South Africa’s listed property sector has seen a remarkable recovery in 2024, with a 52% total return over the year to 30 September, outperforming SA bonds and equities. For those who missed the rally, the question is whether it’s too late to invest.
Rahgib Davids, portfolio manager at M&G Investments
explores
the reasons why he believes it still offers a compelling opportunity to invest.
The sector has experienced cycles of “greed” and “fear.” The boom years, driven by quantitative easing and the rise of REITs, ended in 2018 with the Resilient stable fallout, revealing unsustainable practices. This led to a period of “fear,” marked by economic challenges, the pandemic, and loadshedding.
“The comeback rally began in October 2023, sparked by optimism at the prospect of an interest rate cutting cycle, signalled by a halt in the US Fed’s rate hikes and slowing inflation. This was the further bolstered by the end of loadshedding and a market-friendly election outcome in South Africa, leading to SA bond yields compressing 250bps.
“This shift reflected a reduced SA risk premium and a revival of positive sentiment, which extended to SA listed property, prompting its re-rating accordingly.”
This period of “hope” reflects a fundamental transformation in the sector, setting it up for sustainable growth, said Davids.
To survive the downturn, the sector underwent significant changes:
Despite SA’s weak economy, the sector is poised for growth due to:
“Approximately 60% of the SA listed property stock assets are located offshore, including high growth regions, such as Central Eastern Europe and Spain, where property fundamentals are robust. This diversification helps to mitigate the impact of South Africa’s underwhelming economic performance,” said Davids.
Investment Potential
Post-rally valuations remain reasonable, with the SA All Property Index offering an 8% dividend yield and a 0.7 times price-to-book ratio. The sector is expected to deliver 5% nominal growth, translating to a total return of around 13%.
“For income-seeking investors, listed property has re-emerged as a reliable source of income yield with inflation hedge potential,” said Davids.
“In summary, we believe it is a good time to re-enter the listed property market. This asset class is reinvigorated and possesses a unique risk-return profile reflective of both bonds and equity – worthy of inclusion in any diversified portfolio.”
Valuations have converged, leading to a cautious approach in stock selection, focusing on high-quality companies with strong cash flow and healthy balance sheets.
Preferred investments include SA mid-cap stocks with minimal office exposure, retail properties in SA and Europe, and niche sectors like affordable residential and self-storage, said Davids.