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Housing funds aren’t flying

SPECIALIST HOUSING stocks such as Equity Residential, American Campus Communities, Camden Property Trust and Home Properties are some of the biggest money-spinners on the New York Stock Exchange’s real estate sector. Over the past three years these counters have been cashing in heavily on the housing slump in the United States, bulking up portfolios with large apartment blocks at 50% to 60% discounts to 2007 peaks. Equity Residential’s market cap alone is now close to R107bn – almost equivalent in size to the South African listed property sector in its entirety.

Specialist apartment funds that offer investors regular income payouts should in theory also attract huge investor interest on the JSE, given SA’s massive housing shortage. Yet a residential-focused property fund has yet to make it on to the JSE. Gerald Leissner, former CEO of ApexHi Properties (now part of Redefine Properties), was recently forced to abandon his plans to list what would have been SA’s first outright rental housing portfolio: Kwami Residential Fund.

This followed another failed attempt in 2004 by Cape-based Catalyst Property Asset Management (now Catalyst Fund Managers), which also had to ditch plans to list its so-called Habitat Residential Fund. At the time, Catalyst said it struggled to find enough stock at high enough yields to compete against the returns offered by office, retail and industrial focused property funds.

Leissner hit the same snag, battling to assemble a big enough portfolio that would offer the size and liquidity generally required by institutional investors. Says Leissner: “There’s plenty of appetite for housing funds in SA, but if you want the Investecs, Stanlibs and Old Mutuals to put serious money into residential listings you need a market cap of least R3bn and a starting yield of at least 10%.” This translates into a portfolio of at least 15 000 rental units, which is way more than the 2 000 or so properties that would have comprised Kwami’s initial portfolio.

With Kwami canned, Pretoria-based Premium Properties is now the JSE’s only real estate listing offering investors exposure to the housing market, albeit as part of a diversified retail and office portfolio. Premium owns around 2 000 rental units spread primarily across the CBDs of Johannesburg and Pretoria.

Analysts say although Premium’s residential portfolio only accounts for 35% of its R3,2bn portfolio its foray into the affordable housing market has been a key performance driver over recent years. The stock has counted among the listed sector’s top five funds for the past three years running in terms of total returns.

Surely others should be able to emulate Premium’s success? Jeffrey Wapnick, MD of Premium Properties, concedes rental housing portfolios offer a lucrative alternative to the office, retail and industrial sectors. Some of Premium’s inner city residential buildings deliver income yields north of 12%, which compares favourably with the 8% to 10% typically earned by commercial property stocks.

Housing portfolios are also not exposed to corporate tenant failures, which can potentially leave an entire building empty in one go. Wapnick says Premium’s housing portfolio has 2 000 tenants supporting its income stream at any given time, offers 8% to 10%/year rental growth and with vacancies at less than 2%, which compares favourably with Premium’s office vacancy, currently sitting at 13,2%.

But Wapnick cautions the easy money in the affordable housing market may already have been made. He says finding the right quality stock at the right yields is becoming increasingly difficult, particularly in inner cities where the office-to-flat conversion market has become very competitive. “Everyone’s got on to that bandwagon, which has pushed prices higher and yields lower.”

Wapnick says it can also be difficult to manage residential funds, as you need sophisticated rent collection and management control systems in place to handle large volumes. Says Wapnick: “It took us 12 years to acquire the necessary expertise to play successfully in that space.”

Although Leissner’s Kwami listing is off the table, Rob Wesselo, country director for International Housing Solutions (IHS) in SA, says there’s at least five other potential JSE contenders that could bring a housing portfolio to the market within the next 18 months, including the likes of Afhco, which has a 6 500 unit rental portfolio worth R1,6bn in Johannesburg’s CBD, Amdec and Aengus Property, with around 1 500 student rental apartments on its books. Then there’s Absa, which has over the past three years built a 2 500-strong affordable housing portfolio known as Diluculo Investments and until recently run by Wesselo.

Wesselo says size and liquidity aren’t the key factors keeping housing funds off the JSE but rather a lack of financial data required by property analysts and fund managers on which to base profit and earnings forecasts. “Previously, housing developers and investors managed their portfolios on a very informal basis. But that’s changing, with the more established players now building up solid performance records and increasingly managing their portfolios like professional institutional funds. So a lot of the risk traditionally associated with the affordable housing sector no longer applies,” says Wesselo.

In addition, demand for accommodation among families who can typically pay rentals of between R2 000 and R4 000/month has surged to such an extent that this market sector has become attractive, both as an income and capital growth play.

Wesselo says the most likely scenario is that two or three housing players would join forces to list their combined portfolios on the JSE under one banner. IHS, an international joint venture between MuniMae of the United States and Irish property group Howard Eurocape, could also get in on the listings action two or three years from now once it’s bedded its portfolio down.

IHS entered SA in 2007 to provide equity and mezzanine debt to residential developers active mainly in the R250 000 to R700 000 market. IHS currently has exposure to 1 666 rental units, with another 1 500 in the pipeline. IHS-funded projects are located (among others) in the inner cities of Pretoria and Johannesburg, Soweto, Durban’s KwaMashu and Cape Town’s Mitchells Plain.

Wesselo says eight years ago it was just as difficult for commercial property players to list their portfolios on the JSE but that didn’t deter them for long, with the market cap of the JSE ballooning from less than R30bn in 2003 to its current R125bn.

 
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