MICHAEL AVERY | Listed property sector needs local government reform boost

With the listed property sector returning almost 70% over the past two years, it was hardly surprising that the mood at this year’s biannual South African Real Estate Investment Trust (Reit) Association conference was ebullient. But from my vantage point as MC, it almost felt like a room full of Arsenal supporters not quite ready to crack the champagne just yet as the spectre of Man City loomed over collective shoulders in the form of this year’s local government elections.

Two years ago the sector resembled a patient just out of intensive care after the devastating Covid-19 shutdown. Loan-to-values were still too high, covenants were too close for comfort and discounts to net asset value (NAV) were wide enough to drive a bulldozer through. Research from independent property analyst Keillen Ndlovu revealed that in early 2024, 48% of fund selectors were underweight the sector and only 12% overweight. It was fashionable to hate listed property.

Fast forward to 2026 and the numbers tell a different story. Underweights have shrunk to 12% while 20% of allocators are overweight and another 20% neutral-to-overweight. The sector delivered 29.8% in 2024 and 38.6% in 2025. The all-property index sits above pre-Covid levels though still well below its 2017 peak.

Estienne de Klerk, incoming group CEO of Growthpoint Properties, shared a comment that would have sounded reckless in 2024, as discounts to NAV narrow and the cost of equity comes down, dealmaking should increase.

Ndlovu described the sector as “now trading closer to net asset value on average”. The simple arithmetic is that when your shares no longer trade at 40%–60% discounts your equity becomes a currency again. Combine that with falling loan-to-values and rising interest cover ratios “and some payout ratios increasing”, and suddenly it does seem plausible that the sector has moved from intensive care to optionality.

But 2026 is not just another year in the property cycle. It is an election year and specifically a local government election year. And in South African property, politics is so much more than simply background noise — it is all about the actual plumbing that underpins operations.

But 2026 is not just another year in the property cycle. It is an election year and specifically a local government election year. And in South African property, politics is so much more than simply background noise — it is all about the actual plumbing that underpins operations.

Over the past decade Johannesburg has had nine mayors. Nine. In that time infrastructure has deteriorated to the extent that parts of Joburg resemble a war zone, as anyone who has travelled through Fordsburg or along Jan Smuts Avenue will attest to. For property investors that instability translated into risk premiums, capital flight to Cape Town and offshore exposure, and a lingering suspicion that “SA Inc” was not investable.

Ndlovu’s research, which quizzed 25 fund selectors, including asset consultants, pension funds, multi-managers and wealth managers, doesn’t shy away from these risks. Allocators cite “collapsing infrastructure, water outages and rising rates and taxes”, “tepid domestic growth” and “uncertainty on the outcome of local elections and the strength and stability of the [government of national unity]” as uncertainties and risks. The political variable hasn’t disappeared simply because bond yields have fallen. But the base case of another three rate cuts of 25 basis points each is still supportive.

In fact, the 2026 local elections may prove more consequential for property than any rate cut. Many property execs I’ve spoken to have framed the vote as a potential “turning point for confidence in the property market”, without any hint of hyperbole. Municipal competence determines zoning approvals, service reliability, billing integrity and ultimately tenant viability. A stable, reform-oriented administration in Johannesburg could begin to reverse a decade of capital erosion. But the obvious corollary is that the continuation of coalition fragmentation could entrench it.

And this is certainly where the conference optimism met South Africa’s political reality. Ndlovu notes that “not much extra lifting is required to generate 10%-15% returns in 2026”, but that upside is “likely to be moderate and income led, rather than be driven by aggressive rerating”. That assumption depends on a stable rate backdrop and a reasonably functional operating environment. Municipal dysfunction complicates both.

We know markets are forward-looking mechanisms. The rally of the past two years priced in lower rates, stabilised earnings and reduced systemic risk. It did not price in municipal reform. That remains an option value.

But one cannot deny that the cranes are back in parts of Gauteng. Deal activity has picked up. More than R11bn of fresh capital was raised in the sector in 2025. However, cranes require water, electricity and roads. Capital markets can forgive volatility but they struggle to forgive decay.

The sector’s earnings outlook for 2026 is solid but unspectacular. Hyprop guides 10%–12%, Resilient about +10%, Vukile +9%, Growthpoint 3%–5%. That is respectable. It is also dependent on tenants who can trade, consumers who can spend and cities that function.

There is an irony here. Listed property has outperformed global property since the pandemic. Balanced funds have nudged allocations back above prepandemic levels to 4.2%. Sentiment is more positive than it has been in years. Yet the physical substrate on which much of that income depends, particularly in Johannesburg, remains fragile at best.

We know markets are forward-looking mechanisms. The rally of the past two years priced in lower rates, stabilised earnings and reduced systemic risk. It did not price in municipal reform. That remains an option value.

If the 2026 elections deliver credible coalitions focused on service delivery and infrastructure restoration, particularly in economic hubs such as Johannesburg and Tshwane, the sector’s rerating may not be finished. Cap rates, which have lagged falling bond yields, could compress further. NAVs could stabilise or even expand. The “income-led moderate upside” thesis could morph into something more interesting.

The sector has repaired its balance sheets. Apart from a few glaring governance failures that still haunt the sector it has largely restored its credibility. And with a declining cost of equity it may soon accelerate positive growth-oriented dealmaking. Yet in cities such as Johannesburg, the real turnaround will be measured in potholes filled, leaks repaired, lights kept on and billing systems fixed.

After a nearly 70% bounce the easy trade is done. The next phase belongs not just to CFOs and portfolio managers, but to mayors. Long-suffering residents of Johannesburg and property investors will be hoping voters choose the DA’s delivery track record over the present structural decline when the time comes.

• Avery, a financial journalist and broadcaster, produces BDTV’s ‘Business Watch’. Contact him at michael@fmr.co.za.