South African REITs gained almost 10% in December, driven primarily by a strong recovery in the prices of Hyprop (which was up 21%) and Equites (which was up almost 19%), as well as double-digit returns from sector heavyweights Growthpoint, Redefine and Resilient. For the fourth year in a row, the sector managed to register double digit gains in the final quarter of the year, having risen 19.5% in the fourth quarter of 2020, 10.1% in 2021, 15.9% in 2022 and now 13.5% in 2023. While there was no company-specific news to drive prices higher, expectations of lower interest rates in 2024 and falling global bond yields helped boost investor sentiment towards publicly traded real estate securities across the globe.

Despite the very strong finish to the year, SA REITs underperformed both the equity and bond markets in South Africa in 2023, having also been an underperformer in 2022. The FTSE/JSE All Share index gained 9.3% in 2023, while the All Bond index returned 9.7% and was the top performing asset class in South African for the second year running. SA REITs returned 4.7% for the year, following a weak first half of the year as global bond yields rose rapidly in response to rising interest rates and higher inflation. In 2023, share prices fell on average by just over 5%, while the average income yield was just under 10%. The trailing 12 month dividend yield rose from 8.8% at the end of 2022 to 9.1%, mainly as a result of lower prices at the end of the year as there was little to no growth in dividends, on average, across the sector.

The lack of dividend growth was primarily a function of higher interest expenses and operating costs, offset by a gradual improvement in property fundamentals that saw average vacancy rates decline and a return to positive reversions on lease renewals or new lets across most property types. The exception remains the office sector where high vacancy rates continue to place downward pressure on market rentals.

The sector’s performance in 2023 was dragged lower by a 20% decline in Growthpoint’s share price and a 16% decline in the share price of Resilient. Together, these two companies represent 28% of the SA REIT sector by market capitalisation and their contribution to the sector’s performance during the year was approximately -3%.

Looking forward, property fundamentals in South Africa are expected to continue improving slowly as there is very little new supply in the pipeline. Interest rates are expected to be cut and the level of loadshedding has reduced substantially over the past 6 months. Current consensus forecasts suggest there should be moderate dividend growth from the sector this year, partly reflecting the stabilisation in property fundamentals but also on expectations that the current low average dividend payout ratios will start to normalise now that most companies have strengthened their balance sheets and no longer need to retain as much of their profits. The forward yield on the sector is around 9.3%, which is high when one considers the geographic profile of the sector, with around half the property assets invested in geographies where bond yields are below 5%. Investor sentiment towards the sector remains low but tends to improve rapidly in a declining interest rate environment, leading to substantial outperformance by REITs over other asset classes.