Johannesburg - The listing of a dedicated residential property fund to cash in on South Africa's unmet demand for affordable housing is a strong likelihood, say industry players.
According to Rob Wesselo, head of property investment at Absa's commercial property finance division, a listed fund can generate significant total returns.
"There are shortages of space in the affordable housing market and it appeals to investors interested in income and capital growth," said Wesselo.
Absa launched Diliculo Investments, an affordable housing fund with over 2 000 units in its portfolio, in 2007. The fund plans to own and manage close to 4 000 units by the end of the year.
According to Wesselo, Diliculo may consider to list by the time its portfolio reaches 10 000 units. "It's a matter of time [before a residential fund lists on the JSE]," said Wesselo. "We're seeing more and more players entering the market."
Portfolios of listed property companies Octodec Investments and Premium Properties already include some residential units. Total return (income and capital growth) in 2009 for Premium was 28.9% and for Octodec 9.53%, compared to commercially-focused property giant Growthpoint Properties' total return of 1.66% for 2009.
"There is definitely scope for [a listed property fund] in the country," said catalyst Fund managers' Paul Duncan.
Traditionally, South African investors entered the property game for income yields, which is why previous attempts to list a residential fund have failed.
The yield on a residential portfolio is typically much lower than that of its commercial counterpart. Listed property at present offers returns of between 8% and 10%, compared to around 6% for residential property. However, the market is ready for an investment vehicle to focus on capital growth, said Duncan.
Focus should be on lower end of market
When Catalyst failed to receive backing to list residential fund Habitat in 2004, the firm made a packet by selling the individual properties, according to Duncan.
"A fund where yields aren't that high but which offers capital growth appeals to investors," he said.
According to Marius Marais, CEO of First National Bank's housing finance unit, investors in residential units should focus on the lower- to middle-income market.
"That's where the greatest demand exists," Marais said.
He estimates about 600 000 households fall into this bracket, while only 2 483 building plans for houses and townhouses were passed last year according to Statistics SA.
Marais said investors will be attracted to this market as its sheer volume translates into opportunity. "Investors look at whether there's a large market segment, and if that the people in that segment have a low-risk profile," he said.
However, Duncan cautioned a residential fund has to be well diversified as apartment units are sensitive to supply and demand changes in residential areas.
"It would also be management-intensive and will involve more admin," he said.
Listed residential funds have enjoyed success in the US, Europe and Asia. New York Stock Exchange-listed real estate fund Equity Residential owns and manages 137 007 apartment units and has a market cap of over $8.85bn, compared to SA's R104bn for the entire listed property sector.
- Fin24.com