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Analysts bullish on SA listed property in 2025

Staff Writer
Estimated reading time: 3 minutes

The property sector is well-positioned for continued growth in 2025, buoyed by recent interest rate cuts, strong performances in retail and industrial markets, and a stabilising office sector.

After a notable rebound in October, real estate investment trusts (REITs) delivered a 34% year-to-date return, outperforming other asset classes such as equities and bonds.

Independent property analyst Keillen Ndlovu

noted

that the sector’s outlook improved in the second half of 2024, with most REITs and property companies, which had earlier reported lower earnings, now forecasting modest positive growth for 2025.

Despite the challenge of higher interest rates, the sector has maintained strong financial management, with manageable loan-to-value and interest cover ratios.

Estienne de Klerk, chair of the SA REIT Association and CEO of Growthpoint Properties SA, said that while the benefits of interest rate cuts may take time to fully materialise, they will help REITs raise capital, refinance loans, and acquire assets.

He added that these cuts will enhance interest cover ratios and earnings by allowing debt refinancing at more favourable rates, thereby strengthening tenants’ financial health and their ability to absorb rent increases.

While listed property shares have rebounded largely due to positive sentiment from the formation of the Government of National Unity (GNU), Evan Robins, a property fund manager at Old Mutual Investment Group cautioned against the sector remaining in a holding pattern.

More critical than the GNU’s impact are the need for interest rate cuts and stronger domestic economic growth to drive further gains. Despite a weaker performance than other asset classes over the past decade, the sector’s recovery has been fuelled by improved fundamentals, said Robins.

Investors see listed property as a hybrid opportunity offering both capital appreciation and consistent yield, particularly attractive due to falling bond yields.

Robins said that the ongoing interaction between inflation, earnings growth, and interest rates will determine future capital allocations between bonds and property, with property offering greater long-term growth potential due to its earnings.

However, the pandemic’s impact has led to a lower base for rental earnings, and a macro driver—such as further interest rate cuts or stronger GDP growth—is needed to push the sector beyond its current valuation levels.

Given these conditions, Robins said that South African listed property is expected to deliver decent returns in the medium term if economic fundamentals improve. The sector’s prospects depend on South Africa addressing economic constraints and achieving GDP growth of 2% or more.

In 2017, after nearly a decade of strong growth, the local listed property sector suddenly entered a three-year decline, said Efficient Wealth in a note. This underperformance was triggered by a 20% appreciation in the rand, which impacted an index that generated almost 40% of its income from abroad.

The decline was further compounded by reports of share manipulation and misleading statements from the Resilient group, which made up nearly 40% of the index, causing share prices to plummet by as much as 65%.

Shortly after, the COVID-19 pandemic hit, leading to a 55% drop in the index as lockdowns, work-from-home policies, and weakened landlord bargaining power took their toll, Efficient Wealth noted.

Although the sector showed signs of recovery after restrictions eased in 2021, it underwent significant restructuring. With property being a debt-heavy asset, the environment remained cautious as interest rates rose in 2022 and 2023. However, over the past year, the sector has delivered a robust return of over 50%, prompting many investors to reconsider their exposure.

While recent gains were largely driven by a very low base, better sentiment due to political reforms, improved growth prospects, and the anticipated start of the rate-cutting cycle have helped boost confidence.

Additionally, the sector is showing favourable valuations and improving fundamentals. From a valuation standpoint, the sector continues to trade at a 20% to 30% discount to its net asset value, significantly below long-term averages, said Efficient Wealth.

Rental reversions, particularly in retail, have improved, and vacancy rates, including in office spaces, have decreased. Furthermore, company loan-to-value ratios have fallen from their peak levels and stand to benefit from a lower cost of borrowing as interest rates decline.

“While some caution remains on the durability of the recovery, the property sector seems to be working through its challenges. Improving fundamentals and attractive valuations combined with diversification benefits and characteristics of both income and growth make listed property worthy of consideration, said Efficient Wealth.

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