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SA Real Estate Investment Trusts can unlock further upside by emulating their global peers

South African REITs have performed poorly for investors over the last five years. Even after its recent rally, the SA REIT price index remains over 30% below its 2019 high. Including dividends, the sector’s total return over the five years ending March 2024 was essentially zero.

Picture of Nicolas Lyle

Nicolas Lyle

Property Analyst/Portfolio Manager

SA REITs’ performance compares poorly with the annualised total returns generated by the JSE All Bond Index (+7.0%) and the FTSE JSE All-Share Index (+9.8%) over the same period. A more apposite comparison is with global property stocks, which delivered an annualised total return of 7.3% in rand terms over the same period. They achieved this while weathering the disruption of the Covid pandemic and despite being more sensitive to rising interest rates than SA REITs.


SA has not provided an easy operating environment for its REITs, who have endured weak economic growth and rising costs. Nevertheless, they trade at a greater discount to NAV than their global peer group, suggesting that the market regards them as lower quality operators. We believe they can catch up: by emulating best global practices they can become better stewards of their shareholders’ capital, improve their earnings quality and be rewarded with a revaluation of their shares.

SA REITs have been sailing into macro headwinds since 2009


A REIT’s ability to generate investor returns begins with the rents paid by its tenants, either businesses or households. The stability and growth of rents reflect the prosperity of the nation; therefore, with a few exceptions, REITs will usually struggle to outperform the economy in which they operate.


The performance of South African REITs has to be judged in the context of the domestic economy, which has delivered 15 years of negative real growth. It has been depressed by domestic and international under-investment, weak job growth and deteriorating household spending power, which has been hit by higher real taxes and inflation in the price of imported goods and services as the rand has weakened.


Domestic REITs have not only weathered a weak economy over the last 15 years, they have absorbed the costs and uncertainties of a deteriorating political environment, negatively impacting their cost of capital. Since former President Zuma took control of the ANC in 2009, standards of public sector management have declined while corruption has increased. The Zondo commission’s report left no doubt about the poverty of governance at SA’s state-owned enterprises, which are critical agents for the country’s development. Growing dysfunction in provincial and local government has caused service delivery failure at the municipal level, imposing indirect costs on property owners, including REITs. For example, lacking confidence in the police, landlords have to invest more in security, while property values suffer in neighbourhoods where the municipality fails to maintain street lighting, stable pavements and pothole-free roads. In this context, the growing phenomenon of ‘semi-gration’ to the Western Cape does not principally reflect the remote working revolution unleashed by the Covid pandemic. It demonstrates that citizens’ desire to live in a properly-run province is enough to overcome the financial and emotional costs of leaving friends and family behind. It is no wonder that property in the Western Cape is outperforming the rest of the country.


To compound the burden of service delivery failure, REITs and their investors have been punished by property rates and taxes rising much faster than inflation and rents as shown in the charts below. Rental margins have suffered accordingly over time.


In SA, the size of the public sector in relation to the economy is among the highest in the world. REIT legislation leaves room for improvement (particularly in defining taxable income and allowing private market REITs). Relatively high corporate income tax also limits growth for both tenants and landlords. This is one of the reasons that REITs historically distributed 100% of their earnings to shareholders.


South African REITs have responded to the difficulties of their domestic operating environment by investing heavily in overseas assets over the last 10 years in search of capital preservation and growth.

SA REITs’ governance standards could be improved


Since the Covid pandemic, South African REITs have made considerable progress in strengthening their balance sheets and streamlining their operations. However, we believe that by improving corporate governance they can further increase shareholder value through the economic cycle.


Governance is the responsibility of the board of directors and the large investors who dominate the vote to re-elect them every year. These institutions have the influence to impose best global practice on behalf of their own fund investors and minorities and therefore should promote higher standards of environmental stewardship, social impact and corporate governance.


One of the most telling symptoms of historic governance failures is that, according to MSCI Real Estate, REITs own 25% of all institutional-grade property in SA. This compares with an average of 5-10% in most developed markets, where REITs tend to own only the highest quality segments in niche property markets. The obvious inference is that domestic REITs have raised more investor capital than they have been able to deploy into the very best property assets. The quality of their portfolios suffered during their decade of rapid expansion from 2008 to 2018 as they were obliged to acquire non-strategic assets in SA and offshore.


