Keillen Ndlovu, an investment analyst for the SA Reit Association, stated that the share prices of listed property companies reflect the numerous challenges the sector has faced beyond its control, but the outlook for 2025 and beyond looks more promising.
Ndlovu noted during an online vent this week, as reported by Business Report, that the sector has been viewed less favourably by institutional and retail investors in recent years, despite a notable increase in share prices since October.
For example, while the All-Share Index is trading near its historic highs, listed property shares are at the same level they were in 2010.
“Everyone thought the sector had bottomed in 2020, but then Covid came, which hit the property sector hard. Share prices recovered from that, but fell again after the looting in KwaZulu-Natal, and then again through load shedding, and then also because of the high interest rates,” said Ndlovu.
However, he pointed out that there are currently some “green shoots” in the market.
The establishment of the Government of National Unity (GNU) has the potential to boost business confidence and reduce inefficiencies in municipalities and government departments, such as the Department of Public Works.
Another positive factor is the improvement in business fundamentals across all metrics in the property sector. More employees are returning to offices, with average office vacancies falling to 14.2% from around 20%.
Although it took time for lower interest rates to impact earnings in the sector, it appears that the high-interest rate environment has peaked, Ndlovu added.
There have been 110 days without load shedding, reducing the need for property owners to buy diesel for generators, preventing lost trading due to power outages, and decreasing crime rates.
Ndlovu highlighted that the earnings trend for South Africa's listed properties is on an upward trajectory.
He projected a 3% to 4% decline in average earnings for 2024 but expects this figure to stabilize in positive territory in 2025 and rise to above or around the inflation rate in the following year.
Last year, only three REITs—SA Corporate, Safari, and Attacq—reported above-inflation earnings.
Indicating lower investor interest, Ndlovu said that when the property sector was generating good returns, institutional investors like pension funds typically held between 6% and 7% of their portfolio investments in property assets, but last year this figure fell to below 3%.
However, he anticipates more institutional investment in the sector this year, citing the Public Investment Corporation's recent increase in its shareholdings in Growthpoint, Redefine, SA Corporate, and NEPI Rockcastle.
Over the past year, listed property stocks have risen by 26.3%, and Ndlovu expects this momentum to continue.
Property shares ended as the best-performing sector on the JSE last year following a rally in prices after October.
Before 2018, it was easy for listed property companies to raise funds from stock market investors, with oversubscribed accelerated bookbuilds being common. Currently, companies are primarily sourcing additional funding through dividend reinvestment options for shareholders, a trend Ndlovu expects to continue.
He also noted that the retail property market is performing relatively well, with rural and township retail properties and smaller shopping centres outperforming.
Office vacancies are improving, and if the economy improves, there will be increased demand for office space, although there is currently very little office construction. In the industrial property market, vacancies and rental rates continue to improve, driven by the growth of logistics, warehousing, and online shopping.
Ndlovu concluded by stating that the average discount to net asset value that listed companies are trading at is around 34.85%.
Financial Mail recently reported that property companies have been among the JSE’s biggest winners due to improved investor sentiment, softer bond yields, and a somewhat stronger rand, which has increased interest in undervalued South African stocks.
The extent of the Reit recovery will also hinge on the rand exchange rate. In a research note titled "SA Property Geared to an SA Inc Recovery," Anchor Stockbrokers suggests that the robust offshore expansion drive of local Reits over the past five to ten years will aid the sector's rebound.
This is because several local property companies financed their offshore acquisitions by utilising hard currency debt, cross-currency interest rate swaps, and short euro positions (hedges) on their South African balance sheets.
Anchor Stockbrokers said: “While these positions were very damaging in times when the rand depreciated sharply, these instruments will have the opposite effect as the rand strengthens.”
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