A tale of two provinces

Spear Reit, the JSE’s only property stock exclusively focused on the Western Cape, has grown dividends for the fourth consecutive year.

At most of its peers, distributable profits have slid in the past two to three years due to rising operating costs, higher-for-longer interest rates, load-shedding and the lingering effects of a pandemic-induced spike in vacancies.

Spear owns a R5.5bn portfolio of 39 office, industrial and retail buildings, most of them in and around Cape Town. Last week the company declared a 3% increase in distributions per share for the 12 months to February.

That’s despite last year’s dilutive R457.75m equity raise to help fund a R1.146bn acquisition of 13 properties from Emira Property Fund. 

Spear’s consistent growth story positions it as one of the listed property sector’s most reliable income payers, which CEO Quintin Rossi attributes largely to its singular focus on the Western Cape.

“The province’s world-class infrastructure is a key reason we were able to rebuild much quicker post-Covid than most other Reits [real estate investment trusts],” he says.

He believes the province’s property market has decoupled from the rest of the country, with better growth prospects at lower risk.

The Western Cape also has the lowest unemployment rate in the country, which Rossi says “puts more money in people’s pockets to shop in our centres, which in turn allows our tenants to pay higher rentals and ultimately supports returns to shareholders”. 

Spear achieved impressive like-for-like revenue growth of 11.7% for the year to February, driven by strong tenant demand and positive rental reversions. The latter clocked in at a decent 4.18%.

Vacancies shrank from 6.8% to 3%, driven by a particularly strong uptake of office space. Spear’s office vacancies fell from 16% to 7%.

Rossi says Cape Town’s popular business nodes — including the V&A Waterfront, Century City and Tyger Valley — are running out of high-end office space. He believes the Mother City is poised for a strong rebound in office rentals over the next three years, with limited new supply likely to come on stream.

Rossi tells the FM that it’s the first time since 2014/2015 that commercial landlords in Cape Town are starting to see real (inflation-beating) rental growth.

Other metros are still labouring under an oversupply of empty offices, forcing landlords to drop rentals when leases come up for renewal or risk losing tenants.    

Rossi says the role that the municipality has played in Cape Town’s real estate fortunes should not be underestimated.

“Property investors depend on three main factors: infrastructure, governance and policy certainty. If these building blocks are not in place, it becomes difficult to attract and deploy investment capital.”

He reckons the City of Cape Town ticks all three boxes. It invests significantly more than other metros in new infrastructure and energy and water security. Already, the city centre doesn’t experience load-shedding up to stage two, which will soon increase to stage four, he says. 

Rossi refers to the City of Cape Town’s three-year infrastructure budget of R43bn-R45bn, more than double the R20bn allocated for infrastructure spending by the City of Joburg over the same time.

Yet Joburg’s infrastructure has deteriorated to such an extent that R20bn is nowhere near enough to get things back to an acceptable level, he says.

Rossi believes the rising costs of running a business amid crumbling infrastructure and unreliable water and electricity supply will continue to support semigration to the Cape — among businesses and households alike.   

An increased ratepayer base will further strengthen the City of Cape Town’s already robust balance sheet. “The city has a 99% cash collection ratio, placing it in a very strong position to continue delivering services,” says Rossi. 

We’ve almost had to build our own municipalities around our properties, which is a costly exercise

—  Jeffrey Wapnick

That’s in stark contrast to Joburg, where property owners — commercial landlords in particular — continue to see profits eroded by poor municipal service delivery.   

Octodec Investments, the JSE’s only Reit that invests solely in Gauteng, can certainly attest to this. About 55% of its retail, office and residential building portfolio is in the Joburg and Tshwane CBDs.

Octodec CEO Jeffrey Wapnick says while Gauteng property owners are all suffering from a lack of service delivery and ageing infrastructure, Octodec was also hit by the gas explosion on Lilian Ngoyi Street in central Joburg in July 2023.

The damage is still unrepaired nearly two years later, which has caused lingering vacancies in Octodec’s retail and residential buildings in the vicinity.    

Wapnick says there is talk of repairs being completed by end-August, but the bigger concern is the general state of the local council.

“A lot of work needs to happen to create stability in water and electricity supply, fix potholes and improve refuse removal.”

Wapnick adds that if Gauteng’s municipalities were better run, Reits wouldn’t have to spend nearly as much on installing and fixing infrastructure to protect property values and keep tenants.

“We’ve almost had to build our own municipalities around our properties, which is a costly exercise,” he says.   

He adds that the “scary” unemployment figures, especially among low- to middle-income households, many of whom rent apartments in Octodec’s CBD buildings, have affected residential tenants’ ability to pay rentals and absorb increases.

Octodec is now looking to sell some of its inner-city properties. “There are parts of the CBD that served us well, once upon a time, that don’t any more. So we need to recycle underperforming properties in these areas.”

Wapnick concedes that Octodec’s lacklustre share price performance could be due to its heavy concentration in the Joburg and Tshwane CBDs. “Gauteng is not the flavour of the month.”

Octodec’s share price is trading at about R10, the same level it was two years ago. Meanwhile, Spear’s share price is up 42% over the same time.

The stock has delivered a total annual return (income and capital growth) of 15% for the past three years to February. Analysts believe Spear is likely to continue to outperform the sector given its Western Cape focus.

Curwin Rittles, investment analyst at Metope Group, says the Western Cape, as part of South Africa, is not immune to broader geopolitical risks. But the province’s relative economic outperformance has had a positive impact on property valuations, rental levels and reversions.  

He says though several Reits have exposure to the province, the fact Spear is the only one exclusively focused on the region, is a key differentiator in the South African listed property market, “where sector- or region-specific Reits are rare.”

The stock is expected to deliver earnings growth of 4%-6% for the year to February 2026, which Rittles says is ahead of the market average.

At this week’s share price levels of just below R10, he says Spear appears “reasonably valued”. It trades at a 20% discount to NAV and a forward yield of 8.7%, broadly in line with the sector.

Rittles adds: “The company’s balance sheet remains robust, with a loan-to-value of 27%, providing capacity to support further growth.”