Following a strong finish to 2022, South African REITs have failed to get out of the starting blocks in 2023. This shouldn’t come as much of a surprise given persistent loadshedding in South Africa and rising interest rates globally.

 Since the start of the year, the sector is down just under 5%, underperforming both the South African equity and bond markets. Two companies that were able to buck that trend in February were Attacq and Emira Property Fund. Attacq announced that the company had concluded a non-binding term sheet with the Government Employees Pension Fund, represented by the Public Investment Corporation, in respect of the proposed acquisition of 30% of the ordinary shares and shareholder loans in Attacq Waterfall Investment Company (AWIC) for an estimated cash consideration of R2.5 billion, as well as the injection of a further R300m into AWIC as a shareholder loan. The market responded positively to the announcement and Attacq’s share price gained just under 19% in February.

Emira’s share price rallied just over 10% following a strong set of results for the six months that ended 31 December 2022. Both distributable earnings and distribution per share comfortably beat analyst expectations. Accelerate Property Fund’s share price fell more than 25% after the company announced a R50 million renounceable rights issue at 70c per share to provide the company with the short-term liquidity needed to enable the repositioning of Fourways Mall. There were no other material, market-moving announcements, although Texton Property Fund’s decision not to pay an interim dividend did weight on the company’s share price in February.

As already mentioned, persistent loadshedding between stages 3 and 6 is weighing heavily on investor sentiment towards South Africa in general and the listed property sector more specifically. While it is difficult to quantify the full impact of loadshedding across the sector, since different property types and tenants have different power needs, it provides a significant headwind for South African REITs in 2023 and is likely to shave a few a percentage points off distribution growth this year. REITs are able to recover some of the costs associated with loadshedding from their tenants, but a significant amount of capital expenditure is needed to fully mitigate the impact of loadshedding for tenants in the longer term. It should also be noted that most of the companies in the sector have already done a significant amount of work to protect their tenants from loadshedding, a fact that does not seem to be fully appreciated by the market, as the average South African REIT continues to trade at a 30% discount to the net asset value.