In the eighth episode of The REIT Report on Classic Business (Fine Music Radio), Ian Anderson, Head of Listed Property and Portfolio Manager at Merchant West Investments, joins hosts Michael Avery and Alistair Anderson of Property Flash to unpack the latest SA REIT Association chart book and what the May numbers reveal about the underlying health of the sector.

Anderson sets the scene with a sector that delivered a 0.7% total return in May, ahead of the All Share at negative 0.3% but behind bonds at 2.9%, with the year to date sitting at 2% and rolling 12-month distribution growth at a healthy 9.4%. His read on the muted performance is that investors are simply pausing for breath after an extremely volatile March and April, with conviction levels around the direction of global growth, interest rates and bond yields running at unusually low levels.

Beneath the share price action, however, the fundamental story is materially stronger. Distributable earnings growth, now widely reported as funds from operations, is approaching 10% across the sector, with Fairvest delivering more than 12% growth in distributable earnings and dividends in its latest set of results. Anderson argues that REIT share prices should be higher than they currently are, with the gap between price and fundamental momentum largely explained by uncertainty around the path of US interest rates and the bond market response to a Federal Reserve under pressure to act on its balance sheet. He flags that a durable cease-fire in the Middle East and a drift in bond yields back towards 8% to 8.5% would likely be enough to restart the price momentum that defined earlier parts of the post-Covid recovery.

On valuation, Anderson positions the South African REIT sector as broadly fair when properly adjusted for geographic exposure. With significant property held in Europe and the United Kingdom, where bond yields sit well below South African levels, a simple comparison to local long bonds understates the true valuation picture. The conversation turns to a wave of aggressive capital raising at Vukile and Spear, which Anderson describes as counter-specific and rewarding companies with the strongest growth profiles and the best historical capital allocation discipline. He cautions that the two deals following those raises, Vukile’s entry into Italy at double-digit euro yields and Spear’s acquisition of P-grade office space in the Western Cape with shorter lease profiles, will be watched closely. Both transactions are earnings accretive in year one, but they raise the familiar chicken-and-egg question of whether the deal drove the raise or the raise drove the deal, a dynamic that ended badly for the sector in 2018 and 2019.

Anderson then turns to Equites, now effectively a pure-play South African logistics platform following its UK exit. Strong structural tailwinds, including Amazon Prime’s South African launch and The Foschini Group’s plan to close 400 stores in favour of online distribution, support the local demand picture. Equites has not yet enjoyed the same value uplift seen in offshore peers such as Segro and Prologis, where the repurposing of warehouses into data centres has rerated the segment, but Anderson sees no immediate need to follow that path. The watch item remains tenant concentration, with around 40% of Equites’ revenue now coming from Shoprite, a counterparty he flags as exceptionally well run and growing exponentially relative to the wider market.

Reporting season is rounded off as a clear positive. Vacancies have come down, rent reversions are no longer running at the minus 20% levels seen three to four years ago in offices, market rentals are ticking up and lower funding costs are flowing through. Anderson highlights solar as the underestimated tailwind, with Fairvest’s community and neighbourhood centres particularly well placed to take advantage of available roof space. Solar now contributes a profit line of growing materiality, with Spear already breaking it out as a separate line item. Combined with expensive legacy debt still rolling off at lower rates, the setup points to continued strong growth in distributable earnings and funds from operations over the next 18 to 24 months.

The REIT Report is a twelve-part podcast series produced in partnership with the SA REIT Association and Property Flash.

Listen to Episode 8: https://iono.fm/e/1686889