The following are some examples of governance shortcomings (and therefore opportunities) among the domestic REITs:


  • Lack of specialisation: Growthpoint, Redefine, Fortress, Burstone, Attacq, Fairvest and SAC have pursued diversification without keeping a sufficient eye on risk, in our view, damaging earnings quality and missing the opportunity to become sector specialists like their most highly valued global peers. A generalist approach also incurs the risk of increased operating costs as management structures are often duplicated across portfolios.
  • Excessive dividend payouts: it was not uncommon for South African REITs to pay out 100% of earnings in dividends until capital preservation became a priority during the Covid pandemic. Paying dividends is a REIT’s raison d’etre to some extent; retaining earnings and paying 27% corporate tax instead seems wasteful by comparison.. The US REITs pay out far less of their earnings as dividends, 70% on average. We think this is a prudent approach, building a cash buffer for rainy days and strategic expansion opportunities. We see the tax paid as the cost of a robust balance sheet which can react quickly to changes in the environment. A lower payout ratio also avoids the need to raise capital or sell the most prized assets if earnings are insufficient to cover the dividend.
  • Dual share structures: until early this year, Fortress operated a dual A/B share structure: B shareholders would only participate in profits once A shareholders had received a specified level of return. The level of the REIT’s performance required for B shares to have any value in this arrangement created conflict between A and B shareholders, leading to Fortress losing its REIT status in 2022 and the suspension of its dividend in 2023. This conflict has now been resolved by holders of A shares making, in our view, a significant financial concession to holders of B shares (who included Fortress’ management team).
  • Investments in other listed entities: Resilient’s ownership of interests in Lighthouse and Hammerson, Fortress’s holdings in Nepi Rockcastle and Attaq’s holding of MAS lack strategic merit, in our view.
  • Relationship concentration risk: MAS Real Estate’s dependence on developer, JV partner and investor PKM for growth has forced MAS to unexpectedly suspend its 2023 dividend as the interest rate cycle has turned.
  • Misalignment of incentives:
    • For many years, the Burstone Group (formerly Investec Property Fund) had an external management structure which created a misalignment of incentives. After years of advocacy by STANLIB and others, Burstone finally brought management of the fund in-house in 2023 but this required several negotiations over the costs and value to be released in that process. To this day, Burstone’s purported expansion opportunities in Australia reflect legacy relationships and we believe they should be re-examined.
    • Some South African REITs still have remuneration policies that do not serve the interests of minority shareholders. Examples include geared equity schemes and management performance metrics which incentivise balance sheet growth over growth in free cash flow per share.
  • Sub-optimal capital allocation:
    • South African REITs’ offshore acquisition spree over the last 15 years has generally been disappointing, as it relied on upward property price revaluations to achieve the required returns. Notable missteps include:
    • Growthpoint’s acquisition of Capital & Regional in 2019 was not only poorly timed but it also lacked strategic value.
    • Equites’ relatively weak capital structure forced it to sell prized UK assets in 2023, near the bottom of the market, and its majority stake in UK ENGL, the market-leading logistics property development platform that it acquired in 2019 as a strategic growth engine.
    • Resilient’s botched attempt to take control of Hammerson distracted management from the core portfolio.
    • Hyprop and Burstone’s recently acquired retail properties at yields below their cost of borrowing, let alone their cost of capital.
    • Burstone’s opportunistic acquisition of what we consider to be a mixed-grade Pan European Logistics portfolio which owns assets across seven countries. It offers neither scale nor potential synergies.
    • Emira’s diversification into low-LSM open-air shopping centres in the US through a joint venture in which Emira has a minority stake. Under the control of Emira’s partner, a private equity investor, the JV is investing across various property types, on a tactical basis, all over the US without achieving scale or strategic focus in any of them.
    • Redefine’s acquisition of Echo Polska Properties, a portfolio of ageing retail centres in Poland, and subsequent dilution of existing shareholders when forced to raise capital (through joint venture structures) near the bottom of the cycle.
    • Spear REIT’s share buyback in 2023 was technically accretive to earnings but net negative for shareholders due to the erosion of the stock’s already narrow liquidity. This was a poor trade-off, given the importance of liquidity for a small cap REIT that is off-index and trying to attract more institutional investors. We believe that shareholders would have been better served by using the cash to fund strategic acquisitions.
    • There is a handful of small cap REITs listed in SA that could present interesting long-term opportunities. But they are handicapped by similar dynamics that do not fully align their interests with those of minority shareholders (Exemplar, Dipula, Octodec, Heriot, Safari etc.)


Two SA-based REITs are exceptions to this pattern. They have achieved success overseas by maintaining strategic focus and allocating capital in a disciplined fashion. In Spain, Vukile bought Castellana and a stake in LAR at valuations which allowed for a positive return on invested capital without the need for revaluations. With these acquisitions, Vukile maintained its focus on retail and achieved scale in Spain, thereby increasing its relevance to the country’s largest retailers. Another success was NEPI Rockcastle’s dominant position in grade A shopping malls in Romania, Poland and neighbouring countries during a period of economic growth in those countries. NEPI has generated the highest total shareholder returns in the sector over almost any time horizon during the last 10 years.

