The Reit rally still has legs

Real estate stocks have tested fresh highs in recent weeks, and the sector is now trading at levels last seen five years ago.

Despite some profit-taking in late August, the JSE’s all property index is up more than 20% since early April. That brings the sector’s recovery to nearly 60% since it slumped to multiyear lows in October 2023.

In fact, several South Africa-focused property stocks are now back to pre-pandemic levels or have surpassed them for the first time, including Hyprop Investments, Attacq, Vukile Property Fund, Fairvest, Resilient Reit, Fortress Real Estate Investments, Dipula Properties, Spear Reit SA Corporate Real Estate and Stor-Age.

The 22 domestic property counters tracked by the South African Reit Association delivered an average 14.2% total return in the year to end-August.

Though that lags the broader equity market’s 23.6%, it’s no less impressive given the high base created last year when property stocks notched up a 35.8% total return, comfortably ahead of the all share index’s 13.4%. 

It appears that the sector has shrugged off a still-stuttering local economy and global trade and tariff tensions, with several real estate investment trusts (Reits) revising earnings growth estimates upwards in recent weeks.

The sector’s improved fortunes come on the back of lower interest rates, less load-shedding and reduced vacancies, which are starting to translate into higher rentals.     

Last week, both Attacq and Hyprop declared better than expected dividend growth for the year to end-June. Attacq shareholders are bagging a juicy 26.1% increase in dividend payouts. It’s the fourth consecutive year that the Waterfall City developer has delivered double-digit earnings growth.

That comes on the back of the acquisition of the remaining 20% it didn’t yet own of Mall of Africa — which anchors Waterfall City in Midrand — stellar growth in net operating income and lower diesel and debt costs.

Retail-focused Hyprop, the owner of megamalls such as Rosebank Mall in Joburg and Canal Walk in Cape Town, surprised the market with a 9.9% increase in dividends. Distributable income was up 7.5%, ahead of the 4%-7% forecast.   

Results were buoyed by double-digit operating income growth, strong trading metrics in both Hyprop’s South African and Eastern European malls and an increase in the dividend payout ratio — from 75% to 80%.         

Rental reversions in Hyprop-owned malls are back in positive territory at a decent 4.3%. Tenants’ turnover in its nine local shopping centres rose 5.5%, surpassing the 5.1% in the year to end-June 2024, while the four malls in Eastern Europe posted turnover growth of 6.6%.

Hyprop CEO Morné Wilken foresees a further recovery in earnings, with growth of 10%-12% expected for the year to end-June 2026. He intends to continue to raise the payout ratio. 

This month Fortress announced an equally welcome 23% year-on-year increase in dividend payouts for the second half of its 2025 financial year to end-June.

That comes after a notable rebound in the performance of its R52bn portfolio — mostly logistics and retail properties, split roughly 60/40 between South Africa and Eastern Europe — as well as the collapse of the company’s dual A and B shares in early 2024.

Fortress’s South African retail portfolio posted a particularly pleasing 9.4% increase in like-for-like net operating income. Fortress expects earnings growth of 6%-7.5% for the year to end-June 2026.

Retail-focused Resilient also delivered a double-digit year-on-year increase (12.2%) in dividend payouts for the six months to June. Its R38.3bn shopping centre portfolio is split roughly 76/24 between South Africa and Western Europe.

The local malls are located mostly in secondary cities, rural areas and townships, which benefit from informal cash economies and social grant spending. Flagships include Mams Mall in Mamelodi, Mall of the North in Polokwane and I’langa Mall in Mbombela.

Resilient achieved comparable like-for-like net property income growth of 8.6% and sales growth of 5.2%. Lease renewals came in at 4.9%. Management expects dividend growth of at least 8% for the year to December.

Encouragingly, sector heavyweight Growthpoint Properties, which has underperformed the market for the past few years, is back on the growth track. 

The company, which co-owns Cape Town's V&A Waterfront, achieved a 3.1% distributable earnings increase and a 6.1% dividend uplift for the year to June. Like Hyprop, Growthpoint increased its dividend payout ratio — from 82.5% to 87.5%

Recent trading updates released by Dipula Properties, Equites Property Fund, Octodec Investments, Spear and Redefine Properties paint a similar picture of improving prospects.

