JSE could get first residential property listing by 2011
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