Boosting Investor Sentiment: Strengthening Property Fundamentals in SA

SA REITs have outperformed other asset classes with a 34% return, boosted by lower interest rates and strong institutional interest.

September was a standout month for South African Real Estate Investment Trusts (SA REITs), buoyed by lower interest rates that have revitalized investor sentiment. The recent decline in interest rates has led to reduced bond yields and discount rates, driving up property values and enhancing future profitability as debt costs decrease.

• ‍SA REITs have returned 34%year-to-date, significantly outperforming the broader equity market and SouthAfrican bonds at 15.9% and 16.7%, respectively.
• Lower interest ratesin South Africa and the U.S. have driven property values up and reducedborrowing costs, boosting investor sentiment.
• September saw nearly R14 billionin shares traded, marking the highest monthly trading value of 2024, reflectingstrong institutional interest

Understanding Investor Sentiment: The Impact of Lower Interest Rates on SA REITs

Since the establishment of the Government of National Unity, SA REITs have outperformed other asset classes, delivering an impressive 34% return year-to-date. In comparison, the broader equity market and South African bonds yielded returns of 15.9% and 16.7%, respectively. This positive trend was further highlighted in September, with nearly R14 billion in shares traded—the highest monthly trading value of 2024 to date.

The September SA REIT Chart Book indicates that expectations of lower official interest rates, both in the U.S. and South Africa, have propelled this recovery. The U.S. Federal Reserve’s recent rate cut of 50 basis points, alongside a 25 basis point reduction by the South African Reserve Bank, has aligned with market expectations, further supporting SA REITs.

Ian Anderson, Head of Listed Property and Portfolio Manager at Merchant West Investments, noted that lower interest rates are advantageous for listed property companies. They contribute to reduced bond yields and discount rates, increase property values, and, with an average gearing level of 38% among South African REITs, result in higher future profits as debt costs decline.

While the impact on profitability will take time to fully materialize—given that many REITs hedge interest rate risks over two to three years—the signs are promising. Anderson observed that improving property fundamentals are positively shifting investor sentiment, with significant institutional interest reflected in trading volumes.

Investor Sentiment and the Outlook for SA REITs: Trends and Opportunities

Not all REITs had a smooth month; Growthpoint Properties faced challenges, reporting a 10.3% year-on-year decline in distributable income due to higher funding costs in Europe and a lower dividend from its Australian operations. In contrast, Attacq Limited and Hyprop Investments saw positive results after selling their Sub-Saharan Africa portfolios, with Hyprop's share price jumping over 20% in September.

Additionally, Vukile Property Fund successfully raised R1.5 billion in new equity, and Spear secured R458 million through a vendor placement, signalling growing institutional appetite for SA REITs.

With narrowing discounts to net asset value (NAV) and stabilizing vacancy rates, the potential for capital growth remains strong. Falling borrowing costs and a reduction in loadshedding are set to further enhance distributable income in the near term.

As the outlook for SA REITs remains bright, investors can anticipate continued gains in 2024. For more insights, download the September SA REIT Chart Book at SA REIT Research.