South African Real Estate Investment Trusts (REITs) are a key component of diversified multi-asset portfolios as they deliver stability and attractive returns amid an uncertain global economy.
Since the early 2000s, REITs have experienced significant growth – they now represent 4.9% of the JSE All Share Index (ALSI), 10.2% of the JSE Mid Cap Index and 26.0% of the JSE Small Cap Index.
Naeem Tilly, a member of the SA REIT Association Research Committee and Portfolio Manager & Head of Research at Sesfikile Capital commented:
“REITs remain underrepresented in local balanced funds, with allocations averaging just 2.1% at the end of the third quarter of 2024. This is despite their potential to enhance risk-adjusted returns, thanks to their low correlation with traditional asset classes like equities and bonds.”
Optimal allocations to property in local portfolios is 23%.
Research from the SA REIT Association entitled: REITs in a multi-asset class portfolio, indicates that the recent increase in offshore limits under Regulation 28 has led to a substantial reallocation of assets towards foreign bonds and equities.
The Alexforbes Manager Watch survey shows an average allocation of 4.1% since 2018 and 3.1% at the end of 2023 for a global balanced fund.
“Combining assets with low performance correlation allows investors to reduce portfolio risk while preserving return potential, a key principle of effective portfolio optimisation,” said Tilly.
Tilly said REITs are an asset class that offers significant diversification benefits. Since 1976, global REITs have shown imperfect performance correlations with both the broader equity market (0.42) and bonds (0.37), which are typically considered core holdings in a diversified portfolio. A perfect positive correlation is +1, while zero correlation indicates no relationship. “In the past decade, the correlation with local bonds has increased to 0.49.”
REITs stand out due to several key features. They are required to distribute at least 75% of taxable income as dividends, which historically make up 80% of their total returns and help reduce volatility during market stress. The predictability of real estate leases and rental income gives REITs a defensive edge, enabling more accurate earnings forecasts and lower share price volatility. Additionally, REIT dividends are protected from inflation, unlike many bonds, as asset values and rental rates often rise with inflation.
Itumeleng Mothibeli, Chairperson of the SA REIT Association Research Committee and Managing Director of Vukile Property Fund Southern Africa, said these findings align with global insights from Oxford Economics, which highlight the complementary roles of listed and direct real estate investments. Listed REITs, with their liquidity and diversification advantages, are particularly well-suited for higher-risk portfolios, while direct real estate offers stable income and consistent performance.
“The defensive qualities of South African REITs—such as their inflation protection and mandatory income distributions—make them essential for building resilient portfolios. By harnessing the unique advantages of REITs, South African investors can enhance diversification, stability and long-term growth,” said Mothibeli.
As global economic uncertainties persist—driven by fluctuating interest rates and geopolitical tensions—reassessing strategic allocations to REITs offers significant potential for both local and international investors, added Mothibeli.
Download the REITs in a multi-asset class portfolio report here: https://bit.ly/3EobfPK
