, while experiencing tough times currently, is defensive long-term, as people will always need somewhere to live and the CBD continues to experience strong demand for well-located, affordable accommodation,” adds Octodec.


Wapnick says actions taken by the group to attract new tenants include digitising its leasing systems and placing an increased emphasis on digital marketing.

“We have expedited the roll-out of WiFi to our residential buildings and introduced furnished apartments and shared accommodation at The Fields in Hatfield which has proven successful. We are also working on a trial flexible office solution tailored for the CBD market,” he points out.

Tale of two halves

“Octodec is committed to the Johannesburg and Tshwane CBDs which have strong underlying fundamentals and future growth prospects, underpinned by urbanisation and growth of the emerging middle class.”

On the group’s financial performance, Wapnick describes it as a “tale of two halves” with “the unprecedented economic impact of Covid-19 and resultant pressure on society weighing down” Octodec’s second-half performance to the end of August.

This led to a decrease of 22% in Octodec’s distributable income (per share), largely attributable to the rent relief it granted to tenants affected by the pandemic-linked lockdowns as well as the increase in credit loss allowances, rental reversions and increased vacancies. The group granted tenants relief by way of rental discounts to the tune of R104 million for the period, which contributed to distributable earnings falling to R417 million for period.

Meanwhile, Indluplace CEO Carel de Wit coincidently also mentioned that his group’s full-year performance was a case of a “tale of two halves”.

The group, in which fellow JSE-listed Reit Arrowhead Properties owns a major stake, saw its distribution for the period plunging almost 44% to R44 million. However, the group has instituted a 75% pay-out ratio in order to retain some cash in the face of the Covid-19 crunch.

De Wit says that while tenant turnover within Indluplace’s portfolio increased to 5% from 3% last year, due to tenants under financial pressure moving out, the group is encouraged by very good letting post its year end.

“This is a good sign for us and we believe the uptick in vacancies will be short-term as our rental offering represents good value for money… We will be able to hold our own in attracting quality tenants, despite a very competitive market,” he says.

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