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Will SA Property thrive in ‘25

The South African property sector sounded bells of optimism over two consecutive years, delivering outperforming returns after what seemed to be a prolonged period of roadblocks.  

Overall, the sector has emerged stronger as challenges have reshaped operating models creating notable and sustainable change which includes.  

  • Governance: The scrutiny around sector governance in 2018 prompted a much-needed focus on earnings quality, management KPIs and overall business practices.  
  • Pandemic rental relief: Approximately R3.5 billion in rental relief provided during the pandemic was an underrated factor in sustaining the livelihoods of many businesses in SA.  
  • Energy costs and ESG progress: While loadshedding burdened the sector with millions of Rands in sunk diesel costs, an unintended consequence has been the accelerated (though forced) achievement of key sustainability and ESG benchmarks. SA property is now well positioned to benefit from longer- term energy cost savings. 

New risks on the horizon

Working through challenges has resulted in a cleaner and more fundamentally sound sector, which is well positioned for organic growth, albeit from a lower base. Whilst the market has correctly captured this upside in the 2024 rally, leaving the sector at a fairer overall value, 2025 introduces a new set of global geopolitical and economic uncertainty. Volatility in decision-making within the Trump administration has destabilised inflation and interest rate expectations, the main catalyst for optimism in the second half of 2024. The property sector remains highly sensitive to interest rate movements though mostly to upward movement given the sector’s weighted average cost of debt threads close to current interest rate levels.

Locally, there are several risk factors impacting the sector’s outlook. Above-inflation increases in property rates and taxes continue, with no sign of imminent reprieve despite ongoing consultation with municipalities. Failing infrastructure and mismanagement of municipalities, particularly in Gauteng, pose persistent operational (and potentially financial) risk to landlords where the severity of collapses combined with delays or inactions from local municipalities may necessitate costly intervention. Although water-shedding looms as a potential threat, positively landlords are taking a pro-active stance in implementing water saving measures, leveraging lessons learned from loadshedding.

Opportunities balance risks

Risks aside, we see equal measures of opportunity in the sector, particularly for M&A activity. With many property companies having restructured and “cleaned-up” operationally, now is a good time to capitalise on potential consolidation synergies which could improve liquidity and enhance the sector’s appeal to generalist investors. The recent implementation of the two-pot retirement system is also likely to provide a boost to retail sales and turnover rental growth potential, and we expect a continuation of stronger property fundamentals. This includes normalising rent reversions and signals of marginal upticks in negotiated escalations. Advanced stages of solar implementation are also allowing for experimental wheeling initiatives contributing to sustainable cost-savings.

Sector specific trends suggest Logistics, Modern Warehousing and Convenience and Non-metropolitan Retail are most favourable. Though the Office sector is likely to remain subdued given its dependence on broader economic growth, signs of stabilization warrant cautious optimism. We also see broader opportunity for the emergence of alternative sub-sectors which are currently underrepresented in the listed space. These include Storage, Data centres and Residential.

Risks and opportunities balance to a relatively neutral outlook on the property sector for 2025. Challenges faced in recent history have certainly molded a more solid property sector in general, which after years of reactionary combatting, could be in a prime position to reprioritize innovation and long-term advancements.

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