By Ken Reynolds: Gauteng Regional Executive: Nedbank Property Finance.
In recent times, the consolidation trend and wholesale shift to REITS have characterised the listed property sector. In addition, the past few months have also seen a fairly significant shift in the structures of many South African investment property portfolios. Whereas, for many years, listed funds have primarily comprised commercial, industrial and retail premises, lately, residential properties have been enjoying a steady return to favour.
Arguably the clearest evidence of this portfolio shift came when Octodec Investments and previously Premium Properties transformed old office buildings into residential units in both Pretoria and Johannesburg over a number of years, adding to what is now a large, and lucrative, residential portfolio for that business. More recently, there has been further evidence of the growth in appeal of residential property as part of any investment property portfolio through the acquisition by Redefine of a 51% stake in student accommodation company, ResPublica.
Clearly residential property is once again coming to be recognised as a viable and highly rentable commodity by SA’s listed property roleplayers. It’s certainly not a trend that is unique to this country. In fact, in many ways the South African listed property sector is only now starting to catch up with most listed property sectors in other parts of the world, where residential property has long been a core value-adding component of most property investment portfolios – often comprising up to 5% of the total value of those portfolios. Internationally REITs tend to specialise and as such a large portion of residential stock is held in separate specialised funds.
The reluctance by SA funds to incorporate residential property in their portfolios to a greater extent until now is understandable. Given that the majority of demand for residential rentals falls within the affordable housing space, this can present a real challenge in terms of ensuring sufficient, qualified tenants to make it viable. What’s more, the maintenance requirements, and costs, associated with residential properties are also significantly higher than those related with most commercial, industrial and retail rental units. Therefore, protecting the long-term value growth of a residential property, and its income generating potential, requires high levels of active building management involvement from the landlord.
Recently, a viable response to these challenges posed by many residential property portfolios has come in the somewhat unlikely guise of student accommodation. South Africa has a massive, and continually growing, number of school leavers seeking university entrance. Unfortunately, the country’s tertiary institutions simply don’t have the logistical capacity to accept more than a fraction of the applications they receive every year – and much of this capacity constraint, although certainly not all of it, takes the form of a lack of student accommodation facilities.
However, the student accommodation sector brings its own share of unique challenges for property funds, not least of which is the all-important need to ensure that the property acquired for the purpose of student residences is able to target the area of most need – which is typically in the more affordable range – and balance this affordability with cost efficiencies and the sustainable income-generating capacity needed to keep the property a viable investment over the long term.
On the plus side, the rewards for those funds that are able to strike this balance are potentially significant and, importantly, extend beyond mere financial gain to also include the reputational enhancement of their investment offering.
That’s because education is, and will long remain, a clear and obvious social and economic development prerequisite for South Africa. By acquiring properties that help address the tertiary education shortfalls in this country – particularly within financially disadvantaged sectors – property funds put themselves in a unique position to add this vital development focus to their social responsibility portfolios at no additional CSI cost, thereby raising their appeal amongst an increasingly responsibly minded global investment community.
Importantly, it’s not just at investor level that this social responsibility component is important. For Nedbank, as a commercial property finance partner to many of the country’s leading funds and developers, investment in properties that further South Africa’s educational development is key. For this reason, our Fair Share 2030 strategic focus includes a significant apportionment of the finance we facilitate or provide towards various aspects of education across the country, so property finance that furthers our commitment to education development holds an obvious appeal.
Of course, while the financial benefits of including more student-focused residential property in a listed property portfolio may merely require good judgement and fine-tuned business acumen, ensuring that such investment in student accommodation is also an investment in furthering South Africa’s education standards, requires a far more collaborative effort. This means that funds and investors must fully embrace the responsible component of their investment, while government and tertiary institutions need to be willing to financially support students in meeting their accommodation needs so that they can focus entirely on earning their degrees and becoming the future business leaders South Africa so desperately needs.