One South African sector safe from a United States trade war

South Africa’s listed property sector is expected to significantly outperform other asset classes in the coming years, as it is perceived as a safer investment than equities amid heightened global volatility. 

Property companies, while being defensive, are also well-positioned to benefit from any upside from improved global relations, local economic performance, and declining interest rates. 

This is feedback from Old Mutual portfolio manager Evan Robins, who explained in a recent research note why property tends to be a safer investment during volatile periods than equities. 

On 2 April this year, US President Trump announced reciprocal tariffs across most US trading partners and a 10% across-the-board tariff. 

These were far heavier and widespread than had been expected, and sent global markets into a steep fall over the following days. 

The lowest levels in South Africa were on 7 April, and on 9 April, Trump announced a 90-day pause, which caused the market to rebound.

This little window provided a mini natural experiment into the behaviour of South Africa’s property sector compared to general equities, Robins explained. 

The shock across global and local markets is related to risk concerns and growth expectations, and the period is too short for any other fundamentals to have a material impact.

In South Africa, the volatility was somewhat more sustained, as concerns arose about a possible collapse of the Government of National Unity (GNU).

Robins explained that this provided analysts with the opportunity to conduct a natural experiment to compare listed property and equities. 

Focusing on the extremes, Robins and his team examined the movements from the 2 April close, before Trump announced his tariffs, to the worst intra-day level on 7 April. 

By the time local markets closed on 9 April, before Trump’s announcement that he was pausing tariffs, markets were already well off their worst levels, perhaps in anticipation of some relief.

The table below shows the relative performance of general equities, represented by the JSE All Share Index, versus listed property, represented by the REIT index and All Property Index. 

Why property outperforms 

To understand why property is generally more defensive than equities, Robins distinguished between the primary and secondary impacts that usually occur during an economic shock. 

For listed property companies, when it comes to growth, there is often only a modest primary impact from the shock. 

Real estate investment trusts (REITs) have long-dated contractual leases, and this cash flow is not necessarily immediately impacted. 

The impact stems from the secondary effect, where some tenants may fail, and new tenants can only afford a lower rental rate, resulting in lower occupancies and reduced business activity. On the whole, these impacts bleed in over time as leases expire.

In contrast, there would be a primary direct impact on the profit of, say, a US-based importer or exporter to the US. Some may not survive. 

If tariff wars lead to economic hardship, retailers’ sales would immediately fall as they take the primary impact. These retailers would still need to honour their rental agreement until these expire and are up for renewal.  

Consequently, the predominant contractual cash flows in listed property companies should be less negatively impacted than those of a typical company. Hence, property growth expectations are also affected less, Robins said.  

As economies move in cycles, while listed property is still digesting the secondary impact of a positive growth cycle, or in this example, policy changes, could be already emerging.

Another factor, relevant to the current moment, is that property is not export-dependent, unlike some other industries. 

Therefore, in a trade crisis, it should be less negatively impacted. By contrast, during the COVID-19 period, property was more negatively impacted, as many landlords provided immediate rent relief and therefore took the fall.

Growth expectations are key. When these rise, there is a positive feedback loop. This has implications for the outlook for listed property, Robins said. 

Listed property fundamentals continue to improve as we have argued before, and this continues to be evident, although at a slower rate, in recent company results. 

The current environment may hinder this improvement if the global macroeconomic situation deteriorates, but property as a whole may catch a cold, not while it is stable, but rather when it is weak and sick, as was the case some years ago.

Suppose there is a trade war, confidence-induced recession, or any other growth or risk shock. In that case, listed property should be more defensive than equities, although not entirely immune. Crucially, it should also be able to provide an upside for any positive developments.