Most are expecting inflation-beating earnings growth in the 3%-7% range for their 2025 or 2026 financial years.

At Redefine’s pre-close update for the year to August, CEO Andrew König said easing load-shedding, port and rail reforms and renewed investment flows into the Reit sector have supported the company’s growth story.

Redefine owns a R99.4bn portfolio of retail, office and industrial properties, split 46/34 between South Africa and Poland.

Ian Anderson, head of listed property and portfolio manager at Merchant West Investments, says though Reits’ improved earnings growth outlook may appear modest by historical standards, it’s “very encouraging, given how scarce growth has been across the sector in recent years”. 

Increased payout ratios are hugely positive, as they translate to more dividends in shareholders’ pockets and a lower tax burden for Reits. Anderson adds: “Investors have taken note, which explains part of the strong share price gains over the past 18 months.”

He tells the FM that there are clear signs of a recovery in operating income across all sectors of the South African commercial property market — even the office sector, which was hit hard by the adoption of work-from-home policies during the pandemic.

“[The recovery] is not because the economy is great,” he says, “it just comes off a very low base.” In addition, there’s been hardly any new office construction in recent years, which means even a small uptick in demand can translate into rental growth.

While this may suggest the market has run ahead of itself, we see scope for further upside

—  Naeem Tilly

With several domestic property stocks now trading at five-year highs, the question arises: how much upside is left?

Though some profit-taking is inevitable, as already seen, Anderson says it doesn’t mean the sector is overpriced. 

He believes South African Reits are now positioned for sustainable inflation-beating income growth, which should deliver double-digit annual total returns over the next few years, even after the strong gains of 2024 and early 2025.

In addition, valuations are more conducive to raising capital, which Anderson says should support acquisition activity into late 2025 and 2026, which historically has been a strong driver of returns.

Independent property analyst Keillen Ndlovu agrees, saying share prices should be underpinned by further earnings growth upgrades.

He notes that the listed property sector’s earnings outlook has already shifted from an average 3%-4% drop last year to a 4%-6% increase for 2025.

A continued recovery will be driven by lower debt funding costs and a further reduction in vacancies, which ultimately leads to higher rentals.

Ndlovu says vacancies in logistics (warehouse and distribution depots) and retail portfolios are likely to continue to be mopped up as major retailers such as Shoprite Checkers, Clicks, Dis-Chem, Boxer, Woolworths, TFG and Truworths continue to expand footprints and bring new concepts to the market.

For example, TFG is opening several Beauty Box stores, while Truworths is planning standalone stores for Fuel, Moskow, Ginger Mary and Daniel Hechter. New retail concepts include Woolworths’s WCellar and Absolute Pets, and Checkers’s UNIQ clothing and Petshop Science. US giant Walmart is also set to open its first South African stores before year-end.   

Meanwhile, the sector should benefit from increased allocation among balanced or multi-asset pension and unit trust funds. Ndlovu says exposure to listed property has been rising steadily since the 2022 low of 2.75%. It’s now at 3.8%, the highest since the start of the pandemic.   

He points out that despite the recent rally, most domestic-focused stocks continue to trade at discounts of 15%-30% to NAV, which also supports the notion of further room for share price growth.

Naeem Tilly, portfolio manager and head of research at Sesfikile Capital, says the listed property sector’s year-to-date total return of about 11% is tracking ahead of their initial full-year target of 13%. “While this may suggest the market has run ahead of itself, we see scope for further upside.’’ Tilly is forecasting a total return of 11%-13% over the next 12 months.

He cites two key drivers that will support the sector’s continued recovery: a meaningful downward shift in bond yields, which typically correlate with listed property yields, and better than expected earnings growth figures.

Tilly adds that cost savings from the rollout of renewable energy and water initiatives, which help to reduce companies’ reliance on Eskom and local municipalities, are also starting to flow to the bottom line.

“Taken together, these dynamics reinforce our constructive stance on the sector,” he says.