South African listed property sector now one the largest sectors on the JSE

South African listed property sector is now one the largest sectors on the JSE with a total market capitalisation of R380bn, some 20 times larger it was in 2003
By Thabang Mokopanele
The South African listed property sector is now one of the largest sectors on the JSE by market capitalisation and continues to grow in liquidity. There are now four real estate investment trusts (REITs) among the top 40 companies on the JSE. The international REIT market is seeing global giants coming out of South Africa.

SA REIT Association chairperson, Laurence Rapp the listed property sector’s “vibrancy has become increasingly accepted as an indispensable part of the investment landscape by the broader investment community”.

“The significant collective efforts of our members to promote the sector’s image all contribute to this. We have established greater awareness and understanding of REITs as a result of our regular communication and media engagement, which has also attracted new investors to the sector.”

He says the association will continue to build on this foundation of valuable communication to demystify the sector.

The listed property sector has become an engine for significant wealth creation in the SA investment community. Rapp argues that the sector demands attention from investors, having been the best performing asset class over the past 14 years and second best over one year.

The latest results from the sector show it has far outperformed the prevailing macroeconomic factors. He says the strong entrepreneurial streak within REIT management teams and their excellent deal-making skills allow the sector to perform above its inherent growth potential given the stagnant economy.

“Many of the CEOs and CFOs from these management teams volunteer their time to chair the committees of SA REIT. Taking the industry forward, SA REIT has adopted a more structured approach to its operations that ensures participation is as broad as possible.”

The SA REIT sector continues to be a hotbed of creativity and entrepreneurship, and the sector’s capacity for creative deal-making is expected to continue to drive good earnings ahead of inflation.

While there may be signs of the industry maturing locally, Rapp says he expects to see continued expansion offshore that targets more than a simple currency hedge but also allows the sector’s skilled and credible local teams to apply their know-how in international markets.

“We still hold strong in our view that SA equity investors remain underweight in their property allocations, given various studies published by asset consultants. We acknowledge that to get weighted the sector would have to find another trillion Rand worth of property.

However, notwithstanding the sector’s drive grow its asset base, there has been a significant slowdown in local acquisition activity, because of the weak domestic economy and this is exacerbated by mispricing in the physical property sector given the yields available in the listed sector.

While SA REITs have started to invest in new subsectors locally, such as storage, residential and healthcare property, these assets are still far from being sufficient to support the sector’s growth.

“This is spurring the sector’s offshore investment, which is being driven by the ability to raise capital in South Africa. Also, investors like it and are looking for greater exposure.”

With an economy that is stagnant and an increasingly difficult operating environment, there are fewer opportunities for new development locally, and most development will be centred around existing assets.

“For more domestic developments and acquisition activity, we will need to see growth coming back into the South African economy, greater political stability that removes the spectre of a ratings downgrade and much more efficiency and responsiveness in local planning issues.”

“As the organisation representing the premium property assets in the country, SA REIT is ideally positioned to engage with government and be proactive in finding and supporting solutions in these areas. We acknowledge our role in the greater economy and support its transformation.”

He says he remains firmly of the view that SA REITs are an exceptional investment vehicle through which property ownership can be achieved by the entire population, but specifically those previously excluded from the economy.

“With REITs, people gain access to property investment at a lower quantity than would usually be expected for investment, and at a small fraction of the cost relative to direct investment,” Rapp says.