Listed residential stock unlocks investment potential
Residential property is steadily gaining recognition as a significant force within the listed sector. Shareholder benefits in this investment vehicle range from accessibility and diversification to transparency and liquidity due to regular distributions.
Small but substantial market
Up to early last year, this sector represented less than 2% of the overall JSE property index.
South Africa’s earliest residential listings go back to the Pretoria based family-owned businesses of Premium Properties and Octodec with managing company City Properties, which came to the market 17 years ago as specialists in the renewals of inner city properties.
Markets Larger Overseas
Further afield, global residential property investment funds have long been recognised as an alternative investment to owning title deeds of individual properties. Within the global listed property market, regional composition of the US represents 30% and Europe 7%. Of that, residential property represents 20% of the global listed property market, with Europe holding 1%, the US 17% and the UK 4% of this segment of the overall property market.
Growing Potential Buoyed By Demand
Potential rental income plays a significant role in residential investments across the globe. An example is the recovery of the residential property market in the UK, where a 10% rise in house prices is boosting market sentiment. Shareholders in large capitalisation funds, such as the dual listing (JSE and London Stock Exchange) of Capital & Counties Properties (Capco), benefit from future growth strategies, driven primarily by rental growth opportunities of upmarket apartment and mixed-use developments in central London. Shareholders in this JSE’s offshore real estate fund have cashed in on Capco’s upward growth since 2009, with exceptional returns of 69% last year.
Lackluster Performance in 2013
While long-term average earnings consistently outperform leading benchmarks, last year’s performance from the listed property sector, with returns of 8.39% against equities on the all share index at 21.43%, was disappointing. The Property Index Tracker shows average returns over the last 10 years of cash at 8.9%, bonds at 11.2%, equity at 15.5% and property at 26.4%.
Residential Remains Stable Option
In ideal market conditions, the potential rental income from affordable housing and student accommodation, as the two dominant components in the local residential market, is viewed as a fairly stable option for short-term earnings. From a longer term perspective, South Africa’s housing sector at the end of last year saw house price growth, of 7.8% for the first time since 2008, to have steadily overtaken inflation at 6%. This also coincided with slowed credit growth, reduced from 6.98% in November last year to 6.14% at the end of January.
SA Investors Reconising Potential
While the listed residential sector remains a relatively new phenomenon in South Africa, those currently participating in the market are recognising its potential, says Jay Padayatchi of Meago Asset Management. Large capitalisation funds are increasingly including residential components in portfolio expansions, as seen in Arrowhead’s acquisitions of the R406-million housing portfolio from Jika Properties as well as a R150-million portfolio of student flats in one year. CEO Gerald Leissner referred to this strategy as Arrowhead becoming the first mover when listed residential property burgeons in South Africa.
Quality student accommodation, which remains a scarce commodity nationally, has recently seen Gauteng property developer Jika Properties embark on a massive conversion project of grain silos into trendy shared living quarters. With a R1.4-billion rental housing portfolio in excess of 3 000 units, Jika’s recent shift to the student accommodation market is set to increase its student rental portfolio following its latest acquisition of 30 additional silos in Newtown.
Market players with small capitalisation resources opt to enter the listed domain either through private or publicly raised funds on the JSE’s Alternative Listings Exchange (AltX) prior to achieving long-term goals of main board listings. Examples are property developers specialising in housing, such as the well-established Calgro and newly listed Visual International Holdings, developer of the Stellenberg Village mixed-use residential node.
Retail Banks Now Participating
Growing demand for housing and rentals in the affordable and middle income markets is seeing large retail banks partnering with reputable developers and investors. If successful, property entrepreneurs with an appetite for raising public funds through the AltX sector are able to finance new developments. This follows compliance with stringent listing requirements and ongoing financial management criteria as set out by the JSE. A major benefit is that short-term income earnings are reinvested as opposed to shareholder distributions of Real Estate Investment Trust (Reit) income earnings of 75%.
Increase In New Listings
AltX funds enjoy an accelerated pace with which to satisfy demand for housing while growing market capitalisation through increased investor interest. Analysts say that greater efficiency with regard statutory requirements for smaller players is boosting confidence in this sector. Less red tape for new initial public offerings (IPOs) is seeing a resurgence of new listings. Local IPO activity last year saw eight new listings come to the market, of which five were property funds and Attacq, whose diversified portfolio of assets includes developer and residential components.
Cape based property owner and developer Visual International Holdings, whose proposed AltX listing is underway as one of the JSE’s first listings in 2014, will offer shared ownership in the Stellendale Village mixed-use residential suburb for the middle income market. This 22-hectare development, which will comprise 1 500 homes to middle-income households upon completion, will also feature a fully integrated retirement estate.
SA Demand Strong
Group chairman Charles Robertson says: “Demand for quality housing from the growing middle income market in South Africa is strong. Our model of developing mixed-use suburbs on suitable land near jobs and infrastructure meets this demand.” Robertson says Visual International’s listing will provide the capital needed to pick up the pace of development as well as reproduce its successful model in other high growth nodes around the country.
Potential market growth, which lies in the development of land, has also highlighted the significant contribution of property developers in international real estate markets. Major drivers of large development projects were reported on last year by the European Public Real Estate Association (EPRA): “Relative to the size of their property portfolios, listed property companies in Europe devote two to three times as much investment to the development of new buildings and the improvement of existing buildings than the rest of the real estate industry.”
Renewed interest in the local residential property market is viewed as the long-term catalyst for potential capital growth of this sector. Investors are viewing a steady recovery of the market as the platform from which to explore new development opportunities and joint ventures across public and private industries.
“For individual investors, publicly traded real estate securities generally provide reasonably low cost exposure to relatively high quality pools of real estate assets.”
David Swensen – author of Unconventional Success: A Fundamental Approach to Personal Investment
By Anna-Marie Smith