High performance expected from SA real estate trusts in 2019

Performance from real estate investment trusts in 2019 is expected to deliver positive total returns, say analysts, with the coming year forecast to be better for South African REIT returns overall.  

This is largely driven by current forward income yield, and capital returns based on growth in income, according to Catalyst Fund Managers.

"We expect the REIT sector to deliver total returns in line with the historical annualised 10-year total return of 14%," reports Mvula Seroto, investment analyst at Catalyst.

This is based on performance from November 1, 2008, to August 31, 2018.

Howard Penny, portfolio manager and analyst for Capricorn Fund Managers SA, holds a similar outlook, believing 2019 will be a better year for South African REIT returns overall.

"In a steady valuation environment in South Africa, SA REIT returns could be in double-digit territory, supported by sector distribution yields of approximately 9%, despite lower distribution growth of around 4% to 5%," says Penny.

Positive prospects

Besides positive performance prospects for 2019, factors that market commentators believe will make SA REITs appealing investments in the year ahead include improved corporate governance in the sector, its historically high yields and the good value to be found in the share prices of many REITs.

According to Andrea Taverna-Turisan, SA REIT marketing committee chair, SA REITs are exposed to the best commercial properties in the country and, in some instances, offshore.

"Their property income is underpinned by lease agreements with tenants in these property assets. Rentals are contracted and most escalate at a predetermined rate annually - around 6.5% to 8% in the current domestic market," explains Taverna-Turisan.

Political, economic outlook

According to Anchor Stockbrokers, although South Africa's economic and political outlook is a potential damper on expectations for 2019, the long-term forecast remains positive.

"We expect listed property to deliver a total return, made up of share price movement plus distributions, of roughly 13% to 14% per year over the long term.

"Unless South Africa's economic and political outlook improves substantially in 2019, we expect the total return in 2019 to be marginally lower than the long-term forecast," notes Wynand Smit, real estate analyst at Anchor Stockbrokers.

Penny notes that yields have historically been high despite the potentially unfavourable impact of rising interest rates.

"Despite a rather treacherous rising global interest rate environment, historically high yields remain the greatest supportive force for the sector in 2019 and over the medium term," says Penny.

Smit adds that most SA REITs de-rated during 2018, and if growth expectations start to improve during 2019, the valuations of SA REITs are compelling.

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