Tak­ing off

JSE could get first res­i­den­tial prop­erty list­ing by 2011

Finweek English Edition - - Property Compass - JOAN MULLER

RISK AVERSE PEN­SION FUND man­agers and fi­nan­cial in­sti­tu­tions that have tra­di­tion­ally shied away from res­i­den­tial prop­erty in­vest­ments are start­ing to add af­ford­able hous­ing stock to their com­mer­cial prop­erty port­fo­lios. That could trig­ger the long-awaited move among South Africa’s ma­jor prop­erty play­ers to bring spe­cial­ist res­i­den­tial funds to the JSE. SA stock ex­change in­vestors cur­rently have lim­ited ac­cess to the in­come streams of­fered by large rental hous­ing port­fo­lios, such as those listed in the United States, Bri­tain and Aus­tralia.

Most of the 22 coun­ters that cur­rently make up SA’s R82bn listed prop­erty sec­tor own a mix of offices, shop­ping cen­tres and fac­to­ries. The only listed funds of­fer­ing some ex­po­sure to in­ner city rental flats are Pre­mium Prop­er­ties and Oc­todec In­vest­ments (two rel­a­tively small funds in the Pre­to­ria-based Wap­nick sta­ble) and ApexHi Prop­er­ties.

Cape-based Cat­a­lyst Fund Man­agers (pre­vi­ously Cat­a­lyst Prop­erty As­set Man­age­ment) at­tempted to bring a res­i­den­tial prop­erty fund to the JSE a few years ago but the list­ing of the pro­posed Habi­tat Prop­erty Fund never ma­te­ri­alised. At the time, Cat­a­lyst strug­gled to find enough res­i­den­tial stock at high enough in­come yields to com­pete with the re­turns of­fered by com­mer­cial-fo­cused prop­erty funds.

How­ever, five years on it ap­pears as­set man­agers have the op­por­tu­nity to as­sem­ble rental hous­ing port­fo­lios that of­fer the same level of re­turns – if not bet­ter – than com­mer­cial bricks and mor­tar.

“Surg­ing de­mand for low in­come hous­ing has turned what used to be a high risk/ low re­turn sec­tor into an at­trac­tive in­come play,” says Rob Wes­selo, who heads eq­uity in­vest­ments at Absa Com­mer­cial Prop­erty Fi­nance. The lat­ter re­cently started to broaden its in­vest­ment fo­cus to in­clude af­ford­able hous­ing stock to its prop­erty hold­ings, which in­clude mostly com­mer­cial prop­erty. Absa owns a strate­gic stake in JSE-listed fund Am­bit Prop­er­ties, among oth­ers, and has in­ter­ests in var­i­ous di­rectly held of­fice and re­tail port­fo­lios.

Wes­selo is cur­rently assem­bling a rental hous­ing port­fo­lio that could be­come the JSE’s first out­right res­i­den­tial list­ing once it reaches the right crit­i­cal mass. The fund – known as Dilu­culo In­vest­ments – has al­ready ac­quired 1 500 res­i­den­tial units worth R510m. The rental stock in­cludes 720 units in a mas­sive new mixed-use de­vel­op­ment in Soweto and 180 units in a re­fur­bished block of flats in Pre­to­ria’s CBD.

Rentals for the Soweto de­vel­op­ment – known as Pen­nyville – vary be­tween R1 800 and R2 200/month. Al­though some of those units are still un­der construction, Wes­selo says it’s been “swamped” by po­ten­tial ten­ants.

The 180 units in the Pre­to­ria CBD (of roughly 40sq m) were let within a week at av­er­age rentals of R3 800/month.

Wes­selo says the grow­ing short­age of af­ford­able ac­com­mo­da­tion in SA has pushed in­come yields on low-in­come rental stock to any­thing be­tween 10% and 15%, which com­pares favourably with the av­er­age 9% yield cur­rently seen in the listed prop­erty sec­tor. The rapid growth in the of­fice-to-flat con­ver­sion trend in most in­ner cities has also given in­vestors the op­por­tu­nity to ac­quire large port­fo­lios of rental stock not avail­able five years ago.

Wes­selo says the idea is to grow Dilu­culo to 10 000 units by 2011. That would give the fund the right size for a JSE list­ing. At this stage Absa is only in­ter­ested in ac­quir­ing stock that would typ­i­cally fetch rentals of be­low R3 500/month.

Says Wes­selo: “We don’t want to play in the mid­dle and top end of the res­i­den­tial prop­erty mar­ket. The lower in­come sec­tor is the place to be. Not only do we help ad­dress SA’s hous­ing back­log, it also makes fi­nan­cial sense.”

An­drew Schae­fer, MD of res­i­den­tial let­ting group Trafal­gar, con­firms rental de­mand in low-in­come ar­eas far out­strips sup­ply. He says rental de­mand in town­ships, in par­tic­u­lar, is only start­ing to take off. Schae­fer says de­vel­op­ers have in re­cent years added plenty of new hous­ing stock to town­ships, as banks stepped up their in­volve­ment in the lower end of the hous­ing mar­ket to meet the Fi­nan­cial Sec­tor Char­ter’s R42bn lend­ing tar­get by end-2008.

Says Schae­fer: “The scale of af­ford­able hous­ing de­vel­op­ments now un­der way in and around town­ships for the first time of­fer in­vest­ment funds the right crit­i­cal mass to be­come in­volved at that end of the mar­ket.”

How­ever, in­dus­try play­ers say the high trans­ac­tional costs in­volved in buy­ing and sell­ing of res­i­den­tial prop­erty – plus the tax treat­ment of rental in­come – are pre­vent­ing more fund man­agers from adding af­ford­able hous­ing to their as­set mix.

Wes­selo says there’s a huge op­por­tu­nity for Gov­ern­ment to open up the sec­tor to listed funds by low­er­ing trans­fer du­ties. “SA will in­creas­ingly go the rental route as it be­comes more dif­fi­cult for the man in the street to buy a house. And prop­erty funds can be­come a ma­jor sup­plier of rental stock – pro­vided Gov­ern­ment ad­dresses the tax is­sues.”

Bet­ting on af­ford­able hous­ing. Rob Wes­selo

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