South African Real Estate Investment Trusts (REITs) have become a cornerstone of diversified multi-asset portfolios, providing stability and attractive returns in an unpredictable global economy.
Since the early 2000s, REITs have grown significantly, now making up 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.
However, they are underrepresented in local balanced funds, with allocations averaging only 2.2% in 2024.
For 2024, SA Reits delivered an impressive 35% return, outperforming equities (13%) and bonds (17%).
Naeem Tilly, a member of the SA REIT Association Research Committee and portfolio manager & head of research at Sesfikile Capital, noted: “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.”
The optimal allocation to property in local portfolios is 23%. Research from the SA REIT Association suggests that the recent increase in offshore limits under Regulation 28 has resulted in a significant shift towards foreign bonds and equities.
According to the Alexforbes Manager Watch survey, global balanced funds have seen an average allocation of 4.1% since 2018, dipping to 3.1% by the end of 2023.
“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 also pointed to REITs as a valuable asset class, offering significant diversification benefits. Since 1976, global REITs have shown low correlation with both the broader equity market (0.42) and bonds (0.37), which are typically core holdings in diversified portfolios.
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 for their key characteristics. They are required to distribute at least 75% of taxable income as dividends, which historically account for 80% of their total returns, helping reduce volatility during market stress.
The predictability of real estate leases and rental income provides a defensive edge, enabling more accurate earnings forecasts and lower share price volatility.
Additionally, REIT dividends are inflation-protected, unlike many bonds, as asset values and rental rates often rise with inflation.
Itumeleng Mothibeli, chairperson of the SA REIT Association Research Committee and MD of Vukile Property Fund Southern Africa, said that these findings align with global research from Oxford Economics, which underscores the complementary roles of listed and direct real estate investments.
Listed REITs, with their liquidity and diversification benefits, are ideal 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 leveraging the unique advantages of REITs, South African investors can enhance diversification, stability, and long-term growth,” said Mothibeli.
As global economic uncertainties continue—driven by fluctuating interest rates and geopolitical tensions—reassessing strategic allocations to REITs presents significant potential for both local and international investors, Mothibeli added.