It’s no secret that Cape Town has grown its status as a property and tourism hotspot in leaps and bounds in recent years. The Mother City has effectively decoupled itself from the rest of the country’s stagnating property markets on the back of semigration and the post-pandemic rebound in leisure travel.
The trend has already provided a significant underpin for house price growth, with the city now well ahead of other metros.
Cape Town’s commercial real estate sector is also starting to offer improved returns as more corporates, retailers, manufacturers and SMEs join the relocation wave to escape ailing infrastructure and poor governance in other provinces.
So, if you’re keen to share in what is likely to be the continued outperformance of the Cape real estate market, Spear Reit is worth a second glance. Though still relatively small, with a market cap of R2bn, it is the JSE’s only property stock that has a 100% Western Cape-based portfolio.
Though still relatively small, with a market cap of R2bn, Spear is the JSE’s only property stock that has a 100% Western Cape-based portfolio
The company was listed in November 2016. The bulk of its R4.46bn portfolio is in Cape Town; it comprises a mix of retail, industrial and office assets.
Flagships include the 31,000m² Sable Square shopping centre in Milnerton, the 86,000m² Mega Park industrial park in Bellville and some office blocks: 2 Long Street in the CBD, the Liberty Life Building in Century City and the Mweb building in Parow.
Spear’s management, under CEO Quintin Rossi, is looking to expand the company’s Western Cape footprint and recently entered the burgeoning Garden route town of George, where it’s developing a new R400m industrial park.
The company released a pleasing operational update in December, achieving positive rental reversions in both its industrial and its retail portfolio of an average 5.4% and 4.65% respectively for the nine months to November.
That’s in contrast to real estate investment trusts with industrial and retail buildings in other provinces, which are mostly still experiencing a drop in rentals when leases come up for renewal.
Vacancies in Spear buildings have been well contained at 2.39% (industrial) and 2.95% (retail). Like office landlords across the country, the company is, however, still seeing negative reversions in its offices, albeit at an improved -2.6%, down from -5.52% at February 2023.
Though Spear’s office vacancy is at a sizeable 15.6%, Rossi says a big chunk of the empty space comes from a large tenant that recently vacated at 100 Fairways in Parow, which is now under negotiation with a new tenant.
In fact, Rossi has noted an encouraging uptick in office demand, which has already led to a shortage of space in many parts of Cape Town, particularly for large premises. He says the sector is gaining further momentum on the back of a steady return to the office by small- and medium-scale occupiers. All of this bodes well for office rental growth.
Rossi ascribes the company’s strong operational performance to its geographical investment focus, which allows for a hands-on property management approach. He says: “Spear has stood out as a countercyclical real estate investment, with the majority of its performance metrics outpacing its diversified peers with national ownership strategies.’’
Rossi acknowledges that Spear’s business is not entirely immune to the economic and political woes faced by the rest of the country. Higher-for-longer interest rates also continue to eat into Spear’s profits.
But he maintains the company’s portfolio is more defensive than that of Reits with exposure to other provinces, because of the Western Cape government’s commitment to improve and invest in critical infrastructure. He refers to the more than R5bn worth of new real estate developments that came to the Cape Town market last year alone and to efforts by the city to become the first South African metropole to be free of load-shedding, which it plans to achieve by end-2024.
Rossi adds: “The consistent delivery of clean audits and the trustworthy governance across the Western Cape and its municipal authorities will further enhance investment appetite for real estate in the province.’’
In a research note this month, Anchor Stockbrokers forecast a dividend of 78.88c a share for Spear’s full year to February. That represents a 3.8% year-on-year increase (at a 94% payout ratio) and places the stock among the few local Reits still achieving dividend growth.
At a price of 825c this week, the company trades at a dividend yield of close to 10% and a 30% discount to NAV.
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