SA REIT’s set to achieve positive income growth after three years of decline

• SA REITs expected to see positive distributable income growth for the first time in three years despite economic challenges.
• Interest rates and the Expropriation Bill pose ongoing challenges, creating uncertainty for SA REIT investors.
• Global inflation and US tariff concerns dampen investor sentiment, contributing to a 3.6% decline in SA REIT performance in January.

South African REITs: Positive Growth Amid Economic Challenges

The South African Real Estate Investment Trust (SA REIT) sector is set to experience its first positive distributable income growth in three years, according to Ian Anderson, Head of Listed Property and Portfolio Manager at Merchant West Investments.

Anderson, who also compiles the monthly Chart Book for the SA REIT Association, highlighted several factors driving this optimistic outlook, but also pointed to ongoing risks.

Key Points:

1. Positive Growth for SA REITs:
   Anderson emphasized that after three years of challenges, the sector is poised for positive distributable income growth in 2025. Despite significant headwinds, this growth marks a welcome recovery.
2. Interest Rate Outlook:
   One of the primary risks to this growth is the interest rate environment. While the South African Reserve Bank (SARB) recently reduced interest rates by 25 basis points, Anderson noted that interest rates are unlikely to fall as quickly or as drastically as previously anticipated. This prolonged period of high rates will continue to affect REITs and other interest-sensitive sectors.
3. Impact of the Expropriation Bill:
   The signing of the Expropriation Bill into law by President Cyril Ramaphosa has added further uncertainty. “This development has introduced new concerns for investors, particularly regarding the long-term stability and predictability of the market,” Anderson said.
4. Loadshedding Threat:
   Adding to the challenges, Anderson pointed out the potential negative effects of load-shedding in February. “The threat of additional load-shedding is likely to dampen investor sentiment,” he explained. This could impact the momentum that SA REITs had built in 2024, with performance expected to struggle in the short term.
5. Global Economic Influences:
   A critical external factor is the global economic environment. Anderson noted that the threat of increased tariffs, particularly following US President Donald Trump’s comments on raising tariffs on countries like China, Canada, and Mexico, has contributed to a global inflationary environment. This, combined with higher global bond yields, presents challenges for REITs and other interest-rate sensitive assets.
6. January 2025 Performance:
   SA REITs underperformed the broader equity market in January, with a 3.6% decline compared to the broader market’s 2.3% gain. Precious metals and bonds saw strong returns, while SA REITs struggled due to higher inflation and investor caution.
7. Historical January Trends:
   Anderson highlighted that it is not unusual for SA REITs to start the year with negative returns. Since 2020, they have only posted a positive return in January once, in 2024. Despite this, some individual REITs showed resilience in January. Texton Property Fund led the pack with a 12.5% gain, followed by Accelerate Property Fund (+2.1%) and Spear REIT (+0.9%).

In summary, while 2025 may see positive growth in distributable income for SA REITs, various external and domestic challenges, such as interest rates, geopolitical risks, load-shedding, and the impact of the Expropriation Bill, are likely to create a more uncertain environment for investors. Anderson remains cautious but optimistic, emphasizing the need for strategic adjustments in the face of these challenges.

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