Warming as well as increasingly frequent and severe droughts under climate change are expected to have global impacts on vegetation. We examined the independent and interactive effects of water availability and warming on the growth of savanna grasses and tree saplings. We used a widespread C4 grass species Eragrostis curvula, and a native woody encroacher, Vachellia sieberiana, in South Africa. We simulated a typical savanna microhabitat by planting tree species within a grass matrix, in 45 L containers. Watering treatments were applied weekly as drought (minus 40% of the long-term average), normal (same amount as the long-term average), and excess (addition of 40% of the long-term average). Passive warming was achieved using open-top chambers. We found that water availability was the main limiting factor for grass productivity, with low grass biomass attained under drought treatments. Warming had no significant effect on grass productivity, but had a large positive effect on tree sapling growth and performance when coupled with excess or normal water treatments. Tree sapling root: shoot ratios were highest in the drought treatment, possibly as an adaptation to low water-supply. Specific leaf area was higher with warming than ambient, further elucidating the positive effect of increased temperature for tree growth. Drought has important negative implications for grass productivity, and may reduce the competitive effects of grasses on trees, particularly during the early sapling stage, when competition for resources between tree saplings and grasses are maximised. Coupled with increased performance of trees under warmer conditions, future climate change may further promote tree establishment, especially in areas where rainfall is limiting.