The September SA REIT Chart Book reveals that the anticipated reduction in official interest rates in both the United States and South Africa has boosted the recovery of numerous South African Real Estate Investment Trusts (REITs) throughout the month.
The US Federal Reserve surprised markets by cutting interest rates by 50 basis points after its September policy meeting, while the South African Reserve Bank’s Monetary Policy Committee
lowered rates by 25 basis points, aligning with market expectations.
Ian Anderson, head of listed property and portfolio manager at Merchant West Investments, said: “Lower interest rates benefit listed property companies, as they typically lead to reduced bond yields and discount rates, increased property values, and, given that the average gearing level among South African REITs is around 38% - higher future profits due to declining debt costs.”
Anderson, who compiles the monthly SA REIT Chart Book, said the impact on profitability will unfold over time, as most REITs hedge their interest rate risk by fixing rates for periods averaging two to three years.
Since the formation of the Government of National Unity (GNU), SA REITs have outperformed other South African asset classes, returning 34% year-to-date compared to 15.9% for the broader equity market and 16.7% for South African bonds.
“Improving property fundamentals in South Africa have also shifted investor sentiment positively. In September, nearly R14 billion worth of shares changed hands, marking the highest monthly trading value in 2024, indicating rising institutional interest in the sector,” said Anderson.
He said this uptick has driven the prices of larger, more liquid companies higher, although most REITs experienced positive price gains in September.
The exception was Growthpoint Properties, which disappointed the market with its results for the year ending 30 June 2024.
Despite reporting improved operations in South Africa, particularly at the V&A Waterfront, higher funding costs in Europe and a lower dividend from Growthpoint Australia impacted results, leading to a 10.3% decline in distributable income year-on-year.
The company also projected a 2% to 5% decline in distributable income per share for 2025.
Attacq and Hyprop Investments completed the sale of their Sub-Saharan Africa portfolios, with both companies reporting results that exceeded market expectations, underscoring improved operating metrics in South Africa.
Hyprop's share price surged over 20% in September, while Attacq’s increased by 12.8%. Other notable performers included Burstone (+16.2%) and SA Corporate (+12.0%), both delivering double-digit capital growth.
Vukile Property Fund successfully raised R1.5 billion in new equity through a well-supported accelerated bookbuild, while Spear secured R458m through a vendor consideration placement.
These transactions reflect the growing appetite for SA REITs among institutional investors and the expansion aspirations of both companies, according to the September Chart Book.
Anderson said while discounts to net asset value (NAV) have narrowed in 2024, they remain wide by historical standards, offering investors significant potential for capital upside in a declining interest rate environment.
Vacancy rates have stabilised and are expected to decrease as demand for space increases, with limited new supply on the horizon.
Falling borrowing costs should further drive higher distributable income growth in the short to medium term.
“A reduction in loadshedding will also enhance distributable income growth in the near term, and SA REITs are likely to continue their impressive gains in 2024, albeit not at the same extraordinary levels seen immediately after the GNU's formation,” said Anderson.
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