Standard Bank believes that South Africa has an opportunity to re-invigorate its affordable residential build sector through the establishment of listed residential funds.
Listed funds attract capital based on their ability to deliver returns through rental income. Developers of residential real estate targeting the R3500 to R7500 per month rental market that partner with listed residential funds will attract bank funding back into South Africa’s stalled affordable residential sector.
This has the potential to kick-start the country’s residential build, meeting a critical backlog in affordable housing stock.
Up until 2009, almost everything that residential developers built was taken up by the market. In the wake of the global financial crisis, however, buyers either walked away from projects or pre-approved home loans were cancelled. This left, “developers unable to service development funding on projects with neither buyers nor an income stream,” explains Gary Garrett, Head of Real Estate Finance for Corporate and Investment Banking at Standard Bank.
In response, despite demand for affordable residential stock remaining strong in South Africa, lenders became a lot more cautious in their approach to funding residential developments.
Mr Garrett believes a solution is for developers to build affordable residential rental stock in partnership with real estate funds. “Pre-selling developments to funds on completion creates opportunities for financiers to fund the development phase off the back of much greater certainty around take out,” he explains.
From a listed residential fund’s perspective, the value of their fund depends on the quality and quantity of their stock – as well as how effectively funds manage this stock to produce returns. As such, listed residential funds have a commercial incentive to support the efficient development of new stock.
“Entering into arrangements with real estate developers also means that listed residential real estate funds can develop a secure and guaranteed pipeline of new stock, creating growth opportunities and enhancing earnings,” says Mr Garrett.
The market opportunity of leveraging half a decade of pent up demand speaks for itself, especially in an environment where rents are expected to improve on the back of lenders adopting a more cautious approach to home loan lending.
From a social and economic perspective, listed funds partnering with residential stock developers presents a mechanism to, “attract investment to a new listed asset class – one that directly addresses South Africa’s residential housing backlog, increases activity in the construction sector, and creates jobs,” says Mr Garrett.