South Africa’s Real Estate Investment Trusts (REITs) are gaining traction as a compelling investment opportunity, thanks to a confluence of favourable global and local economic developments, says Nazeem Samsodien, real estate equity analyst, Investec Corporate & Institutional Banking.

A range of macroeconomic factors are aligning to make South Africa’s REITs a top pick for investors in 2025, alongside equities, with both asset classes likely to outperform bonds this year, he said.

On the global front, the Trump administration’s protectionist policies and their impact on inflation are pushing up US 10-year bond yields, which increased by roughly 70 basis points (bp) since the Federal Reserve began the latest rate-cutting cycle in September 2024.

“US 10-year treasury bonds serve as a bellwether for president Trump’s proposed economic policies because they responded similarly during his first term, rising by roughly 60bp from 2.4% in January to 3.0% in September 2018, before reversing the rise in yields by the end of the year given increased concerns of a slowdown in global growth,” said Samsodien.

Against this backdrop, South African REITs offer a compelling mix of yield, resilience, and value, making them an increasingly attractive option in a diversified investment portfolio for 2025.

As such, the 70bp rise in US 10-year bond yields since October last year likely stems from markets pricing in Trump’s proposed economic policies to a certain extent.

Similarly, the dollar appreciated by roughly 5% since the start of October 2024, like its movements in 2018 in response to Trump’s protectionist policies.

In this scenario, assuming the US 10-year bond yield trades at 4.3%, an inflation differential between South Africa and the US of 2.5%, and an SA sovereign risk premium of 3.6%, Samsodien said that Investec analysts forecast that the SA 10-year bond yield will dip below 10.3%, which should provide a total return of roughly 11% for SA bonds by December 2025.

In contrast, Investec analysts forecast that South Africa’s REITs will deliver a total shareholder return of 14.7% and 22.5%, respectively, should the base case (10.3%) and bull case (9.4%) for SA 10-year bond yield scenarios play out.

In addition, the Trump presidency will likely spur lower oil prices as deregulation and slower economic growth dampen global oil demand.

Declining global oil prices are expected to ease inflationary pressures in South Africa, with the Consumer Price Index (CPI) projected to average 3.7% year-on-year in the first half of 2025, rising modestly to 4.35% in the second half.

This subdued inflation outlook creates room for the South African Reserve Bank (SARB) to implement a cumulative interest rate cut of up to 100 basis points over the course of the year—providing a much-needed boost to domestic economic activity.

In parallel, continued capital investment in fixed assets is poised to lower South Africa’s risk premium, reinforcing investor confidence and creating additional momentum for sustained economic growth.

Should the country achieve real gross fixed capital formation growth (GFCF) of 4% y/y, which Samsodien noted is a conservative estimate, South Africa’s real GDP growth could improve to 2.5% per annum in the medium term, potentially moving the country’s budget deficit to below 3.5% by 2026/27.

“If real GDP growth in South Africa recovers to around 1.8% in 2025, which is likely amid lower interest rates and consumer-driven spending on the back of the two-pot retirement withdrawals, history suggests that SA equities and property will outperform SA bonds roughly 90% of the time,” said the analyst.

“Ongoing capital investment in fixed assets in South Africa could further lower the country’s risk premium and add additional tailwinds to the economy,” he added.

South Africa’s Government of National Unity (GNU) remains under scrutiny as it works to demonstrate its effectiveness. Delays in reaching consensus on budget outcomes highlight the complexities of a multi-party system, marked by vigorous debate and negotiation.

For investors, diversification into SA REITs offers an attractive risk-reward profile, underpinned by limited downside and strong domestic tailwinds. Average organic net property income (NPI) growth reached 5.1% in 2024, up from 4.0% in 2023—driven by improvements in renewals, rental escalations, operating costs, and vacancies, said Samsodien.

Vacancy rates remain low across most sectors, while in-force rental escalations have stabilized at around 6.4%, down from the long-term average of 8%. Rental renewal trends are largely positive, with the exception of the office segment. However, major office landlords are well-positioned to benefit from a macroeconomic rebound, which could spur business investment and reduce vacancies.

“Reduced interest rates are also helping to gradually lower the weighted average cost of debt (WACD) for REITs, which peaked in 2024. A 0.2%-point reduction in the WACD will likely add 1.5% growth to distributable earnings, which further supports the buy recommendation on SA REITs.”