The South African residential market offers an attractive opportunity in the affordable housing rental segment largely driven by low and middle income earners who do not qualify for bonds and increased demand for housing located closer to areas of economic opportunity.
Gerhard Zeelie, Head Real Estate Finance (Residential) at Standard Bank South Africa, says: “Investors who select good locations, efficiently manage their assets and look after their tenants can reap good returns from affordable housing rentals. Rentals in the affordable housing rental market can typically offer returns of between 8.5% and 9% after tax, assuming conservative gearing and taking moderate capital growth into account.”
The returns offered by the upper rental market are significantly less, usually as a result of the lower rental yield achievable on these properties and the fact that the capital growth outlook is lower.
He adds that the most important element to consider is economies of scale. Standard Bank South Africa’s Real Estate Finance unit typically funds large projects, of 150 units or more, customarily with a gearing ratio of around 60% debt with the balance funded through equity. The best way to mitigate market risk in larger developments is to plan the development based on a phased approach.
According to Mr Zeelie, investors holding sectionalised units are at an advantage since these units can be sold either together or individually, which allows for flexible exit strategies. For example, this allows an owner to sell say 100 out of a complex of 500 units, if the price and timing is right.
“Such sales would be driven by property market demand,” says Mr Zeelie. Depending on the number of units sold, the sales price can be yield driven or based on the comparative sales value of the units.
The market opportunity is for households earning between R250 000 and R450 000 a year, and paying rentals of between R3500 and R6500 a month. The upper end of the income bracket might seem high, but Mr Zeelie says a large proportion of these consumers have additional financial obligations and may not necessarily qualify for a bond.
The key drivers contributing to the increase in demand for affordable housing rentals is the need by consumers to find accommodation that has convenient access to work, better quality schools and public amenities coupled with the fixed, predictable cost of renting.
Mr Zeelie says a few large players have entered this rental segment over the past few years, however there is room for growth provided that investors get the basics right. “As a start you need an economically viable location, in close proximity to public transport, access to shopping and schools.”
Good returns on both rental income and capital returns have made this sector of the market attractive.
Looking at the 12 month moving average of the value of building plans approved (Source: StatsSa) there is a dramatic increase for houses below 80 square metres. This development in the number of approved building plans which has grown by over 20% in the last year, points to increased activity in the market.
As low-income earners’ incomes rise to middle income level, this is likely to further drive demand for the affordable housing rental segment and entry into this segment. Investors who enter the market at this relatively early stage with significant scale and processes to deal with the asset class can reap the rewards of strong rental income in the short term and profit from sales once customer affordability improves.