Re-rating may be on the cards for the REIT sector

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The South African Real Estate Investment Trust says the R330 billion listed REIT sector could be re-rated this year or next.

According to the association, the FTSE/JSE SA Listed Property Index (SAPY) posted its strongest January performance in a decade, outperforming other asset classes. At the end of January, it was up 9.17% (well ahead of the FTSE/JSE ALSI at 2.69%, bonds at 1.7% and cash at 0.6%).

While most SA REITs de-rated during 2018, it is expected that growth points to a more stable outlook for the sector.

Mvula Seroto of Catalyst Fund Managers says a re-rate in the sector will be a big gain. “However, this will only be possible if the economic outlook improves, there are positive results from the 2019 general elections, and a reprieve from credit rating agency downgrades,” he says. Wynand Smith, real estate analyst at Anchor Stockbrokers, agrees. “Should growth expectations start to improve during 2019, the valuations of the SA REITs are compelling,” he says.

According to Mohamed Kalla, director and portfolio manager at Sesfikile Capital, “Our forecasts point to a more stable 2020 growth outlook, which should result in better re-rating potential a year from now.” Capricorn Fund Managers’ Howard Penny agrees. “Given worries surrounding rising global interest rates, perhaps the bounce back may have to wait for 2020.”

However, Stanlib analyst and portfolio manager Ahmed Motara says it may be too early to call for a material REIT sector rally, given the upcoming elections, concerns around the fate of Edcon and possibly lower retailer rentals.

Andrea Taverna-Turisan, SA REIT Association marketing committee chairman, notes: “With the cost of equity having increased substantially in South Africa, management teams of local property counters will need to focus on the pure property fundamentals of their organisations to ensure the property sector will become more robust and better positioned to deliver shareholder value over time.”