Behind the exuberance and rally of real estate stocks on the JSE

20 Jan 2025

Real estate stocks staged a comeback in 2024 after underperforming in the prior three years as the sector was still recovering from the pain of Covid lockdowns. A repeat of this enthusiasm in 2025 will depend on local and global factors, mainly a Trump presidency.

In South Africa’s vast investment climate, there is one sector that is bucking the country’s economic malaise and continuing to reward investors handsomely.

The sector in question is the JSE’s more than R200-billion real estate industry, which marked the second consecutive year of outperformance in 2024 compared with other asset classes. Other sectors on the local bourse proved to be investment duds last year, mainly mining and retail, with the latter’s fortunes heavily dependent on the economy’s performance and the former exposed to volatile commodities.

Real estate stocks staged a comeback in 2024 after underperforming (from a total return perspective) in the prior three years as the sector was still recovering from the pain of Covid lockdowns.

The South African listed property (Sapy) index, comprising 20 of the largest real estate companies on the JSE, ended 2024 by delivering total returns of 29% (up from 10.1% in 2023). A total return is the main measure of rewards from an investment as it considers share price appreciation and income in the form of dividends declared by companies — in the Sapy index’s case, the 20 real estate companies.

A total return of 29% delivered by the JSE’s real estate sector in 2024 is well above the 17.2% pencilled in by 10-year government bonds, 13.5% by the JSE All Share Index, and 8.5% by cash (the money market).

real estate stocks (Source: Keillen Ndlovu Research, January 2025)

A look at individual real estate shares on the JSE reveals that the top performers are companies exposed to South Africa through their property investments that depend on the domestic economy’s performance for earnings.

Top performers include Hyprop Investments (shopping mall owner), Texton (owner of mostly office properties), Attacq (owner of warehouses, malls, office properties and hotels), Emira Property Fund (owner of warehouses, office properties and malls), Fortress Real Estate Investments (shopping malls and warehouses owner), Fairvest (owner of mostly malls), Dipula Income Fund (owner of malls and office properties), and Resilient Reit (shopping mall owner). According to an industry body, the SA Reit Association, real estate companies heavily exposed to South Africa have delivered an average 35% total return in 2024.

It’s a stunning recovery considering that total returns tumbled during the Covid lockdown years — a period marked by the 40-odd real estate companies taking a financial hit from lower rental payments by tenants and their properties standing empty, as was seen in high vacancy rates. To conserve cash on their balance sheets during this ghastly period, most real estate companies cut dividend payments to investors and some did not declare dividends at all.

Outlook for 2025

Daily Maverick asked money managers what was behind the exuberance and recovery of the real estate sector, and whether the total returns of 2024 could be repeated and exceeded in 2025.

The money managers all agree that the sector has been supported by the positive sentiment around the Government of National Unity (GNU), which has committed to respecting the rule of law, has continued the reform agenda and presided over the end of Eskom blackouts. The properties of real estate companies depend on a stable electricity supply and the end of blackouts means that they are not spending millions/billions of rands on diesel to run generators, which in turn is improving their earnings.

There have also been normal market dynamics that are supportive of the sector, including lower interest rates and declining bond yields, which lowers the debt obligations of real estate companies. The dynamics are also supportive of dividend growth, making investors happy.

Independent property analyst Keillen Ndlovu said the sector’s performance was further boosted by improvements in the underlying metrics of retail, office and industrial properties. Ndlovu said vacancy rates had stabilised in office properties after they increased to record highs after Covid lockdowns, with the full-time work-from-home trend ending as workers have returned to their desks, although only for three to four days a week.

In 2025, he expects vacancies to stabilise and improve for office properties, but rental growth will only happen “after a meaningful decline in vacancies”.

Ndlovu is upbeat about other real estate sectors.

“The industrial sector, a perennial outperformer, is still predicted to do well. It’s mainly warehousing and logistics/distribution (and not manufacturing nowadays) and mostly linked to the retail sector.

“Lower interest rates will help boost consumer spending and the retail sector in general. Township and rural retail [centres] are likely to continue trading better — this market segment has a big informal economy and benefits from government aid, for example, social grants,” said Ndlovu.

He said real estate companies had finally begun to report an improved earnings outlook towards the second half of 2024. Most companies that have delivered negative earnings in 2024 now expect a “marginal positive earnings growth outlook for 2025”.

A repeat of 2024 income returns?

Asked if the positive momentum seen in the sector on the JSE last year could continue in 2025, Ndlovu said it depended on several factors, including whether South Africa delivered real economic growth under the GNU, whether there was positive dividend growth that attracted income-seeking investors, further improvements in property fundamentals, and the windfall received by workers from early pension withdrawals filtering into the economy.

He believes 2025 will feature several risks that could negatively affect total returns, including municipal service charges that continue to increase at above-inflation levels, increased water outages, a resumption of Eskom blackouts, stalling economic growth, the unravelling of the GNU and fewer than expected interest rate cuts.

Ian Anderson, head of listed property at Merchant West Investments, supported Ndlovu’s views, adding that potential tariffs under US President Donald Trump could push up inflation, possibly causing the US central bank to pause interest rate cuts. This scenario is already worrying investors as seen in the volatility of and sell-off in the bond market in recent days. Regardless of the risks, Anderson is more bullish in his expectations, saying that the sector could deliver above-inflation total returns in 2025.

Anderson expects real estate companies heavily exposed to South Africa to deliver total returns of between 8% and 9% in 2025. These percentages could be higher when including offshore real estate companies, which have a rand-hedge profile.

Meago Asset Management, specialising in real estate shares, believes that 2025 will be a year stalked by volatility, which will make it difficult to forecast returns and capital values. Meago also sees a Trump 2.0 presidency having a material risk for the investment climate.

“As a result, we think the key focus for 2025 is a focus on idiosyncratic opportunities within the domestic and global listed property markets,” Meago’s portfolio manager Zwelakhe Mngomezulu told Daily Maverick.

Mngomezulu said a focus for investors in 2025 will strongly be on yields as a key source of returns, which bodes well for the real estate sector. Yields are the income that real estate companies make from renting out a property compared with how much the property is worth. The higher the yield, the more money companies generate.

As a base case, Meago expects the local real estate market on the JSE to deliver more than 10% total returns for 2025.

Such a projected return is informed by positive factors that have improved trading metrics in underlying property dynamics (especially in retail property portfolios), and the basic costs involved in managing properties.

These include improvements in reversion rates (expected profits that property owners will make when selling, which factor in a property’s future value), the average debt costs across the sector being at maximum levels and will have minimal impact on the ability of companies to pay debt back, and projected growth in property valuations driven by improved rental income. DM

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