Global bond yields have started to drift higher, providing a difficult backdrop for REITs throughout the world. Inflation has remained elevated in most regions of the world and major central banks are now expected to delay cutting interest  rates until the second half of the year. It is expected that the South African Reserve Bank will only begin cutting interest rates at the end of the third quarter or the beginning of the fourth quarter, if they cut interest rates at all this year. This means that borrowing costs for property companies will remain elevated and capitalisation and discount rates, which are used in property valuations, will not support higher property values in the short-term. As a result, South African REIT prices continued to move lower in March, but are still higher than they were at the end of last year. SA REITs underperformed the broader equity market during the month, but did outperform the bond market which delivered a return of -2% in March.

Attacq was the big winner in March, gaining more than 11% after reporting results that were obviously better than market expectations. Importantly, Waterfall City net rent growth remains impressive and following the Government Employees’ Pension Fund deal and the sale of Attacq’s stake in MAS plc, the balance sheet has been significantly strengthened to further the company’s growth ambitions. Apart from Attacq, only Fairvest B shares and Vukile were able to generate positive returns for investors during the month. Fortress B shares declined by 5.7% in March, following impressive gains in February, while Hyprop’s share price tumbled 6.4% after the company announced it would not be paying an interim dividend, citing the significant devaluation of the Nigerian naira and recent announcements by Pick ‘n Pay that it would be rationalising it’s offering as reasons behind the decision.

A number of companies reported results or provided updates to the market during March. There were very few surprises and most companies delivered in line with market expectations. Higher interest rates (and therefore borrowing costs) are offsetting the gradual improvement in property fundamentals (lower vacancies, smaller negative reversions in the office sector and some market rental growth in other sectors). The sector continues to trade, on average, at a significant discount to net asset value, which should support current valuations, particularly considering interest rates are likely to start falling later this year or early next year. The uncertainty posed by the upcoming elections in South Africa is clearly having a negative impact on investor sentiment and is a contributing factor to the SA REIT sector trading at such large discounts to the value of their property portfolios.