SA REITs show resilience amid adversity

South Africa’s listed property sector has demonstrated its resilience even in the current tough economic and high interest rate environment.

The sector’s fortunes look set to gradually improve in the medium to long term, based on forecasts that interest rate hiking has reached its peak and a predicted improvement in the availability of electricity, which will have a positive impact on economic growth.

Performance of the REIT sector improved to deliver a better-than-expected total return of 0.7% in 2Q 2023, although performance was flat for 1H 2023.

SA REIT Association Chairman and Growthpoint Properties SA Chief Executive Officer, Estienne de Klerk, says that he is optimistic about the resilience of the sector even though the second half of the year will remain tough.

De Klerk points out that leasing has picked up in the office sector, although it still lags other commercial property sectors owing to some businesses consolidating space, adding to an over-supply in the market. “Businesses that previously gave up offices are returning to the market. Office vacancies in Cape Town and Durban have reduced remarkably and letting activity has increased significantly in Gauteng,” says de Klerk.

This is acknowledged by SA REIT Association CEO Joanne Solomon, who is optimistic about the rental market and demand for office space in particular. “The rental market is showing signs of gradual recovery, despite challenges posed by municipal rates and utility increases in metropolitan areas. The industry is working together to try and reduce the impact in the future of municipal increases,” says Solomon.

De Klerk notes that the logistics and healthcare property sectors are performing well, with the former showing strong results despite some fluctuations in key metrics. Supply and demand in the logistics sector have become more evenly balanced as new development has slowed due to high construction costs linked to higher inflation.

He also says that even though there are good investment opportunities in the market, disposal and acquisition activity in the sector is subdued due to the higher cost of funding and constrained balance sheets, with many companies focusing on managing their loan-to-value ratios.

“Liquidity remains limited and there are not many buyers in this market. Buyers are generally owner-occupiers or small investors assembling portfolios. In certain cases, vendor finance is required, and this is not attractive to many sellers,” says de Klerk.

Keillen Ndlovu, an independent property analyst, says the strategy that various REITs have adopted to dispose of assets to help reduce debt is likely to remain in place. “Dividend reinvestment options or scrip dividends will continue to be a source of funding. Given the massive divergence between listed property prices and physical property values, we may see further consolidation and delistings,” Ndlovu says.

He also says that although the sector is cheap, prospects will further improve once South Africa sees a decrease in load shedding, lower interest rates and a more optimistic economic growth forecast.

In response to the shrinking base of the listed property sector, which has fewer counters on the JSE and a market cap of around 48% less than its peak in December 2017, de Klerk notes the current situation is common for this business cycle and may reverse in more favourable market conditions.

Commenting on listed property companies with offshore exposures, de Klerk says they have not been immune to the high interest rates and inflation which have affected the global real estate sector.

“South African companies that have invested offshore generally adhere to the same conservative principles and disciplines for managing their offshore debt as they do in the more volatile South African environment. As a result of this prudent approach they have performed better than many other investors in these international markets,” he says.

Looking ahead to the future prospects of SA REITs, de Klerk says property remains a long-term investment game and those investors prepared to invest now will reap the rewards when the interest rate cycle improves.

“In the short term, however, most REITs’ distributions will be negatively impacted by higher interest rates on their variable debt. This will reverse when rates start reducing. Several SA REITs are trading at significant discounts to their stated NAVs and offer strong long-term value,” de Klerk says.

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