In an ideal world, investors would seek assets that provide reliable income in the short term and offer significant long-term capital appreciation. This combination is rare in today’s markets, where several global equity markets—including those in the US, Europe, the UK, Japan, and South Africa, are trading near record highs.
However, we believe South African Real Estate Investment Trusts (REITs) offer a unique, undervalued opportunity, to deliver bond-like income returns alongside potential for capital appreciation.
What is a REIT, and Why Invest?
A Real Estate Investment Trust (REIT) is a company that owns, trades, or develops income-generating real estate assets. Listed on the Johannesburg Stock Exchange (JSE), South African REITs offer investors a way to invest in property without the complexity of direct ownership.
Key Benefits of Investing in REITs:
The Return Profile of REITs
The return profile of a REIT investment consists of two components. The first is income returns, which can be understood as the net rental income derived from managing the property—like the rent one might receive from leasing out their own property less expenses for administration and those relating directly to the ownership of the underlying properties. The second component is price appreciation, which reflects the increase in the value of the properties over time as well as the market’s judgement of those values and how effective the various REITs’ managements are.
When combined, the total return from investing in South African property over the past decade has been a subdued. This subdued performance is largely due to negative price returns, which have negated the otherwise robust income returns of the sector.
If we just study the income return component, we see that historically, South African REITs have delivered a strong earnings yield of 10.3%, with 90.5% of those earnings paid out to shareholders. This translates into a distribution yield of 9.3%, which is comparable to the yield on South Africa’s 10-year government bond. The bond-like income stability offered by REITs has made them particularly attractive to income-focused investors.
However, when we study the price component, we have observed flat or even declining prices over the past 10 years on a year-on-year basis. This has resulted in a significant price disparity between market value and net asset value in the sector. At the time of writing the SA REIT companies were priced at a 35% discount to their book values. We believe that as market conditions improve, this discount is likely to correct, providing substantial upside potential for investors. They should also benefit from amongst others lower interest rates, less load shedding expected and the expected spending from the new two pot pension system.
Why is the Opportunity So Apparent Now?
The property market often lags the broader equity market, which presents a notable opportunity for future price growth. We are already seeing signs of improving fundamentals across key sectors. For example, vacancy rates in retail and industrial properties have declined to around 2%, a level not seen since 2016. This positive trend is further supported by rental growth, with new leases being signed on more favourable terms, indicating stronger demand and higher income potential.
The financial strength of the sector also gives us comfort, that the sector is well positioned to improve. The SA REIT market in general exhibiting interest coverage ratios well above 2 times, ensuring that their earnings are more than sufficient to cover interest payments. Additionally, with average loan-to-value ratios below 50%, these companies are not excessively leveraged, and their balance sheets are stable, allowing them to weather market fluctuations while positioning for growth.
How Arysteq Property Fund Capitalizes on These Opportunities
At Arysteq Asset Management, our newly launched Arysteq Property Fund actively manages a portfolio of high-quality SA REITs. We focus on REITs with strong balance sheets and solid fundamentals that can be purchased at a discount. The aim being to ultimately maximize upside while mitigating risk by applying a margin of safety embedded in the purchase price. The foundations in which the fund was set up is already showing positive alpha vs our benchmarks.
| Arysteq Property Fund | Fund* | Benchmark |
| Inception | 14% | 10.8% |
| 1 Month | 4.6% | 4.4% |
| Year to date (unannualized) | 14% | 10.8% |
Putting it all together
Investors can lock in bond-like income returns while positioning for capital gains as property values recover. Given the improving market conditions and financial metrics, we believe the SA REIT sector is well-positioned for future growth. As unit trust distributions and capital appreciation are both not taxable in Namibia the Arysteq Property Fund returns are also shielded for investors from any ravages of taxes.
At Arysteq, we are confident that our Property Fund is well-positioned to capture this growth, delivering active returns in a controlled risk framework. With a 9% distribution yield, it means we would need very little in the way of price appreciation to capture healthy double-digit returns.
