Small residential funds take a back seat

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Listed-sector interest in residential real estate grows, but only a few funds have managed to build sizable portfolios.

While demand is abundant, especially for rental accommodation, high capital costs and other barriers to entry have made it more difficult for small and medium listed funds to gain ground in the residential property market.

This is despite many market commentators saying in 2015 that residential real estate would be the focus area for leading listed funds as opposed to the office and industrial sectors.

Even retail developments were expected to take a back seat to housing.

“Indluplace Properties, SA Corporate Real Estate, Octodec Investments and, more recently, Balwin are the noted players in the residential sector. There’s no meaningful residential exposure apart from these companies,” says listed property funds head at Stanlib, Keillen Ndlovu.

He says some small funds are looking to list residential portfolios later in 2016, but they will not be large ones. They will include a student housing operator listing on the JSE.

Indluplace CEO Carel de Wit says it is very challenging to find scale in residential property.

“It takes time to build a sizeable quality portfolio in the listed property game and I can appreciate that not many listed funds have managed to do this with respect to residential assets just yet. We are still a small fund, so acquiring a R200m portfolio would make a difference to us, but it would not make much of dent to a Growthpoint (Properties),” says De Wit.

Indluplace sprung out of Arrowhead Properties’s residential portfolio. It became the first pure residential real estate investment trust in SA when it listed on the JSE in June 2015 at R10 a share. It is now trading at R9.20 a share, given some share dilution. It listed with a capitalisation of R1.76bn.

“Indluplace, being the first listed residential propertyfocused fund, provides a diversification opportunity for traditional property investors and should attract new investors to the listed property sector. SA has strong demand for affordable rental housing and this translates into low vacancies and consistent rental growth,” the company’s chairman, Gerald Leissner, said at listing.

De Wit concedes it has been a challenging first year for the company, but he is pleased with its performance to date.

At the end of March, Indluplace owned 5,037 residential units, three times more than the 1,659 units it owned when it listed. It now has a market capitalisation of R2.2bn.

“It has been tough for residential-focused funds in the past year, but we feel we are performing well, given weak economic growth and pressure on tenants,” he says. “I think renting property is becoming more popular in SA for people of varied income groups.”

SA Corporate Real Estate Fund and Octodec Investments have strong housing portfolios that complement their office assets. Contrary to many developers, which are focused on major business nodes and cities, SA Corporate MD Rory Mackey sees value in serving residential demand outside main metros.

“Through our subsidiary, Afhco, we currently have 4,250 residential rental apartments and almost 59,000m² of retail space in the Johannesburg inner city. We have acquired buildings with bulk for the redevelopment of an additional 2,300 apartments and 22,000m² of retail space,” says Mackey.

Octodec owns residential property in Pretoria’s inner city and has exposure to Johannesburg-based residential assets.

MD Jeffrey Wapnick says the group is on track to achieve 6% distribution growth for its financial year to August, despite sluggish economic growth and a lack of business confidence.

“We have found many government employees are moving into our accommodation in Pretoria. We are also attracting students,” says Wapnick.

Two companies that may list in the student housing space are Respublica and CampusKey, but they will need to have portfolios worth about R2.5bn-R3.5bn to attract institutional investors.


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