Equity Insights
Pritu Maka
Spear is the only regionally-focused real estate investment trust (REIT) listed on the Johannesburg Stock Exchange (JSE). It predominantly invests in high-quality income-generating assets across all sectors in the Western Cape, obtaining its diversification through gaining exposure to assets that generate strong and sustainable cash flows within the industrial, convenience retail, commercial and mixed-use sectors.
The group's mission statement is to be the leading Western Cape-focused REIT and to consistently grow its distribution per share ahead of inflation, delivering a performance that places it within the top quartile of the South African REIT sector.
Since listing on the JSE as a specialist REIT almost a decade ago, Spear has steadily grown its portfolio and currently has ~39 assets, comprising of a well-balanced mix of industrial (63%), commercial (26%) and retail (11%) assets with the total portfolio being valued at ~R5.5 billion. The total gross lettable area (GLA) of the portfolio is 487 418 m2, which is let to 526 tenants ranging from JSE-listed entities to small or medium enterprises with the majority being A-grade tenants (~47% of total GLA).
During FY25 Spear also completed the acquisition of several properties from Emira Property Fund for R1.1 billion enabling the group to meaningfully increase its market share within the Western Cape, with a complementary high-quality diversified property portfolio comprising industrial, retail, mixed-use and commercial assets. The properties were acquired at market value and hence were accretive to Spear from a distributable profit perspective. Management noted that the deal facilitates revenue and long-term growth prospects for Spear, and creates operating efficiencies, allowing Spear (being a fully internally managed REIT) to increase operating profit margins and drive sustained profitability, by leveraging combined expertise and resources to reduce costs through economies of scale.
The geographically specialised portfolio gives Spear the opportunity to focus on hands-on asset, tenant and portfolio management in the Western Cape. As a result, the portfolio presents stable income over the short-, medium- and long-term, with several redevelopment opportunities that will allow for organic growth and increase of income in the portfolio.
The effects of semigration and localisation of supply-chain solutions have provided great opportunities for the REIT, particularly within the existing industrial portfolio, to add organic value and capitalise on this accelerating trend. The increased interest by international companies seeking to establish a Cape Town office presence also bodes well for Spear's well-located commercial portfolio and the general Cape Town commercial office market.
Overall, the real estate market in Cape Town and the Western Cape has fared far better than the balance of South Africa. Most notably, the office sector has shown signs of a faster recovery as vacancy rates contract and reversionary rental pressure subsides across the Cape Metropole. The Western Cape and City of Cape Town have accelerated the drive to make Cape Town the first loadshedding-free City in South Africa through its energy and electricity policy offering incentive programmes for commercial and industrial properties to feed in excess generation into the electricity grid.
Industrial (63% of total portfolio GLA)
The industrial portfolio, which offers a fully-diversified sub-sectoral product mix ranging from warehousing, logistics parks, urban logistics and manufacturing facilities, demonstrated a consistent performance throughout FY25, attributed to its well-diversified nature and prime locations. Overall, Spear's industrial assets are defined by their efficient operational areas, ample yard space, solar PV installations, and prime locations that connect seamlessly to Cape Town's major routes. Recent trends such as onshoring and near-shoring, local manufacturing, and efforts to mitigate supply-chain disruptions have contributed to increased tenant demand. This has driven rental growth, improvements in occupancies and extended lease terms.
More recently, the industrial portfolio has seen positive momentum continue into the three-month period ending 31 May 2025 (1Q26), with occupancies remaining at 98.11% and in-force escalations being robust at 7.4%.
The group also recently agreed to acquire Consani Industrial Park for a purchase consideration of R437.3 million - the property has a GLA of 80 657m2, which represents ~26.5% of the group's total industrial exposure. The acquisition supports the group's continued focus on securing assets that generate sustainable income and long-term value through long-dated lease tenures and robust rental growth rates.
Commercial (26% of total portfolio GLA)
The group's commercial assets are strategically situated in highly sought-after locations, equipped with sufficient back-up power generation capacity, and generous parking ratios. These features, combined with attractive lease terms, have been instrumental in driving the recent increase in letting momentum. Management witnessed a noteworthy revival during FY25 within the Western Cape commercial office sector and benefitted significantly from the constrained supply of high-quality office space in the Cape Metropolitan area. Despite favourable demand and supply dynamics, new development activity remained slow as developers hesitated to take on development risk, a trend that positions the portfolio well for rental growth in the coming year.
Looking at 1Q26, the portfolio maintained its recovery trajectory as management diligently focused on improving key performance metrics - occupancies came in at 97.7% with an in-force escalation rate of 7.2%. While the occupancy rate may have printed a slight decline during the quarter, the key take away is that the quarterly revenue metrics have maintained its positive trajectory due to renewal revenue being at higher levels than expiring revenue for the quarter.
