The global sell-off in emerging markets, an intractably weak domestic economy, an oversupply of business space and a focus on the quality of earnings are all set to be major drivers of South Africa’s real estate investment trust (Reit) sector in the second half of this year, the SA Reit Association stated in a press release, on Friday.

International investment remains a compelling opportunity for the sector, with over 50% of listed property in South Africa exposed to offshore markets.

Catalyst Fund Managers director and portfolio manager Zayd Sulaiman believes international investment will provide some cushion should the rand depreciate even further.

Anchor Stockbrokers research and property head Craig Smith noted that, “currency depreciation expectations should result in more demand for offshore property, all things being equal. This could lead to further inward listings on the JSE of offshore-focused platforms, especially those with a proven record.”

The SA Reit association stated that micro issues within the domestic Reit sector, which derailed its overall performance in the first half of this year, are expected to have less of an impact on the listed property sector’s rebased second-half showing, which should be driven by a combination of domestic and international macrodevelopments.

SBG Securities real estate equity research analyst Bandile Zondo noted that global monetary policy shifts in developed markets sparked a broad sell-off in emerging markets. “Developed market central banks are rapidly pulling back post-crisis stimulus leading to a broad acceleration in yields, which has had a negative impact on sector returns.”

Sulaiman, pointed out that the global political and economic events – ranging from trade wars and European Union stimulus tapering – combined with a rising foreign interest rate environment, do not bode well for emerging markets in the short term.

In addition, weak domestic macrovariables persist. “After the euphoria of the ANC elective conference in December, reality has set in and it has become clear that any economic recovery will take time. We need decent gross domestic product (GDP) growth to stimulate demand for space and reduce vacancies. This is taking longer than expected,” Sulaiman commented.

Zondo added that South Africa’s market has arguably discounted a weaker economic growth trajectory since the recent disappointing first-quarter GDP print.

“This could see any further incremental fallout being a lot more measured. That said, it is clear that near-term news flow will continue to fuel concerns around the trajectory of any economic recovery and keep any optimism about 2019 at bay.”

Recent sector company results show that local property fundamentals remain weak and companies have to focus on tenant retention, Sulaiman reported.

Smith believes fundamentals in the property sector should improve following a decrease in speculative development. “The pace of this improvement will be gradual and will largely depend on local GDP growth.”

Redefine Properties CEO Andrew Konig agreed, commenting that, “oversupply and persistently soft property fundamentals coupled with discerning and costly capital make for a challenging period ahead for the Reit sector. Remaining relevant to all stakeholders in this environment is key to emerging the better for it.”

Sulaiman said the oversupply of space – especially in the office sector – and lack of demand, is a particular pressure point. “It is placing increasing stress on listed property companies to produce growth in dividends, even artificially by paying out one-off profits and nonrental income streams.”

This comes at a time when some Reits are facing increased scrutiny into their quality of earnings and governance.

Smith holds that the heightened focus on transparency and governance in the sector is likely to continue. 

“These items are firmly on the agenda of institutional investors and pension funds. Those funds with strong governance and a high level of transparency should be rewarded by the market and in a much stronger position to attract equity capital to support their strategies.”