Luqman Hamid
Ninety One
Portfolio Manager
The SA property sector was one of the best-performing asset classes in 2024, benefitting from the post-election optimism and a potential long-awaited turnaround in economic fortunes for the country. Helped by declining local bond yields, listed property returned almost 30% for the year:
The majority of this return was through re-rating, with comparatively smaller contributions from income and income growth. This echoed the case for many SA assets in 2024, where returns were driven by increasing expectations from a low base, rather than fundamental improvement.
Looking ahead into 2025, we see a continued improving trajectory for local property as rental reversions begin to trend upwards across the retail, office and industrial sectors.
In retail, we are seeing rental growth starting to emerge, and we believe this should be supported by low vacancies, greater tenant affordability and high sales growth. Similarly in offices, while there is divergence among different regions, we are starting to see reductions in vacancies. With new office developments largely non-existent at this stage, the outlook for vacancies and rental growth should be supportive as we move into the current year:
From a valuation perspective, the property sector is trading around its highest Price/NAV levels post-COVID. However, on a longer-term basis, the sector is still comfortably below average valuation levels:
We continue to see select opportunities in SA-orientated names exposed to retail and industrial subsectors (i.e. Hyprop, Equites Property Fund and Vukile), while the UK retail names (Hammerson and Shaftesbury Capital) also offer an attractive combination of yield, growth, strong balance sheets and accelerating improvement in fundamentals.
Overall, we expect a decent year for local listed property in 2025. While the majority of the rerating has probably already occurred, fundamentals for the sector appear reasonably favourable. Prospects are clearly very closely tied to the anticipated economic recovery in SA continuing to make progress, and any disruptions or noise, as we have seen in the early part of this year, will impact sentiment in the short term. However, fundamental trends such as higher competition for space in light of limited supply are likely to persist and lead to reduced negative reversions and therefore growth in rental income.
Dividend sustainability also looks much improved. With many companies having restructured their balance sheets, current dividend streams are well covered by operational income. Against the backdrop of moderately declining local interest rates, this should provide a favourable environment for decent returns in 2025. With anticipated income returns in the region of 8% on average likely to be bolstered by some growth and marginal rerating, we see low double digit returns as an achievable target for the sector this year.