South African REITs could return 16-18% over the next year as refinancing cuts debt costs
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Research by SBG Securities published in the SA REIT Journal argues that lower finance costs will shield distributions, supporting total returns of 16-18% over 12 months against the 12-13% the sector usually delivers.
South African real estate investment trusts could deliver total returns of 16-18 percent over the next 12 months as declining borrowing costs support earnings even while growth in property income stays subdued, 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 grew 4.5 percent in 2024, but distributions per share declined 2.1 percent, largely because of higher finance costs after several years of volatile interest rates.
South African REITs typically fix about 80 percent of their debt for an average period of 2.3 years, with the remaining 20 percent 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 50 to 150 basis points lower per facility during 2026 and potentially 2027, supporting sector-wide distribution growth of 6-7 percent 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, which will ensure that earnings expectations do not significantly disappoint.”
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 percent on September 23 as inflation increased following an oil supply shock, but SBG Securities expects inflation to average 3.4 percent in 2027 and the repo rate to reach 6.25 percent by December 31, 2027.
Assuming an exit yield of 8.41 percent on 10-year South African government bonds over the next 12 months, a repo rate of 6.25 percent by December 2027 and a slight increase in vacancies as retail rentals come under pressure, the brokerage calculates a fair forward earnings yield of 8 percent. On those assumptions it estimates a 4.8 percent valuation re-rating on top of forecast earnings growth, producing projected total returns of 16-18 percent over the next 12 months, against the 12-13 percent annualised return typically expected from South African REITs.
Joanne Solomon, chief executive of the SA REIT Association, said the journal gives investors direct access to research from specialists covering the sector, and described Nene's work as “a timely reminder of how closely the income SA REITs pay depends on the cost of funding” as balance sheets strengthen heading into 2027.