REITs best-performing sector on JSE to date, outlook looks even more promising

Johannesburg skyline. Many of South Africa’s leading property companies have begun reporting an improvement in office vacancies nationally. Picture: Timothy Bernard/Independent Newspapers

Johannesburg skyline. Many of South Africa’s leading property companies have begun reporting an improvement in office vacancies nationally. Picture: Timothy Bernard/Independent Newspapers

Published Aug 30, 2024

Share

SA’s listed property has recovered from being the worst performer last year, outperforming bonds, equities and cash year-to-date, and with rate-cut expectations is likely to benefit from further earnings growth, higher retail spending and share price up-side over time, according to an independent property analyst.

In recent months, the sector has seen a rally driven by the US Federal Reserve signalling an end to the rate hiking season, positive sentiment with the formation of the Government of National Unity (GNU), and the anticipation of interest rate cuts in South Africa.

“In global comparison, SA listed property outperformed other asset classes year-to-date thanks to their diversified portfolios, whereas globally, listed property with mostly specialised assets underperformed and delivered marginally positive returns of 2.9% in rand terms,” Keillen Ndlovu, an independent property analyst, said in a statement yesterday.

Year-to-date to end-July, SA’s listed property delivered 14.4% in returns (income and capital growth), compared to bonds (9.8%), equities (10.0%) and cash (4.9%). It was the worst performer over the same period in 2023, delivering a negative 2.2%, said Ndlovu.

SA Reit Association chief executive Joanne Solomon said rate cuts would benefit the listed property sector, leading to a recovery in lending and capital markets, which could result in increased investment activity.

“Our members are reporting an improvement in property fundamentals – declining vacancy rates, rental increases – albeit off a low base, and demand for space, especially in industrial and logistic, retail and select office assets in key locations,” she said.

This rise in confidence in the property market is also being reflected in the residential market, with, for instance, the Pam Golding Residential Property Index for July continuing to rebound, rising to +4.7% , a level last seen in February 2022, having risen steadily from a low of +2.4% in the third quarter of last year.

Similarly, one of SA’s leading REITs, Redefine Properties, reported Wednesday it was seeing positive rental reversions in the retail space, indicating the industry was about to enter a growth phase, while demand for its A-grade offices – which for a long time had been in over-supply nationally – was rising.

There are currently 35 locally-focused listed property stocks on the JSE, of which 29 are REITs and six are non-REITs. There are 11 offshore-focused stocks, of which seven are REITs and four are non-REITs, according to research done by Ndlovu.

He spoke at a recent seminar focusing on the South African REIT sector.

Ndlovu said even though REITs earnings would likely decline 3%-4% on average this year, mainly because of higher interest rates, earnings would return to positive territory in 2025 and to inflation-beating levels in 2026.

“If the economy grows faster and interest rate cuts happen sooner and more aggressively, we can see robust growth in earnings earlier than 2026,” he said.

Over the past few years, the sector has seen a decline in equity raised. From raising R69.4 billion in 2014, SA listed property raised R7.4bn in 2023. However, there has been decent activity so far this year, with Vukile Property Fund raising R1bn and Sirius Real Estate raised £150m from SA and offshore investors.

Pam Golding Property Group chief executive Dr Andrew Golding said headline consumer inflation slowed to 4.6% in July from 5.1% in June, much lower than forecast.

“Overall price pressures have been easing for some time now, reinforcing expectations that the Reserve Bank will cut interest rates by at least 50bps and possibly even 75bps before year-end, with the first cut anticipated in September,” said Golding.

BUSINESS REPORT