Wednesday, January 19

SA Reits: performance, trends and prospects

South Africa’s listed real estate sector had a strong one-year performance, outperforming other asset classes, including equities. Although the sector posted an impressive one-year performance of 65% as of November 11, 2021 and a performance of 29.09% to date, fundamentals remain weak and the sector is still performing below levels. pre-Covid.

While the sector enjoyed a multi-year bull run, it began to fall in 2018, deteriorating further in 2020 due to the impact of Covid-19. Certainly, this pandemic has caused a double-edged economic and health crisis around the world, and it is far from over. Threats continue to emanate for the sector, especially subsectors sensitive to Covid-19, including the office sector.

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Source: Bloomberg, Morningstar Direct, November 11, 2021

What has driven this strong performance?

The sector is coming off a low 2020 base and the outperformance is largely attributed to the following:

  • The recovery in economic activity has been stronger than expected, driven by a strong rand and commodity prices.
  • Expectations of a return to “normality” after vaccination announcements in late 2020.
  • Liquidity from both debt and equity sources has been stronger than expected.
  • The resumption of dividend payments by most Reits has improved confidence and overall investor appetite.
  • Corporate action has provided short-term share price support and opportunities to unlock value in some names.

Will current performance continue?

It’s hard to say what the industry’s total return will be in the short term, but most real estate fund managers are forecasting a one-year term dividend yield at around 9% with growth in distributions forecast at around 12%. % due to the low base effect of Covid-19 in historical numbers. They remain wary of the risks the sector faces in the short term, including potential additional lockdown restrictions and the risks of additional rent exemptions and tenant concessions.

Industry trends

  • Alternative real estate and reuse. Given the level of oversupply, reusing offices in residential spaces would make more sense, but office valuations are too high to justify a conversion, barring a few opportunities in the CBDs of Johannesburg or Pretoria. Some of the commercial space has been converted to storage, but it is relatively small.
  • Flexible work (work from home). This continues to be an important issue globally. We have seen many companies change the views they had last year and start asking employees to come back to the office. Concerns around collaboration, team culture, and in some cases declining productivity levels are some of the main reasons for this. Some surveys show that employers will allow one or two days per week of remote work.
  • e-commerce. Increasingly important locally, it has already impacted many urban shopping centers. Still, many hurdles remain, such as a lack of physical addresses for delivery in rural and online fraud, but the investment of many retailers in their e-commerce platforms is indicative of where retailers see growth opportunities. Additionally, increased investment in e-commerce capabilities and the need to optimize supply chains have led to an increase in demand for logistics space, both locally and internationally.
  • Environmental, social and governance factors remain relatively new and, in their infancy, make it difficult to project the overall impact on the sector. However, increased spending and accelerated implementation of energy efficiency initiatives should help curb cost increases seen in recent years and ultimately lower operating costs for most Reits. The Covid-19 pandemic has shifted the weight of attention towards “social” criteria in the framework of sustainability in the short term. Research by the SA Reit Association (SAReit) estimates that approximately R3 billion of Covid-19 related rental relief was provided by the SA-listed real estate sector. The amount of relief provided was predominantly in the latter part of 2020 and early 2021, with the focus on retaining tenants, keeping businesses open, and people healthy and employed.
  • Technology. In some operating businesses, such as warehousing and industrial multi-rental businesses, technology plays a key role in attracting tenants and signing leases through its online platforms and data collection. This is an important differentiator for Stor-Age, Sirius, and Stenprop. Some retail funds like Vukile have invested in technology that collects and tracks shopper characteristics and behavior, allowing you to understand footfall patterns, consumer preferences, and more. a specific requirement of the tenant.


In conclusion, most real estate fund managers believe that the sector is highly valued and is overlooking several of the headwinds facing the market, mainly the economic environment and the constantly weakening office market. The recent rally has been driven by generalists and offshore flows that changed the calls of their asset classes, which they believe should correct. Once more people are vaccinated in the country and the pandemic is under control, there will be more value for the property to continue to recover.

Thabo Hlangwani, Research Analysis Manager: Absa Multi Management.

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