South African listed property set to boom
South African listed property, made up predominantly of real estate investment trusts (REITs), is an attractive investment opportunity and has the potential to boom in 2025.
This comes as multiple global and local economic factors are aligning to make REITs attractive to investors alongside traditional equities.
Equity analyst for real estate at Investec Corporate and Institutional Banking, Nazeem Samsodien, outlined these factors and how local REITs are set to benefit.
Samsodien explained that United States President Donald Trump’s actions in the US are likely to make South African fixed-income assets less attractive.
The Trump administration’s protectionist policies and their impact on inflation are pushing up US 10-year bond yields, which increased by roughly 70 basis points in September 2024.
US 10-year treasury bonds serve as a bellwether for Trump’s proposed economic policies because they responded similarly during his first term, rising by roughly 60 basis points in September 2018.
As such, the 70 basis point rise in US 10-year bond yields since October last year likely stems from markets pricing in Trump’s proposed economic policies to a certain extent.
Similarly, the dollar has appreciated roughly 5% since the start of October 2024, similar to its movements in 2018 in response to Trump’s protectionist policies.
In this scenario, assuming the US 10-year bond yield trades at 4.3%, Investec analysts forecast that the South African 10-year bond yield will dip below 10.3%, which should provide a total return of roughly 11% for local bonds by December 2025.
In contrast, Investec analysts forecast that South Africa’s REITs will deliver a total shareholder return of between 14.7% and 22.5%, should the base case for local 10-year bond yield scenarios play out.
This will naturally attract capital to this sector as investors see an opportunity to outperform through investing in a relatively safe asset.
Other tailwinds
Samsodien noted that REITs are also expected to benefit from other tailwinds in the South African economy, particularly further interest rate cuts.
Lower oil prices due to the expected slowing of global growth will continue to keep inflation towards the lower end of the Reserve Bank’s target range, giving it room to cut rates further.
Investec forecasts inflation to average 3.7% year-on-year in the first half of 2025 and 4.35% in the second.
As such, there is scope for the Reserve Bank to lower interest rates by a cumulative 100 basis points in 2025, which implies a further 75 basis points of cuts this year.
Ongoing capital investment in fixed assets in South Africa could also further lower the country’s risk premium and add additional tailwinds to the economy, Samsodien said.
Should the country achieve real gross fixed capital formation growth of 4%, a conservative estimate, South Africa’s GDP growth could jump to 2.5% per annum in the medium term, which could lower the country’s budget deficit to below 3.5% by 2026/27.
If real GDP growth in South Africa recovers to around 1.8% in 2025, history suggests that local equities and property will outperform government bonds roughly 90% of the time.
Key to this outcome is the stability of the ruling Government of National Unity (GNU), which has been vital for increased investor confidence in South Africa and a declining risk premium on assets.
However, historically, we’ve seen that local banks and discretionary retail should outperform the defensive property sector in a scenario where real GDP growth in SA recovers to more than 2% in the medium term.
This does not mean that diversifying into REITs does not make sense for investors, given the limited downside risks amid heightened uncertainty.
Local REITs are also benefiting from a convergence of domestic tailwinds that have helped push average organic net property income (NPI) growth to 5.1% for 2024 compared to 4% for the same period in 2023.
Moreover, most key metrics driving organic NPI growth, such as renewals, escalations, costs, and vacancies, are improving or stable, Samsodien said.
The sector is seeing low vacancies across the board, with the in-force escalation profile stabilising at an average of 6.4%, down from 8% over the past decade, while rental renewal growth trends within most sectors are positive, except for offices.
Reduced interest rates are also helping to gradually lower the weighted average cost of debt (WACD) for REITs, which peaked in 2024.
A 0.2%-point reduction in the WACD will likely add 1.5% growth to distributable earnings, which further supports Investec’s buy recommendation on local REITs.
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