Count REITs in: Property offers a compelling investment proposition in 2025

Multiple global and local economic factors are aligning to make South Africa’s REITs a top pick for investors in 2025, alongside equities, with both asset classes likely to outperform bonds in 2025.

From a global perspective, the Trump administration’s protectionist policies and their impact on inflation are pushing up US 10-year bond yields, which increased by roughly 70 basis points (bp) since the Federal Reserve began the latest rate-cutting cycle in September 2024.

US 10-year treasury bonds serve as a bellwether for President Trump’s proposed economic policies because they responded similarly during his first term, rising by roughly 60bp from 2.4% in January to 3.0% in September 2018, before reversing the rise in yields by the end of the year given increased concerns of a slowdown in global growth.

As such, the 70bp rise in US 10-year bond yields since October last year likely stems from markets pricing in Trump’s proposed economic policies to a certain extent.

Similarly, the dollar appreciated by roughly 5% since the start of October 2024, like its movements in 2018 in response to Trump’s protectionist policies.
 

Impact on SA bonds and REITs

In this scenario, assuming the US 10-year bond yield trades at 4.3%, an inflation differential between South Africa and the US of 2.5%, and an SA sovereign risk premium of 3.6%, Investec analysts forecast that the SA 10-year bond yield will dip below 10.3%, which should provide a total return of roughly 11% for SA bonds by December 2025.

In contrast, Investec analysts forecast that South Africa’s REITs will deliver a total shareholder return of 14.7% and 22.5%, respectively, should the base case (10.3%) and bull case (9.4%) for SA 10-year bond yield scenarios play out.

In addition, the Trump presidency will likely spur lower oil prices as deregulation and slower economic growth dampen global oil demand.
 

Interest rate cuts on the cards

Lower oil prices should support lower local consumer price index (CPI) inflation, which is forecast at 3.7% year-on-year (y/y) in the first half of 2025 and 4.35% in the second.

As such, there is scope for the South African Reserve Bank (SARB) to lower interest rates by a cumulative 100bps in 2025, which would support economic growth.

Ongoing capital investment in fixed assets in South Africa could further lower the country’s risk premium and add additional tailwinds to the economy.

Should the country achieve real gross fixed capital formation growth (GFCF) of 4% y/y, which is a conservative estimate, South Africa’s real GDP growth could jump to 2.5% per annum in the medium term, which could lower the country’s budget deficit to below 3.5% by 2026/27.

If real GDP growth in South Africa recovers to around 1.8% in 2025, which is likely amid lower interest rates and consumer-driven spending on the back of the two-pot retirement withdrawals, history suggests that SA equities and property will outperform SA bonds roughly 90% of the time.

Identifying SA opportunities

The symposium also emphasised the importance of understanding local and global macroeconomic factors in investment decisions.

In South Africa, the Government of National Unity (GNU) is still in the process of proving its effectiveness, and investors are closely monitoring its progress. The pending agreement on budget outcome and delay in process so far point towards a government characterised by robust debate and contribution from multiple parties. The local market, however, offers various opportunities, particularly within equity sectors that demonstrate strong performance.

The JSE All Share Index has shown resilience, with a year-to-date gain of 5% as of March 2025, indicating potential for further growth.
 

The case for diversifying into REITs

While historically we’ve seen that local banks and discretionary retail should outperform the defensive property sector in a scenario where real GDP growth in SA recovers to more than 2% in the medium term, diversifying into SA REITs makes sense for investors given the limited downside risks.

SA REITs are also benefiting from a convergence of domestic tailwinds that have helped push average organic net property income (NPI) growth to 5.1% for 2024 compared to 4% for the same period in 2023.

Moreover, most key metrics driving organic NPI growth, such as renewals, escalations, costs, and vacancies are improving or stable.

The sector is seeing low vacancies across the board, with the in-force escalation profile stabilising at an average of 6.4%, down from 8% over the past decade, while rental renewal growth trends within most sectors are positive, except for offices.

However, the major office landlords are operationally geared to benefit from an improvement in the local macroeconomic environment, which should see companies invest in growth and decrease vacancies.
 

Other factors supporting the “buy” recommendation for REITs

Reduced interest rates are also helping to gradually lower the weighted average cost of debt (WACD) for REITs, which peaked in 2024. A 0.2%-point reduction in the WACD will likely add 1.5% growth to distributable earnings, which further supports the buy recommendation on SA REITs.

Furthermore, REITs have levers left to pull in reducing the primary drag on organic NPI growth, which is mainly the above-inflation increases in administrative pricing, such as rates, taxes and utilities.

With administrative costs estimated to comprise 60% of gross direct property costs, implementing solutions like solar photovoltaic (PV) can help ease this burden, even if most REITs are unable to generate renewable power to meet 100% of their needs due to rooftop space constraints. As such, property margins should stabilise over the medium term.