Strong 2024 SA Reit performance suggests positive 2025

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SIMON BROWN: I’m chatting with Ian Anderson, Head of Listed Property and Portfolio Manager at Merchant West Investments. He is also a compiler of the SA Reit Association’s Monthly Chart Book. Ian, appreciate the time. May was another good month for Reits locally. They had a stellar 2024. It continued through into 2025 and, as I say, another good May.

IAN ANDERSON: Absolutely, following on from a very strong April. It was a slow start to the year for Reits. So in the first quarter there were actually negative returns from Reits. I think people were worried about interest rates; they were worried about Donald Trump.

But with the Reserve Bank starting to cut interest rates again and some strong results from companies that reported during the month, the sector was up 4% following on from April’s almost 7% gains. So definitely investor sentiment towards the sector has been improving in the second quarter.

SIMON BROWN: Reits are lagging sort of general equity. But to put that in perspective, 2024, as I said in the intro, was a spectacular year for the sector. So that’s perhaps not unsurprising – and certainly, I would imagine, of no real concern.

IAN ANDERSON: No. Absolutely not. Year to date the South African Reits are up 6.7%, which I think is still a very good outcome. If you annualise that you’re getting close to 15% for the year, and I think that’s probably what most people had pencilled in, in terms of the returns. So you get your decent dividend yield of around 8% to 10%, and then you get a little bit of capital growth on top of that.

But I do think that there is still more room here for these things to move higher. We had a really good result out of Fairvest. I think that’s obviously also building on the momentum that we saw from a number of companies that reported during May, and as long as we continue to see property fundamentals improving – and improving across all property types, not just office or retail or industrial, it’s across all property types here in South Africa – I think there’s potential for higher distributable income growth. On the back of that there is the prospect for higher capital growth as well.

SIMON BROWN: You make a great point there. There is certainly an improving [of the] fundamentals, but that’s continued into this year. The results that we have seen so far in 2025 have shown all the important numbers going the right way. LTVs [loans to value] are dropping, vacancies are dropping. Even in office, reversions are in many cases swinging nicely into the positive. [These are] good fundamentals for the sector, correct.

IAN ANDERSON: And it’s a function of the capital cycle. There has just been absolutely no investment into property in South Africa – particularly office property – over the last seven or eight years, so there’s no new supply.

There’s a small incremental demand in office in particular. People are going back to work or going into the office more often and as a result of that we are seeing, as you’ve already mentioned, a reduction in vacancies and that then starts allowing landlords to drive rentals higher. So we’re starting to see market rental growth.

Obviously, if you’ve got a 10-year lease that’s coming up for expiry and you signed it pre-Covid, there’s going to be a negative reversion there. But there are very few of those leases left. Most of the leases have already been renewed. And what we’re seeing now, as you’ve already mentioned, [are] positive reversions – some as high as 7%, 8% and 9%. I think most of them are in the sort of 3% to 5%, but that’s a heck of a lot better than the -15% and -20% that we were seeing a couple of years ago.

SIMON BROWN: Yes, we’re finally sort of shaking out that pandemic crisis. We are five years past it and I like your point – a lot of leases have now been renewed.

Help me with this one. I typically look at retail, look at yields. I compare that to government bond yields. Does the sell-off not sell off? Do the lower government bond yields on the 10-year actually add some further attraction to Reits?

IAN ANDERSON: Absolutely. It does it on two levels. The first and I think the most important level is it reduces borrowing costs, because a lot of the longer-term debt that these Reits enter into the swaps – they swap out floating rate debt for fixed rate debt – and those swaps will be priced off the yield curve. So the five- and ten-year bond yields are very important when it comes to assessing the cost of capital for Reits’ debt capital. But obviously it is a competing asset class for people’s money.

So if those yields are coming down, other investments start to look a little more attractive and obviously the one that most people would go to if they weren’t going to buy our bonds – and our bonds are still attractive, even though yields are below 10% – the other asset class that they would naturally lean towards is the listed property market because of the high correlations, the fact that they tend to move in tandem as well.

SIMON BROWN: We are also still seeing discount to net asset value pretty much across the sector, and those nice high yields.

In other words, after a spectacular 2024 and a solid 2025, we’re not yet in expensive territory. We could make an argument perhaps that it’s fair value. Some folks would say there are pockets of cheapness, but certainly we’re not moving into expensive by any stretch.

IAN ANDERSON: No. And if you look at the history of the sector historically – and I don’t think we’ll have a repeat of this, I’m not trying to build a case to say that we’re going to go to premiums to net asset value – but if you think about the sort of 2010 to 2017 period, most of the REITs traded at premiums to net asset value. That allowed them to raise equity at premiums to the value of the underlying portfolios, buy properties and create value and additional income through that.

So I don’t think we’re going to ever get back to that. Who knows? I could be wrong. We’re probably not going back there. But the discount is still far too wide in my opinion.

Companies that are showing good growth – like Fairvest, for example – are trading at much closer to net asset value. But there are still some companies that are trading at 40% and 50% discounts to net asset value. I think of Octodec as a prime example of a business that is trading at just too great a discount to net asset value.

But I agree with your comment that there is still value in the sector and as long as the sector continues to produce, or the companies within the sector continue to produce higher growth and distributable income, that value will be unlocked. I think we will see some of that in the second half of this year if the Reserve Bank cuts interest rates again at least once, maybe even twice. The ECB [European Central Bank] is cutting. The Fed will probably also cut this year. Those will all be positive signals for investors investing in listed property, and specifically in the South African listed property sector.

SIMON BROWN: We’ll leave it there. Ian Anderson, Head of Listed Property and Portfolio Manager at Merchant West Investments, I appreciate the time.

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