One property sector booming in South Africa

Commercial property is booming in South Africa, with valuations reaching all-time highs and banks increasing credit extension to this sector. 

South Africa’s commercial property sector is currently valued at R1.92 trillion, a 48% increase from the R1.3 trillion recorded a decade ago. 

It is also only expected to grow further as interest rates continue to come down, lending to the sector increases, and local economic growth picks up. 

This is feedback from Nedbank chief economist Nicky Weimar, who outlined the current economic environment for property companies at a recent presentation in collaboration with SA REIT. 

Weimar explained that the South African economy is in a much better position than 12 months ago, which should buoy property returns. 

The political certainty provided by the Government of National Unity (GNU) has boosted optimism in South Africa and financial market returns. 

The new government has also assured investors that ongoing reforms will be completed and potentially even accelerated. 

Interest rate cuts have boosted this positivity, with the Reserve Bank beginning its cutting cycle in September 2024. 

It has cut rates by a cumulative 75 basis points, and Weimar expects it to cut rates at least once more. 

The local property sector is highly sensitive to interest rates as lower rates boost demand for property, make financing new developments cheaper, and reduce the interest rates on existing loans. 

Furthermore, lower inflation and interest rates translate into higher consumer spending, boosting economic growth and, for certain property developers, increasing their turnover-linked rent. 

Banks are early to this trend, increasing their loans to the commercial property sector much quicker than other areas of the economy as rates come down. 

This can be seen in the graph below, which is courtesy of Weimar and Nedbank. 

South African institutional investors are bullish about the returns that listed property companies are offering after years of underperforming the market. 

The property industry ended 2024 as the best-performing sector on the JSE, reflecting its long recovery from the pandemic.

South Africa’s improved economic performance and lower interest rates are expected to result in Real Estate Investment Trusts (REITs) growing their distributable income for the first time in three years. 

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.

These companies have seen their earnings come under immense pressure in recent years as a decade of economic stagnation and declining consumer confidence hit the property market. 

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

Ian Anderson, head of listed property at Merchant West Investments, 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 that this is crucial for investor return 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.