When one talks about long-term asset classes, property often makes it into the conversation. In fact, it is the epitome of a long-term asset. It is bricks and mortar stuck immovably in the ground. Nonetheless, in the medium term, this asset can be highly cyclical due to the mismatch between slow-to-produce supply and unexpected demand changes, as well as fluctuations in the cost of capital. For this reason, property needs to be evaluated through the cycle. This cyclicality is particularly pronounced in listed property, where dynamic willing-buyer, willing-seller pricing is apparent in real time and is not a once-a-year, smoothed backward-looking paper opinion of an individual valuer.
From the formation of a substantive listed property index in 2004 until 2018, listed property was a market darling, providing both strong absolute returns and a relative return almost double that of the JSE All Share Index. It gave a higher total return for lower risk. However, this was not sustainable over time. Over this golden period, the listed property sector was maturing, inflows were prevalent, and fundamentals were strong enough to support sector earnings growth that was frequently in the high single digits. Towards the end of this era, market exuberance entered the mix with some property companies trading at excessively low yields.
Thereafter, until the onset of Covid, listed property corrected by a quarter while the All Share Index was flat. Covid did, however, exacerbate the pre-existing weakness. Property was a clear loser during the pandemic, as property shareholders effectively gave a complimentary lifeline to retailers (and indirectly banks, who were not as magnanimous to property companies themselves) by being forgiving on contractual rental demands. Landlords took the long view, prioritising the survival of their tenants over short-term earnings. This saw listed property total return falling a further 40% over the first year or so of Covid, while the All Share Total Return Index rose to record highs.
What has happened since then is the focus of this piece. From the end of the Covid period until around 2023/4, listed property returns were basically flat, even as the All Share Index continued to rise (albeit at a slower rate). Things changed during June 2024, and you could have almost rung a bell. This inflection point is apparent in a price graph.
The inflection point was the formation of the Government of National Unity (GNU). Had you bought the SAPY Property Index (just pre-GNU), you would have made a 60% total return by the end of 2025, just over 18 months later. The domestic property companies within that index did even better. Over this period, the JSE All Share Index has been stronger (led by resource stocks), but within the universe of domestic non-resource stocks, listed property has been meaningfully stronger than many sectors.
Why did property rebound so strongly after the formation of the GNU? There were both macro and micro property-specific reasons.
The main macro reason, and this is the primary driver of the whole story, was the strength in bond yields. Government bond yields since GNU contracted in yield by close to 350 basis points until the end of 2025 – a major shift. This was because of the greater investor certainty and the perception of a potential improvement in governance, fiscal and policy direction.
When bond yields fall, the required return on property also reduces as property and bonds are in some way substitutes. Consequently, you will pay more for a property rental stream (the same thing as getting a lower return), which is the same as saying property prices increase. It is math. Falling bond yields were one side of the see-saw, and rising listed property prices the other.
A related macro factor was the reduction in short-term interest rates due to a reduction in inflation and inflation expectations (led by a lower inflation target). The South African Reserve Bank reduced interest rates substantially over this period. This had an impact on the earnings of listed property, as lower interest costs fed through to higher company earnings (in the preceding years, the increase in interest rates had contracted earnings).
An additional factor was the end of load shedding. Load shedding was a headwind for property, as landlords often could not pass on the full cost of generated electricity to tenants, and more importantly, the trading knock tenants took due to load shedding had a negative impact on tenant performance, property demand and the rental levels that the market could afford. The negative impact of load shedding was on the earnings base, so when these additional costs no longer recurred, earnings were lifted.
Another driver was improving property fundamentals. Property entered Covid in a weak fundamental position, with excess supply of property and weak demand. In recent years, this has improved with very little new supply hitting the market, vacancies reducing and the market becoming more balanced. Consequently, the property operating key performance indicator (KPI) improved markedly, and funds were able to generate like-on-like net property income growth ahead of inflation. Even with some negative rental reversion still in the system, fundamentals were strong enough to deliver this growth. This saw a return to positive real earnings growth (from large falls in the period after Covid), which by itself could justify a rerating.
Another tailwind over the past few years warrants highlighting – property companies have been installing photovoltaic (PV) systems. These solar investments are highly profitable, as the property company profits from the difference between the cost of solar energy (with a marginal cost close to zero) and the Eskom tariff, which it can charge to tenants. These financial gains have been material (offsetting to some extent the downside from chronic above-inflation increases in rates, taxes and utility charges). The funds are continuing to roll out solar, so there is still an active avenue to additional earnings growth. It is a “gift that keeps on giving”, as with the Eskom tariff chronically increasing sharply, so does the profit the companies make off their existing PV investments, as they can charge correspondingly more.
The listed property sector is in a very different place than it was five years ago. Bond yields and interest rates are substantially lower, demand/supply conditions are no longer as unfavourable, electricity has gone from a profit detractor to a profit centre, and sentiment has improved. Despite this, sector earnings per share and book value are still below pre-Covid levels.