Masterclass: how do the best global REITs create value?


The US enacted REIT legislation in 1960 and Australia in 1971. In these markets, institutional investors have owned these stocks for decades, long enough for them to build a governance culture in which interests are aligned and management is effectively incentivized to create enduring value for shareholders. But age is not everything: the UK’s REIT regime was established in 2007 and it has made tremendous strides since then.


By comparison SA is a relative newcomer to the global REIT community, enacting REIT legislation in 2013. We believe the sector’s management has some way to go to match the financial management acumen and capital allocation discipline of its international peers.


US REITs have generated better returns for shareholders than their peers in other developed markets (with the notable exception of Sweden) over almost all time frames. How have they achieved this?


Specialisation: over 90% of US REITs are focused on a narrow geographical market or category of property, allowing them to develop expertise and pricing power with their tenants. Pursuing a niche strategy is rewarded by shareholders, who can fine-tune their risk exposure to the sector. UK REITs have also embraced specialization: specialist REITs’ representation in the UK’s REIT index has risen from 25% in 2010 to 82% today.


Disciplined capital allocation: to create shareholder value, a REIT must generate returns on its capital above the cost of that capital. The price it pays for assets is critical. The best-managed REITs are acutely aware of their cost of capital and put it at the centre of their strategic thinking.


Cash retention: In the US, REITs typically limit dividend payouts to the minimum level permitted by legislation (75% of taxable income). Retaining and reinvesting cashflows gives a REIT greater financial flexibility and the strategic space to compound earnings and grow the dividend sustainably over time. This approach demands trust on the part of the shareholders that their capital is best left in the hands of the REIT, but it has the advantage of avoiding the cost and distraction of serial rights issues to fund acquisitions and new developments.


Dividend prioritisation: REITs are tax-advantaged vehicles created to generate income for investors. Federal Realty (a strip mall REIT) has increased its dividend consecutively for 54 years, while NNN (retail net lease specialist) has done so for 33 years, Realty Income (retail net lease) and Primary Health Properties (UK healthcare properties) for 28 years, Essex Property Trust (residential apartments in California) for 27 years and Equity Lifestyle (manufactured homes) for 18 years. Even Public Storage, a more cyclical business with short leases, has never suspended its dividend in 32 years.


Focus on earnings quality: investors reward REITs that focus on earnings quality rather than growth for its own sake. A good example is Prologis, the world’s largest listed industrial and logistics-focused REIT. Prologis has delivered the highest annual average earnings and dividend growth (>12%) of any US REIT over the last five years and has led the pack for the last 15 years in its growth in free cash flow and dividend per share. It has managed all this while being the largest global REIT by market capitalization and maintaining an extreme focus on strategic assets.


Sound liability management: the importance of debt to the REIT business model makes it critical to minimize interest rate risk through the cycle. This can be done by laddering and terming out debt appropriately, diversifying funding sources and using interest rate swaps and other hedging instruments to fix interest costs as much as possible.


Asset-light structures: In addition to investing their own capital, Australian REITs have leveraged their recognized expertise to diversify into fund management, generating fee income and boosting their return on invested capital. Goodman Group is a listed property company that has outperformed the S&P 500 over the last five years, a remarkable achievement in the era of Covid and interest rate rises.


Shifting priorities to match scale: as REITs reach a certain scale, treasury management and sound capital allocation overtake property asset management skills as drivers of shareholders returns. Perceived complexity and over-diversification may explain why Growthpoint and Redefine, the largest SA-focused REITs, trade at significant discounts to NAV relative to the sector.




We believe the relative stability of REITs’ cashflow generation should be rewarded with a higher price/cashflow valuation than the broader market. This is true in the US, where historically, on average, REITs have traded at a 3-4x forward price to free cash flow premium to that of the S&P 500 index. From 2018 to 2023, South African REITs traded at an average price to cash flow multiple of 8.3x, a discount to the broader SA equity market’s 9.3x. Thanks to the recent rally, that valuation gap has now closed, but domestic REITs are not yet being awarded the valuation premium that their global peers traditionally enjoy.


South African REITs’ discount to fair value probably reflects a negative perception, not only of the sector’s operating environment but also its ability to create shareholder value through the cycle. Investor perceptions can change, however, and the domestic REITs have the power to drive such a change by embracing the best practices of their global peer group.


If South African REITs wish to be seen as attractive diversifiers for investor portfolios, as opposed to merely levered bond proxies, they will need to improve corporate governance, allocate capital with greater discipline, and create interesting, future-focused equity stories that can deliver real and sustainable growth in rental income, rental margins and distributable earnings per share.


If they cannot do so they may be increasingly ignored by South African equity investors in favour of the inward listings of better-managed global REITs.

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