South African listed property boom – but there’s a catch

South Africa’s listed property sector, particularly Real Estate Investment Trusts (REITs), are set for strong growth in 2025 as interest rates come down and the country’s economic performance picks up. 

However, this growth is expected to be delayed by the slowing pace of interest rate cuts around the world, which the Reserve Bank is likely to follow. 

This is feedback from the head of listed property at Merchant West Investments, Ian Anderson, who outlined what investors can expect from this sector in 2025 in the latest SA REITs monthly chartbook.

Anderson explained that REITs have come under immense pressure in recent years, with a stagnant economy and intense load-shedding impacting earnings growth. 

This was compounded by most office workers choosing to work from home in the aftermath of the COVID-19 pandemic. 

As a result, the distributable income growth of these companies has remained flat for the past three years. 

This has translated into poor returns for investors from the sector, with most REITs struggling to return to their pre-pandemic levels. 

The poor performance appeared to come to an end in 2024, with property stocks being the best-performing asset class on the JSE. 

However, these companies have gotten off to a rocky start in 2025, with the REIT index declining by 3.6% in January. 

The index underperformed the broader JSE, which rose 2.3% in the first month of the year on the back of the precious metals sector. 

Anderson said it is not unusual for South African REITs to start the year with negative returns. Since  2020, they have only delivered a positive return in January once, in 2024. 

This year, only three companies posted positive returns in January, with Texton Property Fund leading  the pack with a 12.5% gain. Accelerate Property Fund (+2.1%) and Spear REIT (+0.9%) also saw modest  price increases.  

REITs tend to catch up and have the potential to outperform towards the end of the year once again, Anderson said. 

As interest rates come down and positive economic data is released, property stocks will be boosted by a rising tide that lifts all boats. 

Crucially for these companies, declining interest rates makes their debt easier to manage and enables them to raise money for new projects. 

Thus, Anderson expects South African REITs to have a strong 2025 and continue their exceptional performance over the past 25 years, which can be seen in the graph below. 

However, the expected recovery in South Africa’s property market is extremely fragile and is highly dependent on external factors playing out favourably. 

Anderson explained that a major headwind is the slowdown in interest rate cuts in the US, which is likely to translate into the Reserve Bank’s cutting cycle being shallower. 

Interest rates are unlikely to fall as quickly or as significantly as previously anticipated, with the US Federal Reserve keeping rates unchanged at its first policy meeting of the year. 

This decision contributed to higher US bond yields in January and weaker emerging market currencies, such as the rand. 

A weaker rand significantly complicates the interest rate outlook for South Africa as it increases the price of importing goods into the country, potentially reigniting inflation. 

The Reserve Bank stayed the course in its last Monetary Policy Committee (MPC) meeting, with it cutting rates by 25 basis points despite the Fed’s hold. 

However, future rate cuts will depend on the outlook for global inflation and the scale of tariffs introduced by President Trump. 

As a result of this, and the political uncertainty brought about by the signing of the Expropriation Act, Anderson said it is unlikely that interest rates will continue falling at their current rate. 

This threatens the outlook for local property companies as their fortunes are significantly impacted by interest rates. 

FNB Commercial Property Finance property strategist and senior economist John Loos said that a slower interest rate cutting cycle is only one reason why the property sector’s recovery appears to be fragile. 

Loos expects the commercial property market to moderately strengthen in 2025, with vacancy rates declining and net operating income growing by a projected 4.2%. 

Growth in capital value/square metre is forecast at a lower single-digit rate of 3.6% in 2025, up from the 3.5% forecast for 2024.

However, when these figures are adjusted for inflation, they translate into no growth or a decline in real terms, with inflation for 2025 forecast at an average of 4.4%. 

Loos explained that this shows how fragile the local property market is right now and that any negative shock could push the sector back into negative territory in real terms. 

In the latter half of 2024, business appeared to be moderately “buying in” to the positive economic and policy signals.

However, more recent economic data releases since late 2024 have been less reassuring, with financial markets having grown increasingly cautious about the global economic and inflation outlook. 

A key factor in this growing uncertainty is the looming Trump presidency in the US, with possible tariffs having a potentially significant impact on emerging markets. 

Furthermore, local data does not look as positive as initially expected, with South Africa’s third-quarter GDP reading indicating much slower growth than predicted.