Retail (11% of total portfolio GLA)
The retail portfolio remains defensively positioned, supported by prime locations and a diverse tenant mix, mitigating credit risk in a challenging trading environment. National tenants occupy ~40% of the retail portfolio by GLA under long-dated leases with excellent payment records, ensuring stability. The group's retail assets have consistently delivered results in line with forecasts, maintaining performance within management's expectations despite challenging consumer conditions driven by high interest rates and cost-price inflation. Management remains committed to pursuing retail growth opportunities as suitable investment- grade prospects arise, provided they meet Spear's investment criteria. Spear's retail investment strategy continues to focus on convenience and destination retail real estate assets that serve a broad range of LSM groups.
FY25 marked the addition of two medical retail assets to the core portfolio, underpinned by long-term lease agreements with Intercare and Clicks. These additions further enhanced Spear's growing retail portfolio.
In terms of performance, the retail portfolio delivered a consistent operational performance during 1Q26 given its convenience, destination and medical retail focus - occupancies were maintained at 99.1% and in-force escalations were robust at 7.4%. None of Spear's retail assets are reliant on local or international tourism and are all located in areas with excellent public transport infrastructure and sufficient parking.
The fund recently entered into an agreement to acquire Maynard Mall for R455 million - the property has a GLA of 25 969m2 which represents ~47% of the group's total retail exposure. The property is situated in the heart of Wynberg and is a dominant, convenience-oriented community shopping centre anchored by Shoprite.
Operational performance
In FY25, the group's portfolio traded well because of Spear's hands-on asset management approach, the high quality and defensive nature of its asset base coupled with strong lease covenants and a highly-experienced management team. The focus on operational imperatives yielded tangible results, as evidenced by consistent improvement across key performance indicators. A standout achievement was Spear's occupancy rate, which demonstrated steady growth quarter after quarter. This momentum was driven by strong leasing momentum and tenant demand surpassing supply, culminating in an impressive 97% occupancy rate by the end of the reporting period (+388bps y/y). Reversions were positive at 4.2% (FY24: -0.4%) and in-force escalations were relatively steady at around 7.27%.
Group revenue increased 12.5% (like-for-like: +11.7%), attributable to proactive management of the revenue base, despite the challenging macroeconomic conditions. Robust revenue collections of around 98.6% and consistent cash flows from operating activities resulted in the board approving an annual dividend per share of 81.27 cents (+3.1% y/y) at an average payout ratio of 95%. In addition, the core portfolio showed pleasing asset value growth from growing cash flows and improvements in general real estate fundamentals in the Western Cape.
Based on the recent 1Q26 results, the core portfolio continued to deliver robust operating metrics in line with management's strategy despite some additional vacancies, with the overall portfolio occupancy for the quarter being 95%. A slight increase in vacancies was attributable to the strategic pursuit of higher rental rates on renewals, a move that has seen success in the past, as well as a temporary vacancy linked to a sustainability-focused capital expenditure project. Management is confident that occupancy rates will move back to between 95.5% and 97% by the end of 1H26. Given the constraint in supply within the region, emphasis has been placed on securing longer lease terms and higher escalation rates during renewal negotiations. These efforts are beginning to yield positive outcomes, with consistently improving escalation rates being achieved. Reversions remained positive at 2.68%, with in-force escalations coming in at 7.3%.
In terms of balance sheet management, Spear's balance sheet remains robust and well managed. No debt refinancing concerns exist within the business as an active management approach is taken to the debt portfolio to ensure well staggered refinancing terms and defensive expiry schedules across numerous funders. The loan-to-value (LTV) ratio came in at 26.2% (FY24: 31.6%), well below covenant levels, with the improvement being driven by recent disposals. Including the capital raise completed in June 2025, the group LTV will range between 16% and 18%, providing sufficient capacity for accretive acquisitions.
The robust balance sheet enhances optionality for future acquisitions, redevelopments and developments that will enhance the core portfolio. In addition, the group's debt expiry profile provides no short- to medium-term refinancing risk, with the weighted average expiry being ~26 months.
Despite the challenging market conditions and a slight temporary increase in vacancies, management was satisfied that the first- quarter performance was in line with internal targets as several portfolio enhancements contributed to the improvement in key performance indicators across the core portfolio. As a result, dividend growth over the quarter came in at 5.8% y/y, tracking slightly ahead of the midpoint of management's guided range (+4% to +6%) for FY26.
Summary investment case
Risks
Outlook and valuation
Spear is trading on a forward distribution yield of ~8.5% and a ~18% discount to net asset value (NAV), which appears attractive. The portfolio remains well placed to deliver on its strategic initiatives with the group continuing to benefit from the strong return- to-office which has supported letting momentum, semigration, localisation and the commencement of an interest rate tapering cycle in South Africa, all of which will have cascading benefits to landlords and tenants alike as overhead cost pressures start to show signs of relief.
Based on our internal valuation for Spear, the 12-month target price comes in at 1 100 ZAR cents which is reflective of ~17.6% upside potential (including the dividend).
