Chapter 2: Is there an oversupply of residential housing problem?
This is the second of a six-part series about residential rental property as an asset class in the South African context.
Residential demand driven by a growing population
When assessing the demand for residential units in South Africa, it is useful to start by analysing population dynamics. Statistics SA estimated that the country had a population of 60.6-million people at the end of June 2022, with it growing at 1.28% in the past year. The country’s cities are still experiencing an influx of new residents from rural areas and other parts of Africa; people who are looking for better work opportunities and a higher quality of life.
The most densely populated province in SA is Gauteng, which includes the cities of Johannesburg and Pretoria. It is growing as people move from rural areas and from elsewhere in Africa to the city.
The Gauteng Provincial Government reported in 2020 that there were 15.2-million people living in the province, with the number projected to grow to 18-million people by 2030 and then to increase to between 22-million and 25-million people by 2050. This population and population density growth will drive demand for residential housing.
Size of the residential market
Lightstone, the provider of real estate research, valuations, and market intelligence, breaks the
market into five parts. First, the low value segment refers to houses priced under R250 000, and the mid value segment includes homes priced between R250 000 and R700 000. The high value segment includes homes priced from R700 000 to R1.5m. Luxury homes are worth between R1.5m and R3m. Super luxury homes are worth more than R3m, in the South African context.
These definitions show us that the vast majority of South Africans live in modest homes. A middle-class family typically stays in a luxury home, according to this definition. They pay off the mortgage on their home and are not typically renters.
The country is plagued by severe poverty and unemployment. The government plays a crucial role in supplying subsidised housing to millions of people. RDP housing, for example, is provided by the state for free. So, South Africans rent from the low and mid value segments and those investors wanting to earn returns from a portfolio of properties will find much available stock here.
Valued at R5.96trn as of June 2021, there are 6.7-million residential properties. More than half of these, about 53%, were worth R700 000 or less, while 32% are valued at less than R250 000. At least 2-million entry level homes are government subsidised, accounting for about 9% of SA’s residential property market. The government will continue to provide homes to the impoverished as it helps to alleviate the housing shortage while developers will also play a role in providing homes which range from affordable, to affluent, to highly luxurious.
How large can the rental industry become?
Changing economic and convenience factors are forcing people to rent instead of buy. The number of people who rent will grow as the cost-of-living rises. Not only will blue-collar workers have to rent more but professionals will choose to rent instead of buy. Home ownership has been a goal for people in the country where it is deemed an honourable symbol of wealth to attain.
How many people rent as opposed to buy homes?
About a third of South Africans rent homes. We can compare this with large
economies such as Germany where half of the people living there rent properties and the US where 34% of households rent. Germany’s government caps rents on residential properties which helps to make rental affordable for millions of Germans. This system would help the young renters in SA.
Who owns this property?
Investable properties are owned by institutions, families and groups of individuals. Some people in the upper middle classes will own one home which they will rent out and one in which they will live. Typically, people are prompted by their employers to invest money in a pension or provident fund. Some people buy shares on a stock exchange separately or hold assets such as commodities and art.
Supply side factors
How much residential property is in development?
Hundreds of thousands of square metres of residential property is under development. But certain people are building residential schemes without the correct permits and are not correctly documented or not documented at all.
What kinds of residential assets are under development for investment
SA has a shortage of affordable housing which has prompted developers to pursue this sector of the rental residential market. Given the country’s challenges, South Africa’s housing market has come to be structured in such a way that almost a third of it is made up of government subsidised properties. These are homes with basic amenities and do not form part of the rental market. But, overall, more than half of the houses in SA are worth at below R700 000. Homes ranging in value between R250 000 and R700 000 are affordable.
Calgro M3 and International Housing Solutions are prominent affordable housing developers, for example. Then there are mass-scale entry and medium housing price developers, such as Balwin Properties and Reeflords.
What are the variations of affordable housing and are they investment
quality which would attract financial institutions?
Like any rental property, for affordable housing to meet investment criteria, it needs to deliver
returns consistently. These are rental income returns paid monthly and capital returns realised over time. Either the tenant pays the property owner directly or somebody pays the landlord on the tenant’s behalf. An investable rental property needs to be managed so that it retains its value and can be rented out again. As things break through wear and tear, the property owner should pay the repair and maintenance costs. But proprietors will want skilled agents who find tenants who do not cause damages often. There is legislation and are governing bodies in place to govern rental housing practice and to manage disputes.
Office to residential conversion:
Property owners are converting certain office to residential properties as they look to decrease
vacancies in their portfolio. This is costly as design limitations mean that changes may need to be made to properties to make it feasible for conversion. Sandton is Gauteng’s business centre, but it has battled with a high vacancy factor in recent years, exacerbated by the pandemic and a shift in working habits so people can work from home. There is about 300 000 m2 of vacant space in Sandton CBD according to GMaven. If 50% of office vacancy was converted to residential that creates 150 000m2 of space for housing units. That could create space for example, let’s estimate, 2 500 units in the richest business district in SA.
How much of the office sector is feasible for conversion?
Around a fifth of office space may be feasible for conversion to residential property.
Why residential property is reliable
Property Flash cannot guarantee its readers that residential property prices will rise. There are
concerns that there will be a global recession which will place pressure on commercial property
prices in various markets. However residential asset prices should maintain their momentum as
people want to rent decent housing where they are comfortable. The need for suitable shelter
trumps market forces.
The South African residential real estate market is expected to grow at a compound annual growth rate (CAGR) of greater than 9% during the forecast period (2022-2027).
The residential rental market has withstood challenges as the basic need for shelter trumps other events. It is a highly robust sector and has withstood problems. People worldwide had to isolate from one another during the Covid-19 pandemic and, for most people, this meant staying at home. The tens of thousands of people who lost their employment or businesses, sold their homes as they downscaled and started to rent properties.
Which residential property is likely to out-perform?
Residential and specialised properties including student housing, logistics warehouses, properties used in film and storage properties look set to outperform the other traditionally owned property types: factories, offices and malls. How people live day to day changes how properties are used. Online shopping requires last mile logistics facilities. Professionals globally are also working from home for at least one day a week. As people have smaller families and rent smaller homes instead of buying the large homes which their parents traditionally did, the rental residential market becomes more robust.
Over long periods, residential property tends to hold its value unless the area where it is located suffers a drop in the quality of infrastructure and amenities around it.
Across the living standards measures there is not an oversupply of rental housing in SA. At the luxury end this differs as owners of top end properties may battle to rent them in an economy lacking new investment. Luxury properties can perform well, depending on their intended use. Properties which cater for holidaymakers will fare well during the summer in South Africa. Other property owners may be able to rent their high-end homes out to businesspeople working on commercial projects.
But investors who want to buy and then rent out property will find opportunities at the affordable and entry level of house prices, with returns generated throughout the year. The higher end is a smaller and less liquid market.