Property sector bullish on rate cut effect
Growing consensus Reserve Bank will start easing policy in July
Leaders of some of the country’s top property companies are confident that as interest rates start to fall, investor sentiment towards the real estate sector will improve, but it could take time for the benefits to filter through.
Growthpoint Properties’s South Africa CEO Estienne de Klerk told Business Times on the sidelines of the SA REIT Conference this week that debt and interest rates were the key themes for real estate investment companies in 2024 and were likely to continue into 2025.
“There is a consensus view that interest rates have flattened out and that we probably will be moving towards a down cycle. The issue is now not ‘if’ any more, but ‘when and how much’,” De Klerk said.
Growthpoint believes that could come towards the end of the year and would contribute to improved sentiment and economic activity, De Klerk said.
The Reserve Bank began its rate hiking cycle in November 2021 to combat soaring inflation, raising its benchmark lending rate at 10 consecutive meetings before holding at the current rate of 8.25% at its last four meetings.
Some banks forecast a cut in interest rates from July 2024.
“If you look back on 2023, in particular the second half of last year, it does seem that marked peak inflation in most economies in the world,” said Mike Brown, outgoing CEO of Nedbank.
“As a consequence, it does mean that if that trajectory continues, which does look like it will, that global interest rates also peaked probably in the second half of last year, and actually the global conversation ... [has] shifted now to when should we start reducing and by how much.”
The local economy can take cues from global economic moves, and after stronger-than-expected economic data out of the US, all eyes are on the Federal Reserve and whether it will start cutting interest rates from June, later than initially forecast.
Nedbank, the largest lender to the South African property market, forecasts three 25 basis-point cuts in the US starting in June, with the local authorities likely to follow suit.
“We think we’re going to have 75 basis points of cuts here in South Africa as well: 25 in each of July, September, and November, so very much mirroring the behaviour of the Fed,” Brown said.
Interest rate cuts could boost profits in real estate investment trusts (REITs) as they tend to perform better in a lower interest rate environment, but this may only be felt in the coming years.
REITs generally have an average gearing level — the ratio of debt to equity — of 35% to 40%. When interest rates are cut, the debt of a REIT will reprice at the new, lower rate.
“[That] means there is more distributable income [a profit measure for REITs]. If we’ve got more distributable income it means we should have more dividends to pay out, which is then in benefit for shareholders,” said Geoff Jennett, CEO of Emira Property Fund.
“In an interest rate environment where interest rates are going lower, you should see higher dividend payouts and if you’re seeing higher dividend payouts it’s likely that you’re going to see higher share prices,” Jennett added.
The impact of lower interest rates depends on where a company is in its financial year, with the full effect of cuts likely to only be felt in the next financial cycle.
But investors may have missed the mark on when interest rates would have filtered through the balance sheets of REITs.
“If I consider the roasting we took after our results and the forecast we gave, it seemed like investors had sort of missed the impact of interest rates flushing through the REIT sector. And you know, that’s probably still set to continue for the next year or two,” De Klerk told conference delegates.
“When you hit the bottom of the cycle, it’s very bumpy and investors are jittery and certainly if you look at the experience that they’ve had over the past five years they are looking for a key which says interest rates are going to come down. Fundamentally that will improve the economy, that will start flushing through into growth in the different REITs,” he said. Despite a challenging economic environment, the real estate sector managed to take the top spot on the JSE in 2023, ending the year as the best-performing investment sector.
“I think that’s a key factor that will drive sentiment and there is a herd mentality in the investor space. They might hate you today but they’re going to love you tomorrow if you can deliver a bit of growth,” De Klerk said, referring to growth in REITs from lower interest rates.
Several REITs will enter their close and financial reporting periods in March, allowing the market to better gauge the impact of interest rates on the sector.
[Investors] might hate you today but they’re going to love you tomorrow if you can deliver a bit of growth
Estienne de Klerk Growthpoint South Africa CEO