THE BIG HOUSING BET
Institutions are investing more money into multifamily rental portfolios as the sector gains traction as a specialist asset class
Residential property has long been regarded as a lucrative investment among US, UK and European private equity funds, listed real estate investment trusts (Reits) and pension funds.
In contrast, their South African counterparts traditionally believed the office, industrial and retail sectors to be the safer and more attractive bet.
However, there has been a marked shift in sentiment in recent years, with a significant uptick in institutional interest in large-scale residential investments.
In fact, the pool of pension funds, Reits and private equity players keen to increase exposure to rental housing portfolios is expanding rapidly, which has prompted the launch of an industry body to promote the sector as a specialist asset class.
The South African Multifamily Residential Rental Association (Samrra) was launched earlier this year by 13 founding members that collectively own or manage 75,000 residential units across South Africa worth a hefty R40bn.
The association’s founding CEO is Myles Kritzinger, former head of JSElisted
housing fund Transcend. He says the term “multifamily” is commonly used in the US, UK and Europe to describe housing units built for rent and not for sale.
Multifamily portfolios typically include entire apartment buildings, sectional title complexes or estates. These are often owned by institutional investors and managed by specialist operators.
Kritzinger believes the local sector is poised for “enormous” growth as investors become more au fait with the riskreturn profile of residential property.
Besides, the investment case for multifamily housing is particularly compelling in South Africa given the acute shortage of affordable housing.
Kritzinger says there is particularly high demand for quality rental stock in secure developments that offer easy access to employment opportunities.
“Demand is accelerating with rapid urbanisation, a growing middle class, decreasing household sizes and a shortage of housing supply,” he says.
Property players are responding by developing more purpose-built investment-grade housing projects outside the traditional CBDs, many of which are in areas that previously targeted the middle- to higher-income markets.
Barlow Park in Sandton is a case in point. Divercity Urban Property Group, already a major player in the multifamily residential space — in partnership with developer Atterbury, Moolman Group and Twin City Development — recently completed the first phase of the multibillion-rand mixed-use precinct, which borders the M1 highway on the site of Barloworld’s former headquarters in Katherine Street.
Divercity CEO Carel Kleynhans says the initial plan was for Barlow Park to be an office-centric development. “However, when construction was delayed due to the pandemic, we shifted to a residential-led vision.”
The development will comprise 1,600 apartments, of which the first phase of 300 studio, one- and twobedroom units are fully let at rentals of about R5,000-R9,000, appropriate for households earning roughly R15,000R30,000 a month.
Residents have access to uninterrupted power and water supply and free lifestyle amenities including a recreation centre, clubhouse, pool, business centre, gym and other sports facilities.
The precinct’s newly opened 5,500m² retail centre includes a Checkers, Checkers Liquor, Clicks, Vida e Caffè, Roman’s Pizza, Nando’s, Legends Barber, Pick n Pay Clothing, Mr Price, Crazy Store, Pep Home, Oasis Water, Levingers Dry Clean & Shoe Clinic, PostNet and Capitec ATMs.
Independent school Curro also opened at Barlow Park earlier this year. Future amenities will include a medical facility and co-working offices.
Divercity, which is behind Jewel City in Joburg’s inner city, is also taking its affordable housing model to Cape
Town, where it recently broke ground on a 400-unit development in Salt
River, about 2km from the city centre.
Several other projects are in the pipeline for the Mother City.
Kleynhans says its first Cape Town development, 9 Hopkins, will help alleviate the city’s severe shortage of rental stock in the sub-R8,000 price bracket.
The apartment building will also house 930m² of retail space, a clubhouse, gym, co-working area and a communal terrace.
Calgro M3 and RMB-backed Eris Property Group are also bringing a largescale housing-led development to Sandton’s doorstep.
The plan is to transform a 300ha site next to the Marlboro Gautrain station and the N3 freeway into an entirely new suburb, similar in size to Rosebank.
The project, known as the Bankenveld District City Development, will include up to 30,000 bachelor, one-, two- and three-bedroom apartments, 500,000m² of retail, office and industrial developments, extensive recreational and greenbelt areas, schools and clinics.
Calgro and Eris will share the cost of the bulk infrastructure installation (roads, water, sewerage and electricity service provision).
Calgro CEO Wikus
Lategan tells the FM he hopes to break ground in the fourth quarter, once the
Competition Commission has approved the project.
Construction on the top structures should start a year later. The project is likely to take
15 years to complete.
Lategan says the value of Bankenveld’s housing component alone is estimated at R18bn and will comprise several security estates, typically fourto eight-storey walkup apartment buildings, each with its own clubhouse, sports fields and communal gardens.
Like Barlow Park, Bankenveld’s target market is households with a combined monthly income of roughly R15,000R30,000; many people in this bracket now live in townships or informal settlements on the city outskirts, Lategan says.
The idea is to create a quality, affordable product that will enable the city’s labour force to live closer to job opportunities. “There’s a huge undersupply of quality housing that caters to entry-level workers in areas close to economic hubs,” says Lategan.
“It’s unacceptable how many South Africans hardly get to see their families as they have to spend two to four hours every day travelling just to get to work and back.”
Besides the socioeconomic upliftment and impact investment aspect offered by affordable housing developments, the sector also offers decent returns. That’s underscored by research released last month by MSCI Real Assets. The investment firm has been measuring residential property returns as part of the MSCI South Africa annual property index since 2018.
The index’s residential property component mainly comprises affordable housing and student rental portfolios and represents only about 5% of the index’s total R370bn value.
However, Eileen Andrew, vicepresident of client coverage and real estate at MSCI, says there is now enough reliable data to compare the local multifamily residential sector’s performance with that of its global counterparts.
Though households have traditionally owned most residential property directly, Andrew notes that institutional investors in the US, UK and Europe have started investing heavily in the multifamily residential sector in recent decades.
She says a key reason for the rapid growth in multifamily investments globally is the sector’s consistent performance. South Africa is no exception.
“The sector offers a superior risk-toreturn profile compared to other property types, primarily because of its relatively stable income yield, which makes it less reliant on market timing,” she says.
MSCI’s research shows that while capital growth in South Africa’s residential sector has been somewhat under pressure in recent years, it offers one of the highest net operating income yields in the world at 7.6% (see graph).
That’s followed by the US (3.7%) and the UK (3.6%). Italy (1.7%), France (2.2%) and Germany (2.3%) achieved the lowest yields.
South African residential property’s annualised total return for the five years to end-2022 clocks in at 6.2%, which is only 70 basis points below the global residential average of 6.9%.
Yet only 2% of the South African Reit sector’s value is made up of residential property. By comparison, in the US Reit sector, for instance, investments in multifamily housing portfolios grew from 9% in 1990 to more than 26% in 2020
(by asset value).
Granted, residential property in South Africa underperformed the industrial, retail and hotel sectors over the five years (see graph).
But Andrew says this could be partly due to the index sample including mostly affordable and inner-city properties that were harder hit by the pandemic than the mid-market segment. The latter makes up the bulk of residential indices in most developed countries.
Still, she points out that there’s a large difference in total returns among lowerand higher-quality residential assets in South Africa, ranging from 9.2% for apartments that fetch monthly rentals of R8,800-R11,500 to -0.4% in the R2,200R3,432 bracket (see table).
“That highlights how important careful asset selection is for South African investors,” says Andrew.