Despite their strong long-term performance and low correlation with other assets, many investors still have only limited exposure to real estate investment trusts (Reits) as an asset class.
A recent report by the SA Reit Association highlights the case for investors to boost their exposure to Reits, especially in multi-asset-class portfolios with long-term strategic goals, as property is inherently a long-term investment.
“Reits remain underrepresented in local balanced funds, with allocations averaging just 2.1% at the end of the third quarter of 2024. This is despite their potential to enhance risk-adjusted returns, thanks to their low correlation with traditional asset classes like equities and bonds,” said Naeem Tilly, a member of the SA Reit Association research committee and portfolio manager and head of research at Sesfikile Capital.
Over the course of 2024, SA Reits outperformed all other asset classes, delivering a 35% return, far surpassing the broader equity market, which gained 13%, and the bond market, which saw a 17% return.
Since the early 2000s, Reits have enjoyed strong growth, now making up 4.9% of the JSE all share index, 10.2% of the mid cap index, and 26% of the small cap index, reads the report.
According to the association, which represents large commercial property groups such as Growthpoint and Redefine, the optimal allocation to property in local portfolios is 23%.
The recent increase in offshore limits under regulation 28 has led to a shift in asset allocation towards foreign bonds and equities, allowing local investors to invest more internationally and moving a significant portion of assets from local to global markets.
However, according to the Alexforbes Manager Watch Survey, the average allocation to Reits for global balanced funds fell from 4.1% in 2018 to 3.1% by the end of 2023.
Regulation 28 is a set of rules in SA that governs the amount of exposure retirement funds can have to different asset classes, such as local and offshore equities, bonds, property and cash.
Tilly pointed out that combining assets with low performance correlation allowed investors to reduce portfolio risk while preserving return potential, which was a key principle of effective portfolio optimisation.
Low performance correlation refers to the relationship between the performance of two or more assets or investment types, where their movements do not follow the same pattern.
Itumeleng Mothibeli, SA Reit Association research committee chair and MD of Vukile Property Fund SA, said these findings aligned with global insights from Oxford Economics, which highlighted the complementary roles of listed and direct real estate investments.
“Listed Reits, with their liquidity and diversification advantages, are particularly well-suited for higher-risk portfolios, while direct real estate offers stable income and consistent performance,” Mothibeli said.
Reits have much to offer when compared to the other asset classes, including a requirement to distribute 75% of taxable income as dividends, which make up 80% of returns and reduce volatility. The stability of real estate leases provides reliable earnings and lower share price fluctuations. Additionally, Reit dividends are inflation-protected, as property values and rents tend to rise with inflation.
“The defensive qualities of SA Reits — such as their inflation protection and mandatory income distributions — make them essential for building resilient portfolios. By harnessing the unique advantages of Reits, SA investors can enhance diversification, stability and long-term growth,” said Mothibeli.
With ongoing global economic uncertainties, including changing interest rates and geopolitical tension, Mothibeli suggested that revisiting strategic allocations to Reits could present significant opportunities for both local and international investors.
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