Listed Property Rebounds: Fundamentals, not hype, will drive the next cycle

Highlights:

• Property sector shows signs of recovery amid improving sentiment and easing operational pressures.
• Focus shifting from rates to quality of underlying assets and tenant affordability.
• Retail and logistics remain resilient; office sector still weighed down by vacancies.‍

While headwinds remain, there are signs of operational improvement and a stabilisation in market sentiment, according to Siphesihle Zwane, portfolio manager at Allan Gray.

Zwane notes that although share prices in the sector remain highly sensitive to interest rate movements, a reflection of the typically leveraged nature of property companies, investors should pay closer attention to the quality of underlying assets.

“When you buy a company, you are buying a portfolio of income-generating properties. We focus on how those properties are trading, what the rental trends look like, and whether the operational performance supports long-term returns,” he says.

According to Zwane, the long-term fundamentals of property remain intact, but should always be evaluated in the context of relative value.

“At its core, property exists to facilitate an economic activity,” he says. “Whether it’s a retail centre, office building or industrial park, the space must enable the main activity – like shopping or manufacturing, to take place. The more efficiently it does that, the more value it creates.”

Zwane explains that there are a few key drivers Allan Gray considers when assessing property over the long term.

“First, we look at the affordability of the space for tenants. If retail sales, for instance, are growing at a faster rate than rental costs and other expenses like electricity, then tenants can sustain those rental escalations. Everyone wins: The tenant stays profitable, and the landlord benefits from rising contractual escalations,” he says.

The second key factor is the broader cost environment. “Administered prices, such as electricity, and interest rates are crucial,” Zwane notes. “If these rise too steeply, they erode the profitability of tenants and limit the ability of landlords to charge higher rentals.”

Lastly, he says it’s important for investors to compare property to other available opportunities. “We don’t view property in isolation,” Zwane adds. “We evaluate it relative to what else we can own in the market. So, if listed property trades at a meaningful discount to fair value compared to other equities, it might present a compelling case.

He says that retail property remains one of the more resilient components of the market, particularly as operational pressures such as loadshedding have eased.

“In the retail space, there are contractual rental escalations, and at the end of a lease cycle – typically four to five years, terms are renegotiated. We’re seeing more positive reversions than in previous years,” says Zwane. “That’s encouraging, and so is the relative improvement in trading conditions for many centres.”

By contrast, the office space sector remains under pressure, weighed down by persistent vacancies, decentralisation trends, and the lingering effects of hybrid work policies.

“The office space market was built for a level of economic growth that hasn’t materialised. Many properties are now standing empty particularly older buildings in central business districts. Some are being converted for residential use, but that isn’t a viable solution for every property,” Zwane says.

Logistics, on the other hand, continues to benefit from structural shifts in consumer behaviour and supply chain strategy, thanks to the dramatic uptake of online shopping.

“The more goods are moved – between cities, towns and directly to consumers – the more important efficient logistics nodes become. Distribution centres located near key transport corridors have performed well,” he says.

While the listed property sector is no longer the high-growth vehicle it once was, Zwane believes it can still play a role for investors seeking relatively stable, inflation-linked income – particularly in a repriced market where fundamentals are back in focus. “You get access to hard assets and the cash flows that the hard assets generate,” he concludes.