Landlord worth R15 billion quitting the United Kingdom to focus on South Africa

Equites Property Fund is making progress on its exit from the United Kingdom, using the proceeds to invest in South Africa’s booming logistics sector. 

This is a long-term strategic shift that began in 2022, after financial conditions in the United Kingdom worsened, undermining the value of its properties. 

In Equites’ interim results for the first half of the 2027 financial year, the company revealed strong progress in its phased exit from the United Kingdom. 

From 2016 to 2022, Equites built up a substantial property portfolio in the United Kingdom, which made up 40% of the company’s asset base. 

However, since then, it has been disposing of individual assets and entire sub-portfolios to exit the region. 

In the first half of its 2027 financial year, the company disposed of its Aviva Portfolio, which saw five UK properties sold for £200.5 million (R4.39 billion). 

This transaction generated £95 million (R2 billion) in cash for Equites, which it said will be deployed in South Africa. 

The company said this sale was a significant milestone toward fully withdrawing from the UK market. 

Now, Equites has three assets left in the United Kingdom, which are expected to be sold before the end of 2028. 

The United Kingdom became an unattractive investment destination for property companies almost overnight due to the higher cost of capital following elevated inflation and the mismanagement of state finances. 

In 2022, surging UK interest rates eliminated the positive spread that made Equites’ portfolio profitable and undermined the value of the properties themselves. 

While the higher cost of capital would typically be passed on to tenants, the lead time for this in the United Kingdom is relatively long compared to most countries. 

Historically, this was not an issue due to the United Kingdom’s stable interest rates and sound state financial management. 

However, interest rates have remained elevated for an extended period, and Equites was unable to pass this on to customers due to UK leases operating on five-year rent review periods. 

In contrast, South African leases feature annual contractual escalations, offering more predictable growth and the ability to absorb a rising cost of capital. 

The high cost of capital in the United Kingdom and the inability to escalate rent annually meant that investment in the region no longer met Equites’ return threshold. 

This kicked off a phased exit from the United Kingdom, with Equites selling individual assets and now moving on to the disposal of entire portfolios. 

Reinvestment in South Africa

Equites plans to invest the proceeds from the sale of its UK properties into South Africa’s logistics property market. 

This market is undergoing strong growth thanks to the rise in e-commerce and the deterioration of the country’s railway network. 

The company said South Africa’s logistics sector is characterised by structural supply deficits and near-zero vacancy rates.

This makes it a lucrative investment for property funds and developers, offering strong returns and relative safety. 

Equites focuses on pre-let developments, where tenants are secured prior to development and typically own a portion of the property. 

It also engages in sale-and-leaseback transactions, where it buys logistics properties from large companies and leases them back to the same company. 

Equites has done deals like this with blue-chip retailers, including Shoprite and The Foschini Group, as well as freight companies like Digistics and DHL. 

To sustain growth, Equites buys land parcels along major industrial corridors and strategic nodes, including Gauteng, the Western Cape, and KwaZulu-Natal. 

These properties are developed when tenants need more space or want to develop more modern distribution centres. 

In theory, this sounds easy, but in practice it is difficult for Equites, given the scale of sales in the United Kingdom. 

For example, after selling the Aviva portfolio, it could not immediately invest the R2 billion in cash in its South African operations, as there are not enough opportunities lined up. 

Instead, it has had to invest capital in shares of UK-based real estate companies and sell down these stakes when opportunities arise to invest in South Africa. 

This is primarily the company’s choice, as it does not want to dump the proceeds in underperforming local assets. 

It has also used the proceeds to pay down debt, with its loan-to-value ratio coming down from a peak of 39.7% in 2023 to 28.1% in the 2027 financial year.