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South African real estate investment trusts (SA Reits) are extending their lead over equities and bonds, as stronger balance sheets and growing distributions help restore investor confidence after years of pressure from higher interest rates.
The sector has outperformed equities in four of the past five months, maintaining its momentum despite the South African Reserve Bank’s September interest rate increase.
SA Reits delivered a total return of 2.4% in October, taking their gains for the year to 6.5%, ahead of bonds at 5.7%. Equities, by contrast, have lost 3.6% over the same period.
The resilience reflects a stronger financial position across the sector, with improved balance sheets helping listed property companies absorb higher borrowing costs, said Merchant West Investments head of listed property Ian Anderson.
“SA Reits had another good month, beating equities in four of the past five months and leading both equities and bonds this year. A large part of the explanation is the strength of balance sheets,” Anderson said.
The improving performance of the bond market has also provided a more supportive backdrop for listed property. South Africa’s long bond yield eased to 8.72% in October, while the medium-term budget policy statement confirmed government debt had peaked.
The Treasury reinforced the shift in sentiment by cutting weekly fixed-rate bond issuance by R600m and announcing a bond buyback programme. Bond yields are an important consideration for Reits because they influence property valuations and the returns investors demand from income-producing shares.
However, the improving market conditions do not necessarily mean the sector is cheap by every historical measure. Anderson cautions against using the long-term yield differential as a straightforward valuation benchmark, arguing that the composition of the sector has changed since 1998, when listed property companies were predominantly invested in domestic property.
Larger listed property groups now have substantial offshore exposure, making comparisons with the historical average less meaningful.
“The long-run average is no longer a fair benchmark,” he said.
Over the past five years, the yield differential has averaged minus 181 basis points, a measure against which Anderson considers the sector slightly undervalued.
Investor appetite is also signalling renewed confidence in the sector. Fairvest increased its accelerated bookbuild from R500m to R1.25bn after the offer was oversubscribed, with proceeds earmarked for recent acquisitions and further retail property opportunities.
SA Reit Association CEO Joanne Solomon said the willingness of investors to provide fresh capital reflected confidence in the sector’s prospects.
“Investors continue to support our members with fresh capital on tight terms, as this month’s upsized and oversubscribed bookbuild shows,” she said.
The appetite for listed property is being matched by a recovery in shareholder payouts. Distribution growth reached 11.09% over 12 months, its strongest level since 2017 outside the distorted comparisons of 2021 and 2022, and more than double inflation of 4.4%.
Solomon said lower bond yields and temporary fuel levy relief from November could provide further support, particularly for retail-focused Reits.
“Lower bond yields underpin Reit valuations. Fuel levy relief from November also puts money back in consumers’ pockets, which supports the retail tenants at the heart of so many of our members’ portfolios,” she said.
Anderson expects mid to high single-digit distribution growth across most companies in the 2027 financial year, with low gearing and disciplined debt hedging helping protect balance sheets against interest rate pressures.