Laila unpacks how Equites is using lessons from Covid-19 to navigate inflation spikes in SA and the UK.
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In the last 15 years, the world has seen more uncertainty than ever before, from the financial crisis in 2008, the Covid-19 pandemic and the Russia-Ukraine war, to the most recent inflation hikes. However, CFO Laila Razack believes that by treading mindfully, Equites Property Fund can draw opportunity from the uncertainty.
“The second half of 2022 has been tough,” Laila says. “We’ve seen a number of interest rate hikes, coupled with recession fears, which has caused even more economic uncertainty.”
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Equites, which operates in both South Africa and the United Kingdom (UK), has borne the brunt of this uncertainty in the last six months, as South Africa faced floods, terrorist threats and increased loadshedding, and from the UK’s change in prime ministers. “Liz Truss only served as prime minister for 44 days, during which she and her chancellor delivered the mini-budget. They wanted to appease the popular vote and spoke about energy caps for two years, as well as reducing taxes, but fell short on how they planned to fund it. That, combined with the fact that she has now stepped down, has created quite a negative impact on the UK financial markets,” she explains.
Laila adds that the noticeable impact of the uncertainty is that funding costs have increased dramatically, but notes that the demand for logistics property has remained as high as ever.
Because of this, Equites has had to carefully evaluate how it funds developments and acquisitions in order to maintain a strong balance sheet whilst creating value. “About 80 percent of our debt was already hedged, but whenever we enter into new debt facilities, we have to think about whether the investment still makes sense to us, because higher cost of debt means the investments have to generate higher returns.”
Laila adds that: “We control some vacant land parcels that we’re planning to develop for various tenants, including Shoprite and TFG. We’re still continuing these developments but we are carefully evaluating any new projects to ensure we meet our minimum hurdle rates.”
She explains that the company’s immediate strategy is to first make its way through what’s right in front of them and what they’ve committed to, and then think about what comes next.
One of the ways in which Equites is ensuring that there is capital to continue investing in the company’s growth, is by recycling older assets that no longer meet the company’s investment criteria.
“We also have to make sure that we’re not overcommitting in terms of capital expenditure. If we know we only have R2 billion in cash in undrawn facilities, we only want to be spending R1.5 billion thereof and make sure we still have enough liquidity to take us through this period of uncertainty,” Laila says.
All too familiar
This strategy is very similar to the one Equites used during Covid-19. “We sat on R1 billion and said that we wouldn’t be spending any money for the time being. We really had to triple check and rethink any investment decision before any money was allocated to it,” Laila says.
She explains that, during the pandemic, the company’s fundamentals proved beneficial. “We have long-dated leases and 97 percent of our tenants are A-grade or blue chip, which has helped us maintain almost no bad debt. We’ve carried those same principles forward.”
In a way, she believes that the lessons the company learnt during the pandemic has set it up to navigate the current uncertainty. “It was a waiting game back then, and now we’re doing the same.”
Laila adds that:
“You know the business is strong, so you just have to be patient and wait for the storm to pass, because you know it will.”
Sustainability still a priority
While Equites might be careful with new investment opportunities, sustainability remains high on its priority list. “At the moment the business case is still good and it makes sense to keep investing in these even with the interest rates,” Laila says.
The company took out its first green loan in October 2021 and has already satisfied the requirements associated with the loan. It also has a sustainability-linked loan, where it has to meet certain sustainability targets, including improving the percentage of total energy that’s renewable in its buildings every year and increasing spend with enterprise and supplier development partners.
“We’re involved in the City of Cape Town’s energy wheeling pilot project, where we produce green electricity on one erf and wheel it to another erf. That person or company can then use that energy and pay you a fee for generating it,” Laila explains. “It’s exciting to be part of the pilot project because we’ll be right at the forefront of this new energy project.”
Equites also has a number of existing buildings where they’re looking at improving their green profile by increasing solar energy generation, water savings and improving their carbon footprint.
“Sustainability is really ingrained in what we do. We’ve already met all of those for the first year of measurement, and we continue to explore new sustainability options across both portfolios,” Laila says.
She adds that she would like the company to issue a net zero pledge by next year, and that they’re doing a lot of work in the background to come up with science-based targets that will help Equites get where it wants to be.
Personally very passionate about sustainability, Laila explains that being a CFO is more than just accounting. “It’s thinking about your entire business, how to fund it, and how your investments work for you. Sustainability ties into that, because you have to think about the long-term ability of your portfolio to generate an income. In doing that, you have to make sure your buildings are sustainable and built to the best standards. It comes full circle.”
She is also very passionate about the social aspect of sustainability, and relishes the opportunity that being a director on the board of the Michel Lanfranchi Foundation, which is funded by Equites, affords her to influence education and have an impact on people’s lives.
Read more: Equites CFO Laila Razack: representation matters
A future full of opportunities
Laila says that Equites is at a very interesting point in its journey, and while uncertainty may bring challenges, it also brings opportunities. “I believe that some interesting buying and market share opportunities will come out of this. We just have to make sure that we tread mindfully, and when the opportunities present themselves, we’re able to pick up on them and capitalise them,” she concludes.
