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SIMON BROWN: I’m chatting now with Ian Anderson. He’s head of listed property and a portfolio manager at Merchant West Investments. Ian, appreciate the time. The SA Reit Chartbook is out. SA Reits – you and I have been chatting. Phenomenal returns in 2024, again in 2025. March a poor month for Reits locally, down 12.3%. That takes their quarterly return down to -4.3%. This is not fundamentals; this is the war in Iran. It’s all volatility and markets are spooked.
IAN ANDERSON: Absolutely. It was all linked to what was happening in bond yields, global bond yields, but specifically South African bond yields moving over 100 basis points. It’s not going to be good for property at all.
The volumes were big as well – almost R20 billion worth of shares changed hands. So it was an interesting month for property, put it that way.
SIMON BROWN: [Chuckling] And that’s the point – it’s not directly about the fundamentals, that 12.3% off. Actually it was a busy month. We saw Vukile expanding in Spain and Growthpoint, Hyprop [with] good dividend distribution growth. The underlying fundamentals were continuing to look impressive.
IAN ANDERSON: Especially here in South Africa. So when you look at businesses like Hyprop and Growthpoint especially – because they have big South African businesses, but also big offshore businesses – it’s been almost exclusively but very much driven by what’s happening here in South Africa.
So the improving South African fundamentals are helping most of the Reits deliver very, very strong dividend growth. We’re starting to see fairly substantial upgrades. I think in the last quarter dividend growth was over 9% on average – and that’s a very, very healthy position for these Reits to be in.
So again, the 12% decline in prices is very surprising against a backdrop of improving fundamentals. But clearly, as you said, it’s related to the Iran war and what’s happening with bond yields.
SIMON BROWN: Yes, a war happening half a planet away. And we have seen – and you and I have chatted around this – where a lot of returns for the year were going to be around yield and growth in that yield. We have been seeing that. We are seeing yields pick up year on year.
IAN ANDERSON: Absolutely. We’ve had the re-rating; a lot of these Reits are trading at or around their net asset value so there’s not much more scope for the ratings to change; in other words for the yield to reduce. What you had to get was your dividend yield, which is around 8% now, plus whatever growth we were expecting in that dividend. That number is likely to be somewhere around 8-10%.
We were still looking for decent returns this year, somewhere between sort of 12 to 15, maybe even up to 18%, but obviously the war in Iran has been a bit of a setback. But I think it has given people a second bite at the cherry. Yes, absolutely. I think a lot of people probably started this year thinking, ooh, listed property has had its run; I’m not going to get another chance at this.
And suddenly you find yourself with an opportunity to get in at prices that are 10%, 12% lower than where they were at the end of February.
SIMON BROWN: Yes, absolutely. Changing track slightly, Business Day today has an article talking around our office vacancies, which are down at 12.6%. They make the point that this is about the best since mid-2020. Office continues to grind to a better position in managing the vacancies. It’s improving slowly, but it is improving.
IAN ANDERSON: Correct. We’ve spoken about this a few times. There are a few levers that you can pull in order to reduce vacancy. One is not to add new supply into the equation. And I think that’s the one thing – there has just been no new supply of office space. There have been a lot of conversions of office into residential, so that’s taking space out of the equation.
And then I think we are starting to see more and more businesses requiring their staff to come back to work more than three days a week, four days a week, five days a week.
And there has been a little bit of economic activity. We have seen – especially in markets like Cape Town – that there has been demand for office space from overseas or non-South African businesses that are looking to establish a presence in Africa, start a base here in South Africa.
So in certain markets there is demand for office space. But the reason the vacancies have dropped is mainly the lack of new supply.
SIMON BROWN: Yes, I take your point. It is the supply.
A last question. We saw a fair bit happening around indices. There’s the Quarterly Index Review which the JSE does every quarter. That was effective sort of 23rd March. And we saw a couple of Reits moving into property and the SA Reit Index, which is kind of expanding and making them sort of good for the both the Reits and the indices.
IAN ANDERSON: Absolutely. You know the likes of a Dipula, Octodec and Spear all made their way into the All Property Index [Alpi] . The JSE has changed its inclusion criteria. You didn’t have to just be in the All Share Index to be in the Alpi. As long as you met the liquidity criteria you could get into the Alpi. It’s great.
These are not small businesses anymore. They used to be sort of less than R2 billion in market cap, but they’re much bigger businesses today. They’re looking to expand, they’re looking to raise new capital in order to grow their portfolios, and being a member of the Alpi is definitely the way to go. It allows more and more institutional investors to gain access to these businesses. I think it’s great. It expands the opportunity set for investors in South Africa.
SIMON BROWN: And they’re not small. I quickly pulled up Spear, just as one of them – market cap R5 billion. That is a chunky size.
We’ll leave it there. Ian Anderson, head of listed property and portfolio manager at Merchant West Investments, appreciate the early morning.
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