South African Real Estate Investment Trusts Outperform Other Assets

South African Real Estate Investment Trusts Outperform Other Assets

From OxfordBusinessGroup.

While real estate investment trusts (REITs) are relative newcomers to the South African market, they have outperformed other classes of assets in recent months.

Looking ahead, the residential component of the property market, which has yet to be tapped by REITs, is expected to offer new opportunities for growth and provide a further boost to the investment appeal of trusts.

Real estate investment trusts posted the highest year-to-date return on investment (ROI) of any asset class in South Africa in October. Returns reached 15.6 percent, with a year-on-year return on investment of 20.2 percent, according to Cape Town-based Catalyst Fund Managers. Equities, meanwhile, posted year-to-date returns of 11.3 percent, with bonds trailing at 4 percent.

Laurence Rapp, chairman of the SA REIT Association, which represents all listed real estate investment trusts, said the segment had continued to gather momentum in terms of both earnings and capitalization, despite the slower economic backdrop.

South Africa’s economy is expected to expand by 1.4 percent this year, according to IMF forecasts, down from an average of 3.5 percent in the decade to 2010.

A total of 33 domestic real estate investment trusts and three foreign trusts are currently listed on the Johannesburg Stock Exchange (JSE), with the combined market capitalisation for the segment standing at more than R455 billion ($32 billion). Local REITs accounted for around R340 billion ($23.9 billion) of the total as of August, up 43 percent year on year.

Despite being relatively new to the exchange, listed property now has a larger presence than either the retail or health care sector, accounting for 5.8 percent of the FTSE/JSE All Share Index.

The steady nature of REIT returns is attracting investors from many areas of the market, according to Keillen Ndlovu, head of listed property funds at Johannesburg-based asset manager Stanlib.

“Listed property remains the best asset class for growing income streams,” he told industry press in early November. “In contrast to equities, it delivers predictable income and less volatile earnings growth, even in an economic downturn.”

The real estate investment trusts segment is currently dominated by funds operating in the retail, office and industrial segments, with the residential component accounting for less than 2 percent of the total listed property market. However, this may be about to change, according to François Viruly, director of property research firm Viruly Consulting.

“One of the biggest game changers, in my opinion, is that we will start seeing REITs in the residential segment,” Viruly told Oxford Business Group. “This will bring institutional investors back into residential property for the first time since rent controls were introduced in the 1970s.”

There are signs that change is already afoot. In June Indluplace became the first residential-only REIT to list on the JSE. With a value of R1.6 billion ($112 million) at the time of listing, Indluplace manages almost 100 properties comprising some 3600 residential units.

In October residential developer Baldwin Properties also announced plans to list, saying it was looking to build up a rental portfolio worth between R2 billion ($140.8 million) and R3 billion ($211.2 million) by 2020 to run alongside its other build-to-sell projects.

While listed property continues to outperform other assets, the segment has seen revenue growth ease slightly in recent months, with the sector’s returns somewhat lower than the current global average for REITs.

According to a report by Catalyst Fund Managers, issued in mid-October, the world average for listed property funds stood at 15.4 percent for the first nine months of 2015, compared to 13.3 percent in South Africa.

Although an anticipated interest rate hike in the U.S. could see global investment flows redirected away from emerging markets – which could put greater pressure on the South African property market – returns on listed property funds are expected to maintain investor appeal by continuing to outpace other classes of assets in the country, as well as GDP growth more broadly.

Read more at OxfordBusinessGroup.