Time is ripe for specialised funds

Posted On Thursday, 04 September 2003 02:00 Published by
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Soon-to-be-listed Habitat likely to be the first of many funds to focus purely on residential sector
SA will get its first purely residential property fund when Habitat Property Investments lists on the JSE Securities Exchange SA in the near future.

With the arrival of the Habitat Residential Fund, some commentators now believe there is a gap in the listed property sector for residential property funds and that we may see more such specialised funds listed in the future. Existing funds will diversify their portfolios to include this component.

Although historically some property funds have residential properties in their portfolio, there has never been a fund in SA that focuses specifically on residential property. In contrast, residential property makes up more than 20% of all listed property in the US, while the figure is 10% in Europe.

The largest listed residential property fund in the US is worth more than $7bn. However, in SA, residential property has up until now not been attractive to investors.

Property economist Francois Viruly, of Viruly Consulting, says that when rent control was imposed in the 1970s, institutional investors got out of the residential property market. However, with the densification of residential developments becoming a reality in SA, there may be scope for specialised residential property funds.

"In the next few years we are going to see a number of apartment blocks going up in an attempt to try to get home, work and play all closer to each other," Viruly says.

In the next few years institutional investors will be investing in the residential property market. "The issue is whether they will be totally focused residential funds. The continuing debate in the listed sector is should you concentrate on general funds which have property from different sectors or whether there should be specialised types."

Viruly says we may see more specialised residential funds listed, but says there is also an opportunity for existing funds to diversify into the residential property market.

He says investment by institutional investors in the residential property market would need to involve apartment blocks.

Overseas, the residential property market is attractive to institutional investors because land is limited and towns are compact with a lot of apartment blocks.

"The more dense residential developments become, the more opportunities there are for institutional investors," Viruly says.

However, Mariette Warner, Standard Bank Property Income Fund manager, says that while she thinks residential property would be a good medium in the listed property sector, the issue of getting sufficient critical mass is a problem.

"There is a shortage of blocks of flats that have not been converted to sectional title schemes," Warner says.

Just about every block of flats to be found in a reasonable area has been converted to sectional title, she says.

"Landlords who own blocks of flats are unwilling to sell them on yields that could support a listing."

Warner says there is no shortage of land in SA.

"You need at least a R1bn market capitalisation to make any property listing attractive. Given that the average gearing is 50%, the size of the portfolio must be R2bn.

"In the context of the South African residential property market, this is probably unattainable," Warner says.

However, property consultant Niki Vontas thinks there is definitely a market for a listed residential property fund.

"Up until now there has been a tendency to list property vehicles with diversified types of properties, mainly due to the fact that it was difficult to get good quality stock for listing," Vontas says.

He says that between the 1970s and now SA has seen the initial phase of the listed property industry concentrate on creating diversified portfolios.

Vontas says there are two trends in the property market in general: one is a drive for larger portfolios and the other is specialisation of portfolios. "We are following the global trend towards specialisation," he says.

Specialised residential funds would allow the possibility to raise capital for residential developments such as apartments.

"Since the 1970s there hasn't been a real major development of flats in the country."

Vontas says there is also a need for this type of property, especially in the lower end of the market.

"You can argue that if you get a quality residential portfolio you can over time unlock capital values in excess of the values realised in commercial portfolios. You can also argue that residential properties would be easier to trade."

Vontas says there is a gap in the listed sector for this and that specialised portfolios will, over time, include residential golf estates, apartment blocks and residential leisure properties.

Business Day

Publisher: Business Day
Source: Business Day

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