South Africa's REIT sector February Update: Recovery and Challenges ahead

• South Africa's REIT sector rebounded 1.2% in February, outpacing equity and bond markets, but remains 2.5% down year-to-date.
• Analysts expect 3%-5% growth in distributable income in 2025, supported by lower interest rates and improved fundamentals.
• Geopolitical tensions and inflation risks could increase volatility, with concerns over US tariffs and weaker global economic growth.

In February, South Africa's Real Estate Investment Trust (REIT) sector showed signs of recovery, bouncing back by 1.2% after the price declines seen in January. While this rebound outpaced broader markets, the sector still faces challenges for the year ahead.

Below, we break down the key developments and outlook for the REIT sector.

1. February Recovery vs. Broader Markets

• The REIT sector saw a 1.2% increase in February, following a tough January.
• The equity market remained flat at 0.0%, while the bond market posted a modest 0.1% gain.
• Despite this recovery, the REIT sector remains down 2.5% year-to-date, underperforming both equity and bond markets.

2. Positive Outlook for 2025

• Investment managers Ian Anderson and Richard Henwood remain optimistic about the REIT sector for 2025.
• They predict a modest improvement in property fundamentals, coupled with the possibility of lower interest rates.
• Developments such as a 25-basis point rate cut by the South African Reserve Bank, a reduction in loadshedding, and the introduction of the two-pot retirement system by the end of 2024 provide a favourable environment for the sector.

3. Projected Growth in Distributable Income

• The REIT sector is expected to see average growth in distributable income of 3% to 5% in 2025.
• This would mark a positive turnaround after three years of stagnation, though it remains cautious due to external market factors.

4. Geopolitical and Inflationary Risks

• Despite the optimistic outlook, global geopolitical tensions, such as the potential for increased tariffs from the US, could pose risks to the market.
• The ongoing tariff threats could fuel inflation, complicating efforts by central banks to further reduce interest rates in 2025.

5. Global Market Volatility

• Volatility in global financial markets remains high due to geopolitical risks, with concerns over inflationary pressures.
• Weak economic data from the US in late February further raised concerns about future growth prospects for the world’s largest economy.

6. Challenges in South Africa

• In South Africa, market uncertainty was compounded by the delayed 2025 Budget Speech, which followed the rejection of proposed fiscal measures, including a 2% VAT increase.

7. Company-Specific Successes

• Despite broader challenges, some individual companies within the REIT sector have shown strong performance:
  • Burstone’s partnership with TPG Angelo Gordon led to the acquisition of A$280 million worth of logistics assets in Australia.
  • Dipula Income Fund reported strong growth in retail tenant turnover and improvements in operational metrics.
  • Equites Property Fund remains optimistic, forecasting stable dividends and a reduction in its loan-to-value ratio.

While the South African REIT sector is experiencing recovery, it continues to face global and domestic challenges, particularly from geopolitical risks and inflationary pressures.

Despite these obstacles, the sector’s fundamentals appear to be improving, and investors can expect moderate growth in distributable income over the coming year. However, caution is advised as market volatility may persist, especially in light of global economic uncertainty.

Visit https://sareit.co.za/sareit-research/ to download the SA Reit Chart Book for February.

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