South African REITs could return 16-18% over the next year as debt costs fall
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Research published in the SA REIT Journal argues that refinancing at 50-150 basis points lower will protect distributable earnings and support a valuation re-rating, lifting total returns to 16-18% over 12 months.
South African real estate investment trusts could deliver total returns of 16-18% over the next 12 months, as declining borrowing costs support earnings despite subdued growth in property income, according to research published in the SA REIT Association's SA REIT Journal.
Mweishö Nene, lead real estate equity analyst at SBG Securities, argues that falling debt costs are becoming an increasingly important driver of earnings growth as the relationship between property income and distributions to investors diverges. Net property income, generally the primary driver of distributable income per share, grew 4.5% in 2024, but distributions per share declined 2.1%, largely because of higher finance costs after several years of volatile interest rates.
South African REITs typically fix about 80% of their debt for an average of 2.3 years, with the remaining 20% linked to the three-month Johannesburg Interbank Average Rate plus a contracted margin. As fixed facilities mature, SBG Securities expects them to be refinanced at rates between 50 and 150 basis points lower per facility during 2026 and potentially 2027, supporting sector-wide distribution growth of 6-7% in 2026.
“We believe the sector's distributable earnings will be protected from downside surprises because of expectations that finance costs will improve at the margin,” Nene said. “Both 2026 and potentially 2027 screen well as years where pedestrian net property income growth will be supported by finance cost improvement.”
The main threat to that outlook would be a decisive shift by the South African Reserve Bank towards a rate-hiking cycle. The Monetary Policy Committee raised the repo rate by 25 basis points to 7.25% on 23 September as inflation increased following an oil supply shock, though SBG Securities views the move as a cautious signal of policy credibility given the limited ability of rate adjustments to address cost-push inflation. The brokerage expects inflation to average 3.4% in 2027 and the repo rate to reach 6.25% by 31 December 2027.
Beyond earnings, SBG Securities sees scope for a valuation re-rating. Assuming an exit yield of 8.41% on 10-year government bonds over the next 12 months, a repo rate of 6.25% by December 2027 and a slight increase in vacancies reflecting pressure on retail rentals, the brokerage calculates a fair forward earnings yield of 8% and a 4.8% re-rating on top of forecast earnings growth, producing projected total returns of 16-18%. That compares with the 12-13% annualised return typically expected from South African REITs. Nene said the brokerage favours high-dividend assets with predictable growth, lower gearing and high interest cover, all of which it says are improving.
Joanne Solomon, chief executive of the SA REIT Association, said the journal gives investors direct access to research from specialists covering the sector. “Mweishö's research is a timely reminder of how closely the income SA REITs pay depends on the cost of funding,” she said.