2024 outlook for the listed property sector

By: Liliane Barnard, Metope Investment Managers CEO & Portfolio Manager

Liliane Barnard

2023 can be viewed as two distinct periods. The first 10 months of the year were marked by the continued steep rate hiking cycle around the world, including SA. Economic indicators, including employment and retail sales, remained surprisingly strong in the face of rising rates, leading the world’s central banks to adopt a hawkish stance. Markets discounted these higher rates, leading to weak performance in both equity and bond markets. Up until the last week in October, the local listed property sector had lost 10% on a total return basis.

Since late October, markets turned positive after a pivot in the tone of the US Fed on the back of decelerating inflation and slowing (but still positive) job growth. As a result, rates have been kept on hold since July 2023 in the US and since May in SA, where inflation has been within the SARB’s target band of 3-6% since June 2023. Global bond yields fell sharply on the prospect of rates having reached their peak with markets beginning to price in rate cuts in 2024. The listed property sector (the ALPI index) rallied by 23% in the last two months of the year to end the year with a total return of 10.7%.

This was made up of an income return of 8% and capital gains of just 2.7% for the year. Listed property was the top-performing asset class of 2023, eking out a marginal gain over equities (+9.3%), bonds (+9.7%) and cash (8.1%). Among the top performers in the sector were UK and European retail landlords Shaftesbury Capital Plc, Hammerson and Nepi-Rockcastle.

2024 listed property macro outlook

In the coming year, we anticipate a continued, yet gradual improvement in the SA property market. The key issues expected to drive markets (both globally and in SA) include any changes in the growth, inflation and interest rate expectations, a potential escalation of global conflicts, which are affecting global supply chains and elevating inflation, and other risks, and the pace of recovery in the Chinese economy. Domestically, improvements in structural issues and a positive outcome of the election would improve economic activity and confidence.

Global growth is expected to slow from levels achieved in 2023 because of the sharp increases in interest rates in the last 18 months. The World Bank projects that global economic growth will slow to 2.4% this year from an estimated 2.6% in 2023. SA’s growth remains further constrained and is estimated at 1% for 2024.

On the positive side, we expect a continued easing of inflationary pressures after reaching a peak in mid-2023. This is expected to be accompanied by a reduction in both global and SA interest rates, although levels are projected to remain somewhat elevated. In terms of 10-year government bonds, yields have fallen c150bps from their highs in the first half of 2023; however, they are still trading at yields of c.100bps higher than 2019 levels. This triggers revaluation processes in real estate globally, and to a lesser extent in SA, as elevated interest rates have led investors to command higher risk premiums for real estate.

Additionally, elevated interest rates will influence borrowing costs and credit availability. Global property markets could face greater volumes of forced selling, with banks increasingly reluctant to refinance troubled or lower-quality assets. Elevated interest rates on new debt, or when hedges expire, render debt unfavourable in relation to unlevered yields, and increasing cap rates have caused covenants to have to be renegotiated where the lender has the appetite. This will be more prevalent globally than compared to SA, due to the higher relative interest rates in relation to prior decades of very low rates. Given that SA REITs have meaningful investments in offshore assets, investors need to understand the underlying asset fundamentals and credit markets to which our sector is exposed.

Structural issues impacting the economy are expected to ease, fostering a more robust foundation for the property market. SA property companies have been proactive through investment in infrastructure and security, which eases larger structural issues on their business and tenants’ businesses. As underlying tenants fare better, demand for properties is expected to increase, especially in properties that are resilient (for example those that have backup power supply). SA still has impactful structural issues, but any positive reforms should translate to increased demand and, therefore, rentals.

Risks to the 2024 outlook

While the outlook is positive, potential risks can’t be overlooked, particularly the 2024 elections. SA is entering unchartered territory, with a coalition government increasingly likely given weakening ANC support. Local and global investors remain wary. However, heightened social unrest and conflict and policy uncertainty are no longer solely associated with developing economies like SA, and have gripped many European economies, which has increased risk premiums in their capital markets.

There are still many local challenges to deal with before SA can reach its full potential. The turnaround of Eskom and Transnet and failing infrastructure will take many years. Global geopolitical events further threaten price stability and economic growth, which is negative for developing nations. Furthermore, lacklustre growth in China, with its own property market woes, are concerning for SA.

South Africans should stay well informed as to the changes in the evolving outcome of AGOA, the conflict between Palestine and Israel, and the effect the war between Ukraine and Russia has on trade and risk appetite for investors. Staying abreast of these events is an invaluable exercise to manage risk.

2024 positive market trends

Despite the global and local outlook, there are still positive trends:

  • The recalibration of rental levels after large reversions over the last three years
  • A consistent uptick in occupancy rates driven by a recovery in demand and a limited new supply coming on stream
  • Fixed escalations which have bottomed out, and debt costs which are likely to peak in the next reporting period and are expected to lower from current levels.

In addition, with the reduced forecasting risk and gearing levels that have consolidated at levels close to pre-pandemic levels, listed property companies will feel more confident to increase payout ratios, and we have already started seeing this. These factors contribute to a more favourable environment for property investors.

A dynamic and informed approach will be crucial in navigating the evolving landscape of the SA property market in the coming year. The current market could be an opportune time for investors to take advantage of the dislocation by acquiring high-quality REITs at valuations not seen in recent times.

Visit the official COVID-19 government website to stay informed: sacoronavirus.co.za