REIT Initiation – How fair is my value?

We are initiating coverage of the REIT sector on the JSE. This initial report focuses on three entities: Hyprop (HYP), Fortress Real Estate Investments (FFA & FFB) and Growthpoint (GRT).

Consensus expects macroeconomic conditions to be more negative in FY24 and FY25 than in FY23 for all regions (SA, AUS, UK and EE) in which the three companies are invested. Coupled with statistical evidence that suggests a positive correlation between interest rate movements and REIT prices, we conclude there is downside risk to the sector. The benefit from declining rates may only be felt after some lag. Therefore, we expect most REIT prices to decline with rate cuts, as cap rates lag interest rates, with the full impact of tightening still to be felt in economic activity. 

Logistics offers room for real growth due to excess demand and low vacancies, mainly due to changing business strategies with regards to onshoring and nearshoring. Retail, with low effort ratios and low vacancies, offers a stable outlook. Office space may be at risk, as the full effect of downsizing, corporate slowdowns and changes in work dynamics is still to be felt. With low vacancies and excess supply in Gauteng, EE and with cap rates still increasing in AUS, GRT specifically has a significant risk of large FV adjustments. B-grade industrial property faces the risk of slowing economic activity and high vacancies.

Current and future refinancing are likely to reduce DIPS for HYP and GRT. Fortress, which is able to generate real growth and recycle assets into prime logistics, may generate real organic growth, in our view.

With an LTV of 40%, GRT may find it difficult to raise capital, and it may not be able to exit office properties in Gauteng while funding GOZ and GWI.