Economic recovery might stimulate demand for more office space, but the level of new buildings is low due to many years of over-capacity. Picture: Michael Gaida/Pixabay
Listed property company share prices reflect the many challenges that the sector has had to face outside of its control, but the outlook for 2025 and thereafter looks more promising, investment analyst Keillen Ndlovu said yesterday, on behalf of the SA Reit Association.
He said in an online event that the sector has in recent years been viewed less favourably by institutional and retail investors, despite a relatively strong uptick in share prices since October. For instance, the All-Share Index was currently trading around its historic highs, while listed property shares are at the same level as what they were in 2010.
“Everyone thought the sector had bottomed in 2020, but then Covid came, which hit the property sector hard. Share prices recovered from that, but fell again after the looting in KwaZulu-Natal, and then again through load shedding, and then also because of the high interest rates,” said Ndlovu.
He said however there were currently some “green shoots” in the market.
The formation of the Government of National Unit (GNU) had the potential to raise business confidence-levels. It also held the possibility of less inefficiencies in municipalities and government departments such as the Department of Public Works.
Another positive factor was that business fundamentals were improving across all metrics in the property sector. Also, employees were increasingly heading back to their offices as opposed to working from home, with for instance, average office vacancies falling to 14.2% from where it was once around 20%.
And although it took some time for lower interest rates to impact earnings in the sector, it did appear that the high interest rate environment had peaked, he said.
There had been 110 days of no load shedding, which meant property owners did not need to buy diesel for generators; there was no lost trading due to power outages; and there was less crime when there was no load shedding, Ndlovu said.
He added that the earnings trend for SA’s listed properties on average was upwards.
Ndlovu forecast -3% to -4% lower average earnings for 2024, but he expected this figure would stabilise in positive territory in 2025 and increase to above or around the inflation rate in the year thereafter. In the past year, only three REITS: SA Corporate, Safari and Attacq had reported above-inflation earnings.
As indication of the lower levels of investor interest in these stocks by institutional investors such as pension funds, Ndlovu said traditionally when the property sector was producing good returns, these institutions held between 6% and 7% of their portfolio investments in property assets, while last year this figure had fallen to below 3%.
He did however anticipate more institutional investment in the sector this year, with for instance, the Public Investment Corporation, which manages government employee pension fund investments, already earlier this year having increased its shareholdings in Growthpoint, Redefine, SA Corporate and NEPI Rockcastle.
Already, over a one-year period, listed property stocks had increased by 26.3% and he anticipated the momentum to continue. Property shares also ended the best performing sector on the JSE last year after a rally in prices after October.
Ndlovu said prior to 2018, it was easy for listed property companies to raise funds from stock market investors and oversubscribed accelerated bookbuilds were common. But currently the companies were mostly sourcing additional funding through dividend reinvestment options for shareholders, a trend he anticipated would continue.
He said in general the retail property market was doing relatively well, with rural and township retail properties and smaller shopping centres outperforming, in particular.
Office vacancies were improving and if the economy improved, there would be increased demand for office space, but there was currently very little office building taking place. In the industrial property market, vacancies and rental rates continued to improve, largely driven by the growth of logistics and warehouse market, and the growth in online shopping.
Ndlovu said the average discount to net asset value that the listed companies were trading at was at around 34.85%.
BUSINESS REPORT