2021 MSCI South Africa Annual Property Index returns show the sector recovered to a positive return of 5.3%

Kllaus Karmpher Author

Klaus-Dieter Kaempfer

Head: Commercial Property Finance and Equity Investments, Absa


The IMF’s January 2022 World Economic Outlook forecasts global growth to moderate from an estimated 5.9% in 2021 to 4.4% and 3.8% in 2022 and 2023, respectively. This outlook was produced early in the first quarter and had not accounted for the outbreak of the conflict between Russian and Ukraine. The IMF further forecasts South Africa’s economic growth to decrease from 4.9% to 1.9% from 2021 to 2022 and to further decline to 1.4% in 2023. However, Absa Economic Research Unit forecasts moderately higher expectations with growth of 2.1% in 2022 and 1.7% in 2023.

These economic forecasts could be upended by the recent outbreak of conflict between Russia and Ukraine. This conflict has had far-reaching global economic systematic effects. This includes; the triggering of sanctions against key Russian government institutions and persons; the disturbance of global food supplies - Russia and Ukraine collectively account for 20 to 30% of the world’s grain exports; the rise in commodity prices – including oil and gas as well as grains and potential impacts on global inflation.

Shocks emanating from the war in Ukraine and the related sanctions could affect Emerging Markets including South Africa most concretely by disrupting the supply of commodities, as well as by increasing financial stress and reducing global confidence. The concurrent risks of faster tightening cycle by the US Federal Reserve and negative investor sentiment due to the escalating conflict may trigger financial market volatility, leading to weaker exchange rates and significantly higher yields. Whilst this conflict has caused a rally in commodity prices benefitting oil exporting nations and other commodity exports such as South Africa (Iron ore and Platinum) the risk of a deceleration in global growth and a decline in confidence will likely limit these gains.

The recovery of the retail property sector from the stress of the pandemic and the 2021 July unrest in South Africa has been patchy and slow. The retail sector as a whole achieved a total return of 6.5% in 2021, significantly up from -4.4% in 2020 and albeit still down from the pre-pandemic performance of 7.6% achieved in 2019. One of the trends that developed within this sector during the pandemic was the widening spread of total returns between convenience format retail and very large destination retail formats. In addition, there was a widening of the spreads between rural and peri-urban versus urban shopping centres. The 2021 MSCI results show that there is evidence of recovery from the effects of the pandemic in that the spread has narrowed somewhat.

The South African office sector has been characterised by long-standing structural vacancies, which have been exacerbated by the effects of the pandemic. Office returns have rebound from a total return of -1.7% as at 2020 to 0.8% as at 2021, demonstrating the continued weak macro-economic conditions.

Industrial sector performance has demonstrated resilience in the wake of the pandemic with total returns increasing from 1.2% to 7.5% from 2020 to 2021. This sector remains robust, with performance consecutively outstripping the performance of the All Property Index. Comparatively, the industrial sector has recorded the lowest vacancy rates amongst the traditional property sectors. The strength of the sector has been bolstered globally due to a shift to distribution and warehousing to support the growth of online retail and locally by improved logistics and supply chain networks.  There has also been a trend towards on-shoring of manufacturing capabilities plus higher stock levels to build-in more resilience.

The performance of the residential sector has rebounded largely supported by expansionary monetary policy – which was spurred on by the onset of the COVID-19 pandemic. The foregoing is further demonstrated by the sustained upward trajectory observed in building plans passed and completed. Residential building plans passed accelerated by 50% and residential building plans completed increased by 35% compared to the corresponding period last year. Residential property within the MSCI Index achieved a total return of 4.7% in 2021, up from -3.0% in 2020.

Although direct property returns are still far from their historic highs, the recent MSCI South Africa Annual Property Index results indicate that the market is steadily recovering from the ravages brought about by the pandemic.

Over the last 14 years, South African listed property companies have been investing offshore, as a way to diversify from the limited prospects offered by the South African economy. This process of diversification was spurred on by a confluence of a number of factors, including attractive asset pricing and yields; continued relaxation of exchange controls in South Africa as well as the opportunity for geographical and currency diversification.

One of the regions that South African Real Estate Investment Trusts (REITs) invested in was the Central and Eastern European (CEE) region,   with their comparatively fast growing economies, as well as attractive property market yields.

Recent analysis suggests that gross exposure to the CEE region by SA listed property counters is estimated at R202bn. The foregoing is combination of both direct and indirect investment in the region. Total CEE exposure amongst property counters included in the JSE South African Listed Property Index (SAPY:J253) accounts for 28% of total property assets.


Exhibit 1: Geographic split of property assets for the South African Listed Property Index (SAPY:J253) – Absa Equity Research

The elevated levels of geopolitical risks in East Europe will likely cause investors to to be cautious in respect of further investment.

Kllaus Karmpher Author
Klaus-Dieter Kaempfer

Head: Commercial Property Finance and Equity Investments, Absa

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