January 6 2024 10:30
Keillen Ndlovu
JSE-listed property stocks were the winners for 2024 in terms of traditional investments for South Africans, beating other equites, bonds and cash.
Listed property as measured by the FTSE / JSE All Property Index achieved a 29.8% total return including dividends and share price growth in 2024. Bonds realised a 17.3% return while equities achieved a 13.5% return and cash achieved 8.5%. This was a good year for traditional investments.
Listed real estate funds, many of which are real estate investment trusts (Reits) have recovered from a low base in recent years. The start of the interest rate cutting cycle from September 2024 has also helped.
Low interest rates help property because they make it more affordable for people to borrow money to buy a home, which increases demand in the market and can lead to higher property prices; essentially, when mortgage rates are lower, more people can qualify for loans and are incentivised to purchase property, driving up market activity and potentially property values.
Listed property funds are also more likely to invest money in assets and to spend on developments when the cost of borrowing money is lower than before.
Independent analyst, Keillen Ndlovu says property stocks have also been helped because loadshedding has been halted.
“We ended the year 2024 with 280 consecutive days of no loadshedding. No loadshedding resulted in savings on diesel costs to power generators, no traffic delays, due to traffic lights not working, which generally results in abandoned shopping and business trips, and no lost trade. Some shops in the past closed because of a lack of full backup power, spoiled food and mobile signal issues affecting transaction payments and access to e-hailing services like Uber and Bolt,” said Ndlovu.
“The sector has been boosted by the recent interest rate cuts, good performance from the retail and industrial sectors, and a stabilizing office market, which has seen vacancies fall, with most workers returning to offices three to four days a week from fully working at home. The sector began to enjoy an improved earnings outlook in the second half of 2024. Most real estate investment trusts and property companies that delivered negative earnings growth in 2024, provided a marginally positive earnings growth outlook for 2025,” he said.
Despite the higher interest rates, many funds’ balance sheets have been well-managed, with loan-to-value ratios and interest cover ratios, on average, under control and no breaches happening with banks.
Ndlovu said the listed property sector had disposed of many assets at or around book value, mainly to reduce debt levels, over the past two to three years, and we started to see the sector moving from being a net seller of assets to a net buyer of assets, particularly in the retail space in 2024.
These disposals around book value and recent acquisitions – see table below) took away some criticism and concern that the listed property assets could be overvalued.
There was increased interest from institutional investors in buying stocks, including balanced and multi-asset funds and generalists.
A positive future
Lower interest rates will help to improve interest cover ratios and earnings as debt starts to get renewed at lower interest rates, and therefore reduced interest costs. The financial health of the tenants and, therefore, the ability to pay rent and or absorb any rental increases and also a need for more space as business and cashflows will improve.
Ndlovu said many property funds’ balance sheets are in good shape with loan-to-value ratios (LTV) around 39% and interest cover ratios (ICR) at 2.2 times. Most Reits are continuing to aim to improve these ratios, that is to reduce the LTVs to below 39% and improve ICRs to more than 2,3 times.
Bank covenants on average for funds are such that the maximum LTV is 50%, and the minimum ICR is 2,0 times.
Outlook
Ndlovu says that most Reits and property companies that delivered negative earnings growth in 2024 provided a positive outlook for 2025, albeit below inflation on average. Inflation beating earnings growth, on average, was likely to happen later in 2025 and mostly in 2026 when the positive impact of lower interest rates will be fully felt, as some of the debt is still being rolled over at higher interest rates.
Sector overview
We are likely to see an improvement across all the sectors, Ndlovu says.
o The industrial sector, a perennial outperformer, is still predicted to do well.
o Lower interest rates will help boost consumer spending and the retail sector. Township and rural retail likely to continue trading better.
o Office market likely to see vacancies improving. However, rental growth will only happen after a meaningful decline in vacancies.
o The residential sector will likely remain resilient with very low vacancies and arrears as demand exceeds supply. The ability to absorb rent and utilities increases remains an issue, but this could improve if the economy picks up.
What could keep the positive momentum on listed property?
• Positive sentiment with the government of national unity continuing continues and better economic growth prospects
• Declining bond yields and further interest rate cuts
• Fundamentals continue to improve across all sectors
• Positive dividend growth attracting income-seeking investors
• Property weighting in indices increasing, resulting in balanced fund managers and generalists having to own some property stocks as they avoid taking too much benchmark risk.
Risks
- Profit-taking and short-term volatility
- Fewer than expected interest rate cuts
- Municipal charges continue to increase at above-inflation levels
- Water outages worsen, and loadshedding resumes
- Lack of improvement in economic growth
- GNU does not work out as expected, and investor sentiment shifts back to offshore investments
Despite the positive sentiment GNU has primarily driven, offshore diversification has not slowed down. The sector is experiencing increased investments in Spain and Portugal. Funds Lighthouse and Vukile Property Fund are active in this space and will likely do more transactions in 2025.
“Central and Eastern Europe continues to be attractive with investors. This region can be accessed mainly through NEPI and MAS Real Estate and domestic counters such as Hyprop, Redefine, Emira Fortress, Growthpoint, and Burstone.
Landlords continue to invest in backup water facilities, less water usage, solar power, and greener buildings and help to invest in infrastructure around their properties (for example taking over the running of traffic lights). Most landlords have invested in backup power. Most landlords are working on increasing their backup water facilities from 2 to 3 days supply to 5 days and are finding innovative ways to use less water.
“Most landlords continue to improve security systems and presence in and around their buildings/neighbourhoods.” says Ndlovu.
247@propertyflash.co.za
