Listed property companies are branching out into SA’s residential market to tap shortages of housing and accommodation


The global phenomenon in countries such as the US, Australia and Europe, where investors are offered specialist listed-property stock, took off in SA in May 2015 when residential property fund, Indluplace Properties, listed on the JSE. The fund is a wholly owned subsidiary of real estate investment trust (REIT) Arrowhead Properties.

While Indluplace is the first specialist residential REIT in SA and the first such entity to list on the local stock exchange, experts believe this is only the start of a burgeoning trend.

According to Property Assist financial director Cir Pieterse: ‘There are many advantages to be found in this new market.’ He says companies could exploit the potential ‘with the assistance of residential specialists that use existing structures to minimise risk and maximise returns and by utilising the available tax advantages’.

Many JSE-listed property entities and REITs such as Arrowhead, Freedom Property Fund, Octodec and Visual International have either been building the residential side of their portfolios or have indicated that they plan to do so over the next two years. These funds are keen to tap into SA’s residential market where there are shortages in the low-cost housing, student accommodation and executive-apartment market segments. The developments are mostly, but not exclusively, centred in urban areas in Gauteng, the Western Cape and KwaZulu-Natal.

Robin Lockhart-Ross, Nedbank corporate property finance managing executive, told SA Property Insider at the end of 2014 that JSE-listed property funds were finding opportunities in the rental residential market.

‘Given this clear shift towards the residential buy-to-let market, we would expect to see a focused residential fund established over the next 12 to 24 months. In order for this to happen, however, we may see certain players actually combine their portfolios in order to bring a viable listed residential fund to the market.’

He said many players were seeking student accommodation in particular. ‘Most major tertiary institutions are only able to supply about 25% of the accommodation needs for students, meaning there is ample opportunity to provide housing for this segment. In fact, we may even see the establishment of a new fund dedicated to providing student accommodation in the future.

Place to let PQ

‘With the focus on low-cost housing, I believe listed property funds have a meaningful role to play’


‘There are still pockets of opportunity in SA’s property market, particularly within certain segments of the market, and it is here that developers will see the best value in the short term.’

Pieterse agrees with this. ‘If combined with sections of the Income Tax Act, as well as by utilising other benefits for properties situated in the urban development zones, above-average returns can be achieved,’ he says.

‘Obtaining the services of companies already specialising in these products and services will enable listed companies to avoid unnecessary pitfalls. Other products, which can secure growth and address most of the risks in the residential property market such as rent to buys, can be used to hedge yields against any downturn.’

Ken Reynolds, Nedbank corporate property finance regional executive, says many global REITs are weighted in favour of a specific sector. Over time, SA can expect to see more sector-specific REITs and Indluplace’s listing could possibly spark this.

A further characteristic of the local property market is a shift to high-rise apartment living in Johannesburg’s upmarket suburbs of Sandton, Rosebank, Hyde Park and Dunkeld. According to an SAcommercialprop-News article, new developments and upgrades in the business and retail sectors are the reason for the demand.

Almost half of SA’s office development is taking place in Sandton so these developments have pushed up demand for high-rise executive living in the vicinity, as people who work nearby want to live and play close to the area where they work.

‘Five years ago the going rate for upmarket sectional title units in Sandton averaged R25 000/m²  to R35 000/m². Now, off-plan sales of luxury apartments regularly fetch rates exceeding R40 000/m² and are rising fast. Similar trends are developing in Rosebank, neighbouring Dunkeld and the inner-city,’ says Reynolds.

‘There are opportunities in the industrial development zones where most of the development costs [changing commercial space to residential/sectional title] can be recovered by utilising the Income Tax Act,’ says Pieterse.

Francois Froneman, a partner at advisory firm Middel & Partners, supports the view that residential property has become an attractive prospect for JSE-listed property entities. He says the commercial, retail and industrial property sector seems saturated for now, ‘with retail sales not performing that well and therefore the retail sector not anticipating material growth ahead.

‘With the focus of the government on low-cost housing, I believe there are opportunities for listed property funds to have a meaningful role to play in the development and earnings potential of rentals for this asset class. However, this asset class does have higher risks and a lot more administration. I think that is the reason the larger listed-property players have mostly stayed out of this market up to now.’

A REIT must pay at least 75% of its taxable earnings available for distribution to its investors

Froneman argues that local specialist funds similar to the well-established listed residential property types that exist in the UK, Australia and Europe are likely to do well in SA.

‘With the introduction of REIT legislation in 2011 and the listed-property sector outperforming the rest of the JSE for the last three years, the prospects for specialist listed property funds as new asset classes for future growth are positive.’

Analysts believe the more intense focus on residential stock comes partly from diminishing prospects in the retail, industrial and office segments of the market. This sector of the listed commercial property market far outperformed that of the JSE All Share Index in 2013 and 2014.

According to BDLive, SA-listed property counters outperformed equities, bonds and cash in the second half of last year. However, this is not expected to continue at the same rate as performances have started to taper off in 2015.

The website says firms that rent out office space are the worst effected by the slack economy, with growth forecasts of less than 2% for the year ahead. Weakening business activity results in more vacancies in office accommodation and this does not bode well for this segment of the listed property sector, which is heavily dependent on business activity. The same applies to retail, which relies on healthy consumer spending habits.

Property capital growth fund, Freedom Property Fund, which listed on the JSE in 2014 to strategically acquire and develop a portfolio of mainly residential properties along with some industrial and office space, achieved 33% above its forecast in headline earnings in the eight-and-a-half month financial period to the end of February 2015.

Place to let IN

The fund’s net asset value of 6.06% and revenue streams also came in above earlier forecasts. It has developments at Tweefontein Residential Estate in the Limpopo province’s platinum belt near Steelpoort (where it is also invested in industrial development at the mine), sectional title units in Pretoria and mixed-use developments in the Western Cape, from Langebaan to Stellenbosch. The capital growth fund has the option of converting to a REIT.

Octodec, another JSE-listed REIT with a market cap in excess of R6.5 billion, has 26.9% of its portfolio in residential stock along with retail, office and industrial stock. The fund claims to have ‘the most significant residential portfolio of all REITs listed on the JSE’ and focuses on properties with turnaround potential in high-growth areas of Johannesburg and Pretoria.

By Louise Brougham-Cook
Image: Andreas Eiselen/HSMimages