South African real estate investment trusts (REITs) offer investors a decent place to hide at a time when global markets have endured extended volatility linked to geopolitical conflict and an oil supply shock. That is the conclusion of new research published by the South African Real Estate Investment Trust Association (SA REIT Association) in its SA REIT Journal.
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In the article, Mweishö Nene, Lead Real Estate Equity Analyst at SBG Securities, argues that falling finance costs will protect the sector’s distributable earnings from negative surprises until early 2028.
Nene’s analysis starts with the link between property performance and the income paid to investors. Net property income (NPI) is usually the main driver of distributable income per share (DIPS), but the two have diverged in recent years. In 2024, like-for-like NPI grew 4.5% while DIPS fell 2.1%, a gap Nene attributes largely to finance costs after several years of unusually volatile interest rates.
SA REITs typically fix around 80% of their debt for about 2.3 years, with the balance floating at the three-month Johannesburg Interbank Average Rate (JIBAR) plus a contracted margin. As fixed facilities come up for renewal, Nene expects them to reprice between 50 and 150 basis points lower per facility in 2026 and potentially 2027. On that basis, SBG Securities forecasts DIPS growth of 6% to 7% for the sector in 2026.
Protected from downside surprises
“We believe the sector’s distributable earnings will be protected from downside surprises because of expectations that finance costs will improve at the margin,” says Nene. “Both 2026 and potentially 2027 screen well as years where pedestrian net property income growth will be supported by finance cost improvement, which will ensure that earnings expectations do not significantly disappoint.”
The main threat to that support, in Nene’s view, would be a decisive shift by the South African Reserve Bank (SARB) towards a rate-hiking cycle. The SARB’s Monetary Policy Committee (MPC) raised the repo rate by 25 basis points to 7.25% on 23 September as inflation rose. SBG Securities’ economists see the increase as a cautious signal of credibility, since cost-push inflation following an oil supply shock limits what monetary policy can achieve.
A risk-weighted view of asset classes
The SBG Securities house view is that inflation will average 3.4% in 2027 and that the repo rate will reach 6.25% by 31 December 2027. The inflation forecast is broadly in line with the SARB’s own expectation of below 4%. Market consensus also expects cuts to resume in 2027, differing only on their extent. In Nene’s view, finance costs should therefore keep falling for SA REITs through 2027, protecting earnings against significant downside until early 2028.
After a run of negative global surprises since early 2025, Nene argues for a risk-weighted view of asset classes. Here the sector’s balance sheets count in its favour, with interest cover strengthening as the average cost of debt falls and gearing coming down.
“We generally favour high dividend assets with steady and predictable growth projections, lower gearing and high interest coverage, which are all improving now for SA REITs,” he says.
His valuation draws on the sector’s long-run relationship with the yield on 10-year South African government bonds. Assuming a 12-month exit bond yield of 8.41%, a repo rate of 6.25% by December 2027 and a slight increase in vacancies to reflect pressure on retail rentals, he derives a fair forward earnings yield of 8.00% for the sector. On SBG Securities’ estimates, that implies a 4.8% re-rating on top of forecast earnings growth and a total return of about 16% to 18% over the next 12 months, against the 12% to 13% a year typically expected from SA REITs.
In his view, the combination of earnings protection from lower finance costs, scope for a re-rating and investors’ search for assets that store value supports the case for SA REITs in the short to medium term. He therefore describes the sector as a decent place to hide.
Joanne Solomon, Chief Executive Officer of the SA REIT Association, says the SA REIT Journal is aimed at investors, members and the wider market.
“Through the SA REIT Journal, investors can hear directly from the specialists who analyse our sector, in their own words and under their own names. Mweishö’s research is a timely reminder of how closely the income SA REITs pay depends on the cost of funding. It also shows how much stronger the sector’s balance sheets are as it heads into 2027,” says Solomon.
Mweishö Nene’s full article, SA REITs: A Decent Place to Hide, including his supporting charts, is available to read here.
