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Residential investments – The least attractive to investors

Although JSE-listed property companies are expected to bolster their foray into the residential sector in 2015, industry players still view this sector as least attractive.

There is demand for residential units on the back of shortages for low and middle market consumers, strengthening the investment case into the sector.

Figures from PwC’s Real Estate: Building the future of Africa report indicates that in 2012 the housing backlog was estimated to be 2.1 million units.

By 2014, the backlog stood at 2.3 million residential units – a figure that is estimated to grow by 178 000 units each year.

However, despite the clear opportunity that exists for residential investments, the sector might not court the interest of investors compared with the overall local property market.

PwC Africa’s real estate leader Ilse French says Africa’s middle-class, which is expected to grow from 15 million in 2014 to over 40 million by 2030, spells more retail opportunities than residential.

French explains that while there is a “huge need for residential units”, there are also gaps between the costs of funding for residential developments and expected investor returns.

For example, in South Africa investors are looking at “9% to 9.5%” financing costs and amassing returns of 5% in the initial five years of making residential sector investments, say French.

The cost and return imbalance is perhaps the reason behind investors sitting on the fence. And indeed the listed property sector has been on the fence with the roll-out of residential units.

French adds that residential investments by South Africa’s listed property companies are low, not more than 2% to be specific.

“Other developing regions are sitting at 25% and the developed world at 15%,” she says.

Australia, US and Europe are considered mature real estate investment trust (or global stocks) markets, where specialist listed residential funds are available. In South Africa, companies like Arrowhead Properties, Octodec Investments, SA Corporate Real Estate Fund, Growthpoint Properties and more already have residential exposure.

Potential?

South Africa is tipped as having the potential for specialist residential funds, given the listed sector’s rapid growth. Just in 2014 the sector delivered total returns of 26.6% (including dividends) to investors.

The sector’s market capitalisation is now over R350 billion, which French says is “now close in the value to the corresponding sectors in Singapore and Hong Kong.”

Investing in the residential sector is seen as a way of diversifying from other commercial property sectors – which are arguably going through headwinds.

However, estate agency companies report that the residential market is on the mend, following the start of the global recession in 2007. The residential market is now characterised by a shorter duration of properties being on sale, robust show-day attendance and stock shortages fuelling a surge in residential property prices.

If some of the local property counters do not tap into residential opportunities, then offshore counters will. “There are areas where there have been huge developments – where some of the US-based funds have invested in Africa through low-cost housing,” French says.

These foreign-based funds are buying into South Africa’s urbanisation which is expected to grow by 70% by 2030 and with this follows growing incomes.

Africa rising

Global investors aren’t only descending into South Africa for opportunities – other African countries are also sparkling.

The narrative on Africa is changing, from a continent of hopelessness to flourishing opportunities. PwC’s global real estate leader Kees Hage says global investors are on the prowl for better yields and the search has directed them to Africa.

“Investors and developers are increasingly targeting African real estate as one of the key emerging markets, drawn by the prospect of 20% plus returns across many territories,” Hage explains.

Ray Mahlaka on MoneyWeb