HUGE demand for affordable housing should, in theory, make the JSE a popular place for residential landlords to raise capital. Yet, until about a year ago, Premium Properties, now merged with sister fund Octodec Investments, was the only stock among the JSE’s 45-odd real estate counters to offer income-chasing investors part exposure to the rental housing market.
Unlike their US and European counterparts, the South African listed sector has traditionally shied away from residential property because of a perception that housing — particularly the lower-income rental sector — is way too risky.
Having to deal with delinquent tenants, rental arrears and SA’s onerous eviction legislation, which favours tenants, are some of the key concerns.
Besides, most listed property companies are making more than enough money from their retail, office and industrial building portfolios, and have no pressing need to look for alternative revenue streams.
Despite constant talk of bringing housing portfolios to the JSE, nothing has materialised until now. The most recent attempt to list a specialist housing fund was by industry veteran Gerald Leissner, CEO of Arrowhead Properties, who was forced to can his proposed Kwami Residential Fund in 2010. At the time, Leissner said he had battled to assemble a big enough portfolio that would offer the size and liquidity to pique the interest of institutional investors.
Five years on, Leissner’s plans are coming to fruition.
Arrowhead took its first leap into the housing market early last year when it acquired a Johannesburg inner-city rental housing portfolio for R406m from Jika Properties. A few months later it bought a R150m portfolio of student rental flats at the West Rand campus of Australian university Monash. By April 1, Arrowhead will have bulked up its housing assets to R1.7bn.
Leissner hopes to separately list the portfolio, known as Induplace, in the next three to four months. The rental flat and townhouse portfolio fetches an average rental of R4,000 a month and is spread across Soweto, Windsor (Randburg), Witbank, Vanderbijlpark and the inner cities of Pretoria and Johannesburg.
Others are following Arrowhead’s lead. Since July last year, SA Corporate Real Estate Fund has acquired a R1.3bn portfolio from the Affordable Housing Company that includes about 4,500 rental flats in Johannesburg’s inner city.
Redefine Properties and Growthpoint Properties have also in recent months added a housing component to their retail, office and industrial offering.
In November, Redefine acquired a 51% stake in student housing developer Respublica for about R204m.
Unlike its peers, Growthpoint has a small exposure to the upper end of the market via about 250 rental apartments at its V&A Waterfront precinct in Cape Town. Emira Property Fund and the Resilient group are also eyeing residential opportunities.
There were two new listings with a residential bias on the JSE last year: AltX-listed Visual International and Freedom Property Fund. Visual International focuses on mixed-use lifestyle developments where properties typically sell for between R400,000 and R700,000, while Freedom has a R6bn rental housing pipeline it hopes to roll out in mining towns such as Klerksdorp, Burgersfort and Steelpoort.
Neither has generated much investor excitement, no doubt because they are capital growth and not income plays.
“Income-dependent investors are hungry for something new and fresh, now that the traditional retail, office and industrial property sectors are reaching maturity,” says Avior Capital Markets property analyst Naeem Tilly.
He notes that housing represents less than 2% of the listed property sector’s market cap of close to R400bn, compared to the US, where residential listings make up 17% of the listed sector’s total market cap.
“We believe housing will become an increasingly important asset class on the back of listed property companies’ search for diversification and superior returns.”
Tilly adds that the outlook for the rental market is favourable given that a significant proportion of SA’s population falls into the primary rental target market of ages 20-34 years. “Moreover, affordability issues will continue to prompt South Africans to rent instead of buy.”
THE listed sector’s focus is likely to remain on high-demand inner city rental markets aimed at households earning up to R15,000/month who can afford rentals of up to R6,000/month, as well as the hugely undersupplied student letting sector.
Avior estimates SA’s shortage of university student beds at about 104,000.
Tilly says it is unlikely that the listed sector will move into the upper end of the rental housing market soon as average income yields are at 7.5% on average. “That is unappealing compared to the affordable market where economies of scale and office-to-residential conversions can bolster landlords’ net yields to over 10%.”
SA Corporate MD Rory Mackey says the fund’s expansion into the housing market was driven by the search for diversification. “We started to look for new investment options about two years ago when we realised that sluggish economic growth and depressed consumer spending would dampen growth opportunities in the retail, office and industrial sectors. We were looking for a sector that offered not only strong growth prospects but also powerful defensive characteristics.”
SA Corporate’s entry into the housing market with average rentals in the R2,500-R4,400/month range is mainly focused on Johannesburg’s inner city, where there have been rejuvenation efforts and improved public transport.
Mackey would like to grow the portfolio to at least R3bn. “Once we reach that level, we could potentially list our housing portfolio as a separate entity.”
The Affordable Housing Company will continue to manage the housing portfolio on behalf of SA Corporate, providing comfort to investors. “You need specialist knowledge and well-established rental collection and lease vetting structures to play successfully in this space.”
Arrowhead CEO Mark Kaplan has a similar view. “The demand-supply metrics and rental growth prospects of the lower income housing market are very attractive. But it is critical that the management of housing portfolios is in the right hands.”
INVESTORS are realising that the rental default and vacancy risks traditionally associated with the affordable housing market may have been overstated. “Granted, housing portfolios are more management-intensive than commercial portfolios. But the demand for affordable rental housing is so vast that residential property is in fact less risky than commercial property.”
Many office buildings in prime Johannesburg nodes such as Rosebank and Sandton have vacancies above 20% compared with a vacancy rate of less than 2% in Arrowhead’s housing portfolio.
The listing of more dedicated housing funds will only succeed if they have the buy-in of the large fund managers. Industry players say not everyone has warmed to housing as an asset class, primarily because of a lack of reliable housing performance data for profit and earnings forecasts.
The Investment Property Databank (IPD), part of the New York Stock Exchange-listed MSCI group, is collecting figures from major players in SA’s rental housing market to compile data on investment returns for the residential market. MSCI-IPD vice-president in SA Phillip Barttram says a transparent and independently compiled support tool will enable residential investors to compare the returns of professionally owned housing portfolios.
A key challenge is creating the right terminology to ensure accurate comparisons of the subsectors of SA’s housing market. Says Mr Barttram: “We have to get everyone to speak the same language. For instance, a flat in Cape Town’s Rondebosch let to a student is not the same type of asset as a student rental in Joburg’s Braamfontein.”