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Hurry up 2 - Hurry up and wait

Hurry up and wait

By Mark van Dijk

, |

The affordable housing market has high demand, low supply, and the promise of long-term investment returns. So what’s the catch?

Investing is a long-term game. Gregg Sneddon, the financial adviser who blogs and tweets at thefinancialcoach.co.za, often emphasises this point to his clients: ‘Investing takes time,’ he says. ‘Three years is not “time”. Five years is not “time”. Seven years is not “time”. Start with 10 years. We tell clients to “do the Mickey Blue”. It’s a reference to that old Hugh Grant movie where he tried to speak like a gangster and all he could say was, “Forget about it.” So do the Mickey Blue. Wait 10 years and,until then, forget about it.’

 

Learn to wait

The Mickey Blue approach is ideal for what’s known as alternative investments – financial assets like infrastructure and real estate, which don’t fall into the conventional investment categories (like stocks, bonds and cash). When you invest in alternatives, you’re likely to be locking up your funds for a long time. It shouldn’t come as a surprise, then, that the Old Mutual Investment Group (to pick just one example) has invested R19.3 billion of its clients’ money in affordable housing as part of its impact investments. Nedbank, meanwhile, disbursed R1.2 billion towards the building of more than 2,860 units in 2018 alone.

In 2016, the Government Employees Pension Fund (GEPF) approved a R10.5 billion facility to lender SA Home Loans in order to boost public access to affordable housing. Of that, R5 billion was earmarked for public servants, R2 billion for affordable housing for low-income earners, R2 billion to help SA Home Loans extend mortgages to other qualifying applicants, and R1.5 billion for affordable housing developers. ‘We can make good financial returns,’ GEPF vice-chair Dries de Wit said at the time, adding that affordable housing is key to economic development, stimulates the demand for goods and services, and will help grow the economy.

Hurry up

But while affordable housing infrastructure is an investment that pays off over the long term, it’s also an issue that couldn’t be more urgent or immediate in South Africa. There’s a massive demand for affordable housing across the country, and the market is growing increasingly impatient. In May, activist group Reclaim the City followed up their Human Rights Day protest at Cape Town’s Rondebosch Golf Course by digging foundations and laying bricks on the Green Point Bowling Green. The group insisted that City of Cape Town Deputy Mayor Ian Neilson had promised affordable housing on the land, saying in a statement that: ‘The Green Point Bowling Green is an example of the City’s failure to redistribute land and prioritise the needs of poor and working-class residents.’
But what’s the catch?

If you’re an investor, you’ll have noticed three things in what you’ve read so far: when it comes to affordable housing, there’s a high demand, a limited supply, and the promise of potential long-term returns. So what’s the catch?

The catch, quite simply, is that while all the pieces appear to be in place for great gains, the reality is that affordable housing (like any investment) carries a certain degree of risk. In February 2016, affordable housing developer RBA Holdings went into business rescue before posting an after-tax loss of R10 million in the six-month period to end-June – and that after reporting a R1.8 million profit in the previous corresponding period. Haunted by horror stories like that, some investors and developers have been scared off. Recent developments, however, suggest that they might want to reconsider.

 

Never mind the catch, check the yummy bait

In April, Johannesburg Mayor Herman Mashaba announced that R20 billion (or US$1.3 billion) would be invested to redevelop and rebuild Joburg’s inner city, while at the same time creating affordable housing. (This, he emphasised, was in addition to the three developments already under way in Hillbrow and Newtown.) Over 171 bidders had responded to Mashaba’s call in 2016 to ‘turn Johannesburg into a building site’. Ultimately, 24 development blocks consisting of a total of 84 buildings were awarded to developers on free long-term leases, with construction expected to begin pretty much immediately.

The projects include affordable housing, student accommodation and new retail spaces in some of the CBD’s sketchiest areas: Yeoville, Berea, Vrededorp, Fairview, Salisbury, Marshalltown, Wolhuter and Turffontein. The City expects to see thousands of affordable housing units built, with Phase One consisting of 6,500 units, and a commitment that 20% of each individual development would cater for rentals at R900 per unit per month, with the balance going up to R4,500 (excluding utilities).

‘This is just the start of bringing change to the city,’ Mashaba said. ‘More building and developments are set to be constructed in future. Through the city’s inclusionary housing framework, which makes provision for new developments to include at least 30% affordable housing, residents can now live where they choose across Johannesburg with better access to jobs and opportunities.’

 

A growing opportunity

During the announcement, Mashaba revealed the underlying reasons for Joburg’s inner-city housing need: more than 150,000 people are on the City’s housing list, and there’s a growing backlog. What’s more, about 3,000 migrants come into the city every month in search of further economic opportunities … so that demand is only going to grow.

That’s why more and more investors are finding that South Africa’s housing shortage – whether in the Joburg CBD or on Cape Town’s bowling greens – is creating opportunities for high investment yields. In 2017, research by property consultants Knight Frank found that yields for prime location residential property ranged from 5% to 5.5%, while affordable housing sectors were seeing yields of between 8% and 10%. Similarly, Lightstone’s residential property report for November 2017 saw a 36% price inflation in the low-value housing sector, while prices in the luxury market increased by just 1%.

Still, the high cost of capital, due to the level of perceived risk in the affordable housing sector, is preventing investors from reaping high risk-adjusted returns. ‘This leaves the market underserved with lenders, investors and developers cautious to enter, despite the clear demand for this type of housing,’ Kiara Suttner, a Private Equity Analyst at investment services provider RisCura, wrote in a statement last March. Suttner underlined that while operating and financing risks and a lack of transparency drive up the cost of capital, the impact of these risks is ‘likely overstated due to skewed market perceptions’.

‘The industry has seen success in investing in affordable housing,’ she wrote. ‘Global private equity investor International Housing Solutions delivered a 24.5% risk-adjusted return in its first successful South African project exit in 2013. Since then, it has seen double-digit returns in this market. Together, these facts and figures show that South Africa’s affordable housing sector can offer investors strong rental growth and returns.’

In the meantime, investors – like the thousands of people who’re waiting for affordable houses to be built – will have to be patient as they wait to see those investment returns. The market appears to be there. It’s just a case, it seems, of conducting your due diligence, assessing the risk, and – as always – doing the Mickey Blue.

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