Amidst the turmoil of global market volatility, sparked by geopolitical tensions and an oil supply shock, South African real estate investment trusts (SA REITs) offer investors a decent place to hide. According to new research published by the South African Real Estate Investment Trust Association (SA REIT Association) in its SA REIT Journal, Mweishö Nene, Lead Real Estate Equity Analyst at SBG Securities, predicts a total return of 16% to 18% over the next 12 months for SA REITs.
Factors supporting earnings stability
The relationship between net property income (NPI) and distributable income per share (DIPS) has become disconnected of late. In 2024, NPI grew by 4.5% on a like-for-like basis, while DIPS declined by 2.1%. Nene attributes this disparity primarily to the impact of finance costs, which have been volatile in recent years due to fluctuating interest rates. As debt servicing expenses decrease, Nene believes that earnings expectations will be supported in the coming years.
SA REITs typically secure approximately 80% of their debt for a period of around 2.3 years, with the remaining amount tied to the three-month Johannesburg Interbank Average Rate (JIBAR) plus a contracted margin. As fixed-rate facilities approach renewal, Nene anticipates that they will be repriced between 50 and 150 basis points lower per facility in 2026 and potentially 2027. Based on this assumption, SBG Securities forecasts DIPS growth of 6% to 7% for the sector in 2026.
“Both 2026 and potentially 2027 screen well as years where pedestrian net property income growth will be supported by finance cost improvement, which will ensure that earnings expectations do not significantly disappoint,” Nene said.
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Monetary policy signals and debt costs
In late September, the South African Reserve Bank (SARB) increased the repo rate by 25 basis points to 7.25% in response to rising inflation. However, economists at SBG Securities view this move as a cautious demonstration of credibility, noting that the bank’s ability to combat cost-push inflation, resulting from an oil supply shock, is limited. The consensus view at SBG Securities is that inflation will average 3.4% in 2027, and the repo rate will decrease to 6.25% by December 31, 2027.
Balance sheet resilience and valuation
Following a series of negative global surprises since early 2025, Nene advocates for a risk-weighted assessment of asset classes. In this context, the sector’s balance sheets are a positive factor, with interest coverage ratios strengthening as the average cost of debt falls and gearing decreases. Nene generally favors high-dividend assets with stable and predictable growth projections, lower gearing, and high interest coverage – attributes that are improving for SA REITs.
Nene’s valuation is based on the sector’s long-term relationship with the yield on 10-year South African government bonds. Assuming a 12-month exit bond yield of 8.41%, a repo rate of 6.25% by December 2027, and a slight increase in vacancies to reflect pressure on retail rentals, he derives a fair forward earnings yield of 8.00% for the sector. According to SBG Securities’ estimates, this implies a 4.8% re-rating on top of forecast earnings growth, resulting in a total return of approximately 16% to 18% over the next 12 months, compared to the typical 12% to 13% annual return expected from SA REITs.
The combination of earnings protection from lower finance costs, scope for a re-rating, and investors’ search for assets that store value supports the case for SA REITs in the short to medium term.
