At these levels, there’s value in the current oversupply of commercial property space

Author: Geoff Jennett, CEO of Emira Property Fund

Listed property share prices are starting to show an increased value proposition and this will inevitably lead into the physical commercial property market.

So far, in 2024, real estate investment trust REIT returns are up in excess of 50%.

Nowhere are signs of a real estate turnaround more evident than in the Western Cape, where offices that sat vacant just 18 months ago are now full.

The semigration trend to the province is part of this. But it's not the whole story. Improving sentiment post the Government of National Unity (GNU), less load shedding easing strain and costs, and the first reduction in interest rates, together with the expectation that they will fall further, are country-wide factors all contributing to a surge in sentiment and confidence.

In addition, most corporates are now insisting on a return to in-office work, resulting in a greater need for office space. This spells opportunity – particularly in Gauteng, which is the hub of South Africa's economic engine, and where vacancies are still prevalent.

There’s more value to be unlocked

Successful investors look further than headlines to find value. And, as the economy starts to stir, savvy investors can scent opportunity.

Property is inherently cyclical, and it's starting to pick up the first gusts of coming tailwinds. Yes, the sector still has an oversupply to digest, but there's value in it if acquired at the current low pricing levels. As offices fill up and economic sentiment improves, their values will increase commensurately.

With the anticipation of reduced vacancy levels, property investment becomes more attractive, and the prospect of new developments becomes increasingly feasible, drawing investors and speculators back into the market. It’s a potentially tantalising prospect after years of stagnation.

Disciplined, sustainable growth

In fact, the future prospect is more alluring than it has been for a long time. This is even true in the local REIT sector, where we still see share prices that significantly undervalue their businesses, but with the incoming tailwinds, we will inevitably see an acceleration towards the recovery on the horizon.

When market sentiment overshoots fundamentals, long term investors like Emira stay focused on what makes business sense, not getting caught up in the hype – acquiring at below value in places where economics are suppressed and disposing when values are full. It all comes down to strategic capital allocation and responsible growth. When markets show extreme dislocations from value, that is the time to to move and take advantage of what will eventually show as long-term value creation.

Demonstrating its agility and business sense, Emira's recently sold off its portfolio in sought-after Cape Town at what it perceives as fuller value. This strategically aligned move freed-up capital to be deployed in Poland, where returns are extremely enticing (undervalued with strong economic growth prospects) and where we had identified the right entry point (co-invested into equity with local partners with growth aspirations) – a decision that makes business sense for Emira in its pursuit of diversification and value creation.

The stage is set for a long-awaited turnaround

Rising REIT returns, reducing vacancies, and returning office appetite all point to a sector in recovery mode. The property cycle is turning, and those with a keen eye for value are already taking notice.

The South African property sector still has meaningful operational and infrastructure hurdles to overcome, but the winds of change are starting to blow and, with a nuanced understanding of the sector and a discerning eye for emerging potential, there’s substantial value in listed property stocks right now with further value to be found in the future.