Residential funds unattainable

Johannesburg – A unit trust fund specialising in residential property will remain a pipe dream in yield-obsessed South Africa, according to industry players.

The idea was raised at the South African Property Owners Association and Investment Property Databank conference in Cape Town last week, based on successful international examples.

South Africa is the only country in the emerging world where the government and private pension funds ignore the residential sector for institutional investment, said Professor Francois Viruly, a property economist.
 
"Residential funds consist of 14% on the international index," said Viruly.

Portfolios of listed property companies Octodec Investments and Premium Properties already include some residential units.

However, according to Hayden Bamford of Alternative Real Estate, scale is the greatest challenge in assembling a dedicated residential fund.

"A residential fund is difficult to assemble - it will be a volume game for returns to be meaningful," said Bamford.

"Residential assets are management intensive; the properties ideally need to be in close proximity to each other so that it is possible to extract economies of scale," said Bamford.

By way of comparison, Bamford points out that the largest North American retirement residence fund, Chartwell Seniors Housing REIT, was established in 1999 with about 7 000 suites (more or less the size of Life Healthcare today).

It now has 38 000 suites in 247 facilities across Canada and the United States, as a specialist provider of senior housing facilities.

Rob Wesselo, head of property investment at Absa's commercial property finance division, said a dedicated residential property fund can be successful if the fund targets low- to middle-income housing units.

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.

Diliculo may consider listing when its portfolio reaches 10 000 units.

However, Bamford said the lack of social benefits that support housing at the lower end of the housing spectrum - such as housing benefits in the UK - is another challenge in South Africa.

"Such benefit schemes tend to generate stock and ensure that a rental pool of housing stock is available at different levels of affordability," he said.
 
 - Fin24.com