In diversified portfolios, property exposure such as real estate investment trusts (Reits) is often seen as a hybrid of equity and debt. The strong dividend underpin makes them behave somewhat like bonds, while the ability for those cash flows to grow over time pulls them closer to equity.
Some strategies can generate much stronger growth than others. The extent of growth is a factor in the valuation, as fast-growing Reits can trade closer to traditional equity, while slow-growing Reits will behave more like debt.
Reits that shift their valuation along the spectrum from debt towards equity generate excellent returns for shareholders. In other words, seeking out and acquiring growth assets is a valuable exercise for property funds — provided the risks can be managed correctly. This is where a number of property funds have historically fallen short in their expansion strategies.
In assessing growth prospects and appropriate yields, investors in Reits spend time thinking about both the cyclical and structural factors at play.
For example, office properties have been under immense pressure since Covid, with ongoing negative reversions (that is, new leases signed at lower rates than the expired leases). Even A-grade and P-grade offices are still struggling to find a supply-demand balance that would lead to growth. In lower-grade offices, it’s a bloodbath that has seen many properties redeveloped for other uses.
The shift to hybrid working environments put a structural dent in demand for office properties, but there’s also a cyclical element here that will turn at some point. When enough supply has been taken out of the office market, reversions will turn positive and landlords will breathe a sigh of relief. This typically leads to an increase in supply in response to the improved economics, eventually causing the cycle to experience a downturn once more as reversions turn negative.
For a structural rather than cyclical trend, we can turn to the retail sector. The widespread adoption of e-commerce by consumers cannot be ignored, especially as South Africa’s online penetration rates are still way below what you’ll find in developed markets. The direction of travel for online shopping is up, not sideways or down.
On apps like Sixty60, where the order is fulfilled by the nearest Checkers store, the landlord still gets a slice of the action as the products are put through the till. Turnover-linked clauses capture this activity and give the landlord some protection against e-commerce. But this doesn’t offset the loss of foot count in the malls and the resultant impact on the line shops that used to benefit from having a grocery store as the anchor tenant.
The direction of travel for online shopping is up, not sideways or down
In upmarket areas where consumers are willing (and able) to pay for convenience, Reits need to focus on destination shopping experiences to encourage consumers to travel to the malls. Growthpoint’s flagship asset, the V&A Waterfront in Cape Town, benefits from unrivalled natural beauty and an extraordinary experience. This is the standout example in South Africa of the power of destination shopping. Other premium malls aren’t nearly as lucky with their backdrop, making it harder to achieve growth in excess of inflation.
Conversely, shopping centres on busy commuter routes or in lower-income areas have been enjoying ongoing growth in both foot count and average basket size. Key underlying trends such as urbanisation and the shift from informal to formal retail are at play here. They are trickier to manage in terms of security and related factors, but the juice is more than worth the squeeze.
To see this in action, we can look at Vukile Property Fund. It doesn’t have any malls you would recommend to a tourist, but the year ended March 2026 saw like-for-like retail net operating income growth of 10.3% in the South African portfolio. The retail portfolio increased 12.3% in value on a like-for-like basis, an exceptional result in an economy with sluggish overall growth.
Trading density (a measure of sales per square metre) was up 5.3%, well ahead of inflation. With tenants doing well in these malls, Vukile’s shareholders are smiling. Aside from the obvious positive impact of turnover clauses and how this drives growth in income, there’s also the benefit of positive reversions. Profitable, happy tenants are willing to pay higher rates for the space, driving stronger income for the malls and an increase in the valuation.
Even in the property sector, seen as a less risky space than other equity sectors, there are ways to chase meaningful growth. Vukile is one of the very best local examples, not least of all because it has also achieved success in Europe, something that has proven to be difficult for many local Reits.
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