Rapidly rising government bond yields, particularly in the United States, provided a very difficult backdrop for listed property securities during September. South African REITs declined by 2.4% but it should be noted that most of that fall can be attributed to the 10.7% decline in the share price of sector heavyweight Growthpoint Properties after the company issued guidance for 2024 substantially below market expectations. South African REITs actually held up pretty well during the third quarter, all things considered, suggesting there’s a lot of bad news already reflected in share prices, most of which are now trading between 30% and 60% below net asset values. The sector comfortably outperformed the South African equity market in the third quarter and also managed to outperform the bond market over that period, although since the start of the year, South African REITs are still down 7.8%, while the equity market is up 2.2% and the bond market, thanks to very high yields, is up 1.5% in 2023.

Growthpoint’s disappointing guidance for 2024 highlighted some of the refinancing risks facing global real estate companies over the next 12 to 24 months. There is a lot of debt maturing in developed markets on fixed rates of between 1.5% and 3% that is being refinanced at rates north of 5%, placing significant pressure on cash flows and interest coverage ratios. Higher bond yields are placing upward pressure on cap rates and discount rates and although rents are rising because of higher inflation, property valuations remain under pressure, again placing pressure on balance sheets and funding costs because there is now less collateral for banks and they are increasing margins to compensate for the additional risk. Growthpoint’s South African portfolio is actually performing quite well as vacancies have stabilised, negative reversions on new leases are substantially lower than a year or two ago and the V&A Waterfront is once again attracting significant numbers of foreign tourists.

The stabilisation in South African property fundamentals was echoed by several other companies that provided trading statements to the market during September. Companies either reaffirmed guidance or, in the case of Delta Property Fund, communicated a number of positive outcomes on the road to recovery. Delta’s share price doubled in September following the release of its voluntary update to the market. In other company news, Equites announced the sale of a parcel of land in the UK for £29.75 million. Earlier in the year, the company had announced its intention to exit the UK development business and this forms part of that process.

The sector continues to trade at historically deep discounts to net asset value, reflecting the extremely low levels of investor confidence in the near-term prospects for South African REITs. This is understandable given the low levels of economic growth, loadshedding and rising interest rates in South Africa. That being said, inflation does appear to be moderating and real interest rates are now at very high levels, which means the next move by the South African Reserve Bank would be to cut, although the timing of that move is obviously up for debate. Listed property tends to perform better relative to other asset classes when interest rates are falling and given the very low starting base, this time might be no different.