Octodec MD Wapnick on the resilience of inner-city property investments

Johannesburg, 21 July 2023 – Octodec Investments, the largest single owner of properties in the Johannesburg and Tshwane CBDs, has carved a niche in a market others shy away from. The JSE-listed real estate investment trust (Reit) owns a diversified portfolio of 246 residential, retail, office, industrial and specialised assets valued at R11bn. Some of its CBD retail assets are mixed-use, with residential or offices at the top and retail at the bottom, such as Inner Court in Tshwane. These assets benefit from foot traffic passing through and people working and living in the CBD. Other mixed-use assets include The Fields and Sharon‘s Place in Tshwane, as well as shopping centres such as Killarney Mall and Woodmead Value Mart in Johannesburg.

Octodec’s knowledge of the inner city provides the fund with a competitive advantage to create sustainable and innovative spaces in a market that is little known about. Under the leadership of MD Jeffrey Wapnick, the fund continues to focus on upgrading and redeveloping its assets to unlock value for shareholders Octodec’s assets serve a thriving ecosystem of residents, small businesses, professionals, government employees and students, who form the diverse inner-city community that makes up a sizeable portion of its tenant base. Its residential portfolio of 65 properties and more than 9,200 units is experiencing unprecedented demand as inner-city accommodation remains affordable for many people starting out, those who have moved from the rural areas in search of jobs, and some students. Business Day caught up with Wapnick to talk about the resilience of the inner-city real estate market and Octodec.

What is unique about Octodec?

Denise Mhlanga stated, Octodec is one of the smaller listed Reits and operates in Gauteng with a large portion of our assets located in inner cities. Many people see this geographic and, specifically, CBD focus as a problem. We are a diversified fund with more than 14,000 tenants — if a tenant moves out, we can get a replacement. We have stayed in traditional areas because we believe in investing in the right localities, we have intimate knowledge of our market, and that is our competitive edge.

Your residential portfolio is outperforming. How are you getting this right?

We offer quality and affordable rental apartments in secure environments; hence demand continues to grow along with rental income while vacancies are reducing. About 64% of our portfolio is in Tshwane CBD and 36% in Johannesburg CBD. The portfolio offers 9.5% in yields. There is a chronic shortage of quality accommodation in the inner cities.

Our portfolio, with very low vacancies, continues to experience demand, enabling us to capture market share.

Our rentals range between R3500 and R6500 per month. To ensure more people can access quality accommodation at lower prices, we are piloting a product of much smaller units with certain shared facilities, bringing the rental price to below R3000. We were the first fund to convert office blocks into residential apartments (not all our residential blocks are conversions), and to date we have over 9,200 residential units. Demographics in the inner city have changed since SA became a democratic state and this has created an influx of people from other localities and rural areas in search of better opportunities. CBDs are the first step for those starting out, and this creates opportunities for the fund to provide quality accommodation with value-adds such as cashless laundromats, Wi-Fi and revamped common areas that are attractive to tenants.

What is the fuss about CBD retail and convenient mall offerings?

In the CBDs, most of our retail offering is located on the ground floor of residential and office buildings. We have street retail as well as convenient shopping centres outside CBDs.

In on the ground floor: MD Jeffrey Wapnick says that Octodec’s knowledge of inner cities gives it a competitive advantage.

We offer premium retail localities in the CBD with major national and listed retailers trading out of our assets, especially in Tshwane. In Tshwane, prime retail localities are characterised by heavy foot traffic, and this has been the case for 50 years. Areas like Stanza Bopape Street [the former Church Street] and Lilian Ngoyi Street are examples. We recently completed the redevelopment of a Shoprite store at Lilian Ngoyi. Our CBD retail portfolio attracts the likes of TFG, Truworths, and Shoprite as well as small retailers.

CBD retail trade is returning to pre-pandemic levels, and retailers see value in our locations and know how to capture this segment of the market. Our other retail assets, with the exception of Killarney Mall, are doing very well. We constantly relook our tenant mixes, and the only challenge we have at these malls is parking.

What about other assets?

Our industrial portfolio comprises small units in industrial parks where we have control of the environment. About 50% of our office portfolio is leased to government, with the balance of smaller spaces let to small and medium-sized enterprises. As a function of low economic growth, demand for bigger offices has stalled and tenants are under pressure. As a result, we have seen a vacancy creep in our portfolio.

Any acquisitions on the cards?

The market is tough — we are selling noncore assets but there are no buyers. Our focus is to reduce vacancies, redevelop assets in strategic localities to grow earnings, attract and retain tenants. We are converting a vacant office block to medical suites due to demand and this increases our small portfolio of healthcare facilities to two.

What is the outlook for Octodec?

SA’s macroeconomic and political issues are concerning, but we believe the fund is well positioned. Octodec is very cheap now — the yield is above average in the sector and our structure is simple. Our diversified portfolio creates sustainability within the business and given growing demand for rental accommodation in the inner city, we think the residential portfolio will continue to outperform.