JSE real estate shares stage a comeback after languishing for years

26 Sep 2024

Shares of real estate companies are up more than 20% so far this year. Lower interest rates, the formation of a market-friendly Government of National Unity and the end of Eskom blackouts for four months have improved sentiment around property.

SA’s more than R200-billion real estate industry on the JSE is staging a comeback after underperforming over the past three years where lower share prices and investment returns were the norm for long-suffering investors.

This week, the South African listed property index (Sapy) — comprising 20 of the largest real estate companies on the JSE — reached levels last seen in January 2020, before the Covid pandemic dimmed the fortunes of most companies. So far this year, the Sapy index is up 26.4%, higher than most indices on the JSE.

The top-performing real estate shares are those heavily exposed to SA and invested in the country, as they have each appreciated by more than 22%. These include Hyprop Investments, Redefine Properties, Growthpoint Properties, SA Corporate Real Estate, Vukile Property Fund and Resilient Reit — companies whose property portfolios include office, warehouse and shopping malls based in South Africa.

The rebound in real estate shares seems to have kicked off late last year when most central banks, (led by the US Fed), inferred that they were nearing the end of their interest rate rising cycle. At the time, investors on the JSE started backing real estate shares. When the US Fed delivered the first cut a few days ago, a decision quickly duplicated by the SA Reserve Bank, real estate shares on the JSE flew and more investors got in on the action.

Investors see an interest rate cut as positive for asset values, which tend to rise in a lower interest rate environment. Real estate companies tend to carry a lot of debt on their balance sheets because their operations are capital-intensive. These companies regularly look to borrowing markets to fund their growth. Lower interest rates have a positive impact on debt costs and property valuations.

The team of money managers at Catalyst Fund Managers believes that the cut in interest rates “will positively impact sentiment”. However, the effects on real estate companies’ earnings will be gradual. This is because a large percentage (between 70% and 80%) of debt held by companies is fixed and stays the same regardless of interest rate changes. So, it will take time for such debt conditions to roll off.

Behind the share recovery

The recovery in real estate shares on the JSE has also been supported by the positive outcome of the May general election, the formation of the Government of National Unity (GNU) that has been largely welcomed by financial markets for the continuation of the reform agenda, lower bond yields, and the improved SA economic outlook. The end of Eskom blackouts for four months has also improved sentiment around the earnings of real estate companies, whose properties depend on a stable electricity supply.

Said Catalyst Fund Managers in a research note: “The decrease in load shedding should provide relief in terms of diesel and generator maintenance costs. Additionally, longer operational hours for solar systems, most of which are grid-tied, will offer secondary benefits. The retail sector, heavily impacted by power outages, is set to benefit from the improved reliability and performance of South Africa’s energy generation, experiencing fewer business disruptions.”

As companies generate rental income from their properties, without having to spend money on diesel costs to run generators, dividend payouts to investors are likely to be higher.

A Johannesburg-based asset manager exercised caution around the investor exuberance on real estate shares. The manager said in the short term, real estate shares had outperformed, but the picture had not been rosy in the long term. Underscoring this is the fact that over the past five years, real estate shares have delivered a return of about 1% (on an annualised basis), compared to 12% by the JSE All Share Index over the same period. However, this might also present a buying opportunity for investors as the shares are considered cheap.

Ian Anderson, the head of listed property at Merchant West Investments, noted that most real estate company shares had long traded at deep discounts to net asset value (NAV) and were likely to offer significant upside in a lower interest rate environment.

Most shares are trading at an average discount to NAV of more than 20%, with some trading at 2010 levels. DM

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Behind the share recovery