South African property stocks rebound amid global volatility

Despite turbulent global markets and ongoing geopolitical tensions, South Africa's listed property sector is experiencing a noteworthy resurgence. Real Estate Investment Trusts (REITs) are rebounding with many companies reporting stronger balance sheets, increasing income, and a renewed sense of confidence from investors. Ian Anderson, Head of Listed Property at Merchant West Investments and compiler of the SA REIT Association’s Chart Book, joined CNBC Africa to discuss the sector's outlook. According to Anderson, there have been significant improvements in the sector's balance sheet strength and market sentiment compared to five years ago. Companies in the listed property sector have focused on reducing their payout ratios, leading to more cash being held within the companies. This has allowed them to enhance the quality of their property portfolios. Additionally, there has been a gradual improvement in property fundamentals in South Africa, with many companies reporting better-than-expected results and upgrading their guidance for the year. Notably, Growth Point has seen exceptional performance, revising their guidance for distributable income per share due to stronger fundamentals in their South African portfolio. Anderson attributes this improvement to factors such as lower interest rates, reduced load shedding, and a more favorable economic environment. Local companies like Growth Point have shown positive results, indicating improved underlying tenants' activity and rental collections across different property types. While vacancies in the office sector remain high, other segments such as neighborhood retail and industrial properties have witnessed a strong recovery in occupancies. This uptick in demand is expected to drive market rentals higher as vacancies decrease. The return of reliable dividend growth is on the horizon as REITs are forecasted to experience distributable income growth above inflation over the next few years. Factors contributing to this growth include reduced vacancies, potential increases in rental levels, and the ability to refinance debt at lower rates. The tourism and retail recovery in premium real estate assets, particularly in regions like the Western Cape and the V&A Waterfront, are providing significant tailwinds to the sector. The increase in tourism has had a substantial impact on businesses like Growth Point and the V&A Waterfront, boosting various property types within these destinations. While global macro shocks pose a risk to South Africa's REIT sector, managers are primarily focusing on mitigating impacts on borrowing costs due to higher bond yields. With over 50% of income generated outside of South Africa, REITs are relatively insulated from immediate global shocks. However, exposure to regions with geopolitical risks such as Eastern and Western Europe could impact long-term profitability. Despite uncertainties, Anderson remains optimistic about the sector's prospects for 2025 and 2026, driven by the ongoing improvement in South African property fundamentals.