Good news about South Africa’s property sector

South African Real Estate Investment Trusts (REITs) are expected to grow their distributable income for the first time in three years in 2025. 

This marks a significant shift for the industry as it indicates the sector’s post-pandemic recovery is turning into growth. 

A REIT is a company that derives income from the ownership, trading, and development of income-producing real estate assets. 

In South Africa, a REIT receives special tax considerations and offers investors exposure to real estate through shares listed on the JSE. 

Some of the most prominent examples of these companies are Growthpoint, Redefine Properties, Hyprop, and Stor-Age. 

These companies own some of South Africa’s most iconic office buildings and its largest shopping centres, generating billions in annual income. 

REITs are required by regulation to pay at least 75% of their taxable earnings available for distribution to investors. 

However, in recent years, these distributable earnings have been declining as a stagnant economy, intense load-shedding, and poor consumer spending have negatively impacted the operations of these companies. 

The rapid growth of working from home during the COVID-19 pandemic also resulted in these companies losing out on valuable earnings from their office portfolios. 

This situation greatly improved in 2024, with the formation of the Government of National Unity (GNU) and load-shedding being suspended for over 10 consecutive months. 

Declining inflation throughout last year and the Reserve Bank beginning its cutting cycle in September compounded the positivity surrounding the sector. 

Increased economic activity, greater disposable income, and the return to the office have significantly increased the footfall in many of the properties owned by REITs. 

Head of listed property at Merchant West Investments, Ian Anderson, said this should translate into improved earnings for these companies. 

Crucially, it should result in the distributable income of these companies growing for the first time in three years. 

Anderson explained in SA Reits’ monthly chartbook for January 2025 that this is crucial for investor returns from these companies. 

While property generally appreciates in value, unless the physical asset is sold, very little of this benefit flows through to shareholders. 

Thus, most of the returns that investors receive from REITs come in the form of dividend distributions. This compounds any potential benefit from the share price appreciation of these companies. 

These distributions have historically proven extremely lucrative for investors as the dividend yield of REITs has hovered around the 7% mark. In the past decade, the average yield has been closer to the 10% mark. 

Anderson said the expected growth in distributable income is also vital for the companies as it can make the industry attractive to investors. 

The market capitalisation of South African REITs has been closely tied to the growth of distributable income generated by these companies. 

As distributable income growth has stagnated, so has the share prices of many of these companies. 

This stands in stark contrast to the strong growth experienced by these companies throughout the early 2000s and mid-2010s, when the REIT framework was created in South Africa. 

Anderson explained that the REIT structure has made the property sector increasingly attractive to investors by effectively guaranteeing returns from distributions. 

It also made the world’s largest asset class, real estate, easily accessible through trading on the JSE. 

While not forecasting a decade of strong growth as seen in the 2000s and 2010s, Anderson expects REITs to perform well in 2025 as they grow their distributable earnings. 

These companies should also benefit from a rising tide that lifts all boats, as the JSE All Share is expected to perform well in 2025. 

According to Bank of America’s latest South African Fund Manager Survey, local asset managers expect the JSE All Share to return 15% in rand terms in 2025.