High-rise returns

Posted On Friday, 28 October 2011 02:00 Published by eProp Commercial Property News
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US-backed private equity fund International Housing Solutions, which entered SA’s affordable housing market in 2008, recently breached the R1bn lending mark.

Paul Jackson

“Inner-city investors are still earning income yields in the 12%-16% range. That’s double the 6%-8% that buy-to-let investors are getting in Sandton or Umhlanga”


The big banks may well have backed out of seemingly high-risk inner-city property markets but alternative lenders, private equity funds and institutions are starting to pick up the slack.

The fund has to date financed 25 projects comprising about 25000 residential units, many of which are located in and around urban areas.

The Trust for Urban Housing Finance (TUHF), another alternative lender in the affordable housing space, has seen its mortgage book double to R1,3bn over the past three years. The trust backs developers and entrepreneurs who want to invest in rental housing portfolios in areas characterised by urban decay, predominantly the Johannesburg, Pretoria, Port Elizabeth and Durban CBDs and surrounds. These include mostly refurbished blocks of flats aimed at tenants who can afford rentals of R1500-R4000/month.

The potential for social returns on investment aside, turning former crime and grime hot-spots into vibrant residential hubs is also lucrative for financiers and investors, says TUHF cofounder and CE Paul Jackson

He believes major banks’ move out of many inner-city areas in 2008, when the credit crisis hit, was a knee-jerk reaction. “The banks have grossly overstated the default, building hijacking and vacancy risks associated with lower-income, rental housing portfolios in inner cities.”

Jackson says inner-city housing is no riskier than any other segment of the residential property market, as long as buildings, vacancies and arrears are well managed. “Our nonperforming loans are less than 1% of our total mortgage book and the average vacancy rate on the 450 residential buildings in our portfolio remains well below 3%.”

Jackson, an agricultural economist by profession, says to date the trust has only scratched the surface of the redevelopment opportunities. “Demand for affordable rental housing should grow exponentially over the next five years.”

But he concedes that inner-city entry levels for buy-to-let investors are no longer at bargain basement levels. In the Johannesburg CBD, for instance, one could pick up a small flat from as little as R15000 eight years ago. Today you’re paying R100000 for the same unit.

Rentals, however, have been growing equally strongly at an average 10%12%/year. That means inner-city investors are still earning income yields (gross annual rental income as a percentage of market value) in the 12%-16% range. That’s double the 6%-8% that buy-to-let investors are getting in Sandton or Umhlanga, says Jackson.

The bulk of TUHF-financed housing developments are redeveloped or refurbished buildings. Loan sizes typically vary from R2m to R10m. A loan of around R4m should cover 80% of the purchase price plus redevelopment costs of a dilapidated block of flats with 20-30 units in Hillbrow (Johannesburg) or Sunnyside (Pretoria).

Latest figures from property economists Rode & Associates confirm that rental growth in SA’s inner cities has generally outperformed that of the suburbs. That’s especially true for Johannesburg. Rentals for bachelor flats in Jozi’s inner city are up 37,6% in the two years to the end of June 2011, from a monthly average of R1980 to R2725. That’s against average growth in flat rentals across SA of less than 4% over the same time.

TUHF backs an interesting array of investors — from an ex-CEO to a former domestic worker. Says Jackson: “We will look at any deal where the potential cash flow will provide a debt service cover ratio of 1,3.’’

Last modified on Tuesday, 11 March 2014 09:05

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