South African real estate investment trusts (Reits) fell 5% in August as investors took profits after a strong run, despite continued growth in distributions and corporate activity across the sector.Reits underperformed both equities and bonds during the month though the sector remained marginally positive for the year, according to the SA Reit Association.The sector’s forward yield rose to 7.09% as Reit share prices fell, while the 10-year government bond yield held broadly steady at 8.76%. The pullback reflected profit-taking after a strong run rather than a shift in domestic interest rates, the association said.Merchant West Investments head of listed property Ian Anderson, who compiled the latest SA Reit Association Chart Book, said August largely reversed the gains recorded in July.“August reversed July almost exactly. What August looked like was investors choosing to take profits after a long run of price gains rather than a fundamental change in their view of the sector,” Anderson said.The sector’s distribution growth remained strong. Rolling 12-month distribution growth was 10.58% at the end of June compared with consumer inflation of 4.3% in July.Anderson said the gap between distribution growth and inflation showed that income from Reits remained resilient despite the drop in share prices.“The real spread between distribution growth and consumer inflation has widened back above six percentage points. That is quite significant because it tells you that the income being generated by the sector is still growing well ahead of inflation. Nothing that happened to share prices in August changed the income the sector produces, so investors need to separate what happened to the share price from what is happening to the underlying income,” he said.The drop was concentrated among some of the larger counters, particularly those with significant offshore exposure. Emira gained 2.3%, Fairvest A rose 1.5% and Equites increased 0.3%, making them the only sector shares to record gains during the month.Trading volumes were also low, with about R9.7bn worth of Reit units changing hands in August.The real spread between distribution growth and consumer inflation has widened back above six percentage points. That is quite significant because it tells you that the income being generated by the sector is still growing well ahead of inflation. — Ian Anderson, Merchant West Investments head of listed property Despite the fall in share prices, corporate activity remained elevated. About R3.5bn of transactions were announced or completed during the month, while more than R1bn was raised through new equity in the sector.Dipula’s R2bn acquisition of nine shopping centres from Moolman Group was among the largest transactions. Resilient reported strong distribution growth and guided for at least 9% growth for the full year, while Redefine’s loan-to-value ratio fell below 40%.SA Reit Association CEO Joanne Solomon said the level of corporate activity remained strong despite lower share prices.“August was a weak month for prices, yet it was one of the busier months of the year for our members. We saw significant transaction activity, companies raising capital and continued investment across the sector. So the weakness in the listed market did not reflect a lack of activity among the underlying property companies,” Solomon said.The domestic interest-rate environment has also become more supportive. Inflation remains within the South African Reserve Bank’s target range, while the repo rate is 7%.However, higher long-term bond yields in developed markets remain a risk for Reits with significant offshore portfolios.Anderson said the improvement in domestic operating conditions remained intact.“Locally, fundamentals continue to improve. We have seen the domestic interest-rate environment become more supportive, inflation is within the target range, and distributions continue to grow. The income line remains the more reliable guide, particularly when you have a month like August where the share-price movement was driven largely by profit-taking,” he said.