October 29 2024 15:50
SOUTH AFRICA
Multifamily residential rental property is gaining attention as an investment type as its professionalisation is supported by key institutions and bodies including the South African Multifamily Residential Rental Association (SAMRRA).
SAMRRA, which was launched early in 2024, includes a group of specialist residential operators and landlords, who are committed to attracting reliable and trust-worthy investors, who can foster a strong present and future for this industry.
SAMRRA institutionalises South African multifamily rentals as it looks to support inclusive investment, to help owners to generate consistent returns while helping stakeholders, its founding CEO Myles Kritzinger says.
The association advocates for best practice principles where there is better transparency around the risks and rewards connected to multifamily property.
SAMRRA believes in this asset class and in the future economic prosperity people living in South Africa. This is a country with a young and growing population relative to other middle-income countries. This population is not only growing as more South Africans start families, but the growth is also being driven by immigration as people from across the continent make new lives in Mzansi.
DEMAND FOR HOMES
Providing quality housing for millions of people in the country fills a basic need and offers commercial opportunities to developers and investors.
Yet in the past investors have not typically seen residential property as a large-scale investment type. Post 1994, life and insurance companies tended to be commercial landlords in South Africa. They invested in shopping centres, offices, and, to a lesser extent, industrial factories and warehouses. Later, property funds were formed and listed on the JSE where they could access capital especially from investment banks and other large financial institutions. These funds also focused their capital on retail, office and industrial property.
But in the past few years, eyes have turned to residential property as an investment type which will provide consistent rental returns and capital growth for decades to come. In fact, globally, multifamily residential rental property is being embraced as an asset class for an assortment of reasons.
Paramount among the reasons that people in South Africa are becoming serious about investing in multifamily residential is population growth. Just look at how the country’s commercial centre, Gauteng is set to attract millions of more people in the coming years.
In fact, the Gauteng Provincial Government made a profound prediction when in 2020 it reported 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. Other provinces such as the Western Cape and KwaZulu-Natal are also gaining people often to semigration where people move from Johannesburg and Pretoria so that they can live at the coast.
Cussonia Central, Midrand International Housing Solutions
Not only in South Africa is there a shortage of housing which runs into multiple millions of units, a shift towards rental housing is also happening because of economic forces. High consumer inflation, economic uncertainty and rising unemployment make renting appealing. Across a range of income groups, more people are renting, as their affordability has waned. Some fortunate and affluent people reside in an apartment in South Africa in our summer, and in a different one in Europe during our winter. Other people are choosing to use their incomes differently, wanting to spend on holidays and entertainment instead of putting millions into large family homes.
Demand for rental housing is expected to continue at high intensity as economic factors deter people from home ownership. Globally, demand for multifamily rental housing has climbed as renters have been priced out of the buying market by high property prices and rising interest rates. Apartment occupancy rates also tend to stay firm during economic downturns, as renters are disinclined to relocate and then opt to stay in rental housing longer than they otherwise would.
While there is no shortage of demand for rental housing, investing in it does come with challenges. It can be a complicated asset to manage when it reaches a large scale because there are so many unique tenants.
SAMRRA is led by Kritzinger, the former CEO of Transcend Residential Property Fund. Transcend was listed in 2016 out of a portfolio owned by International Housing Solutions (IHS), a group which since its formation in 2005, has financed the development of energy efficient, affordable homes and helped to foster communities.
Transcend offered investors access to a fund which only invested in residential properties. One other “pure residential” fund with a rental focus, which listed on the JSE was Indluplace Properties, which was formed out of Arrrowhead Properties. In the past couple of years both have been acquired and delisted. Transcend was taken over by Emira Property Fund and Indluplace was bought by SA Corporate Real Estate. Octodec Investments is a diversified landlord which has exposure to rental apartments in the CBDs of Johannesburg and Tshwane,
There are numerous other listed funds which have exposure to housing assets as well as private companies which are accumulating residential investment portfolios.
SAMRRA currently has 14 members which include institutional landlords who own and manage large-scale, multifamily residential estates and other entities closely aligned with their common interests. They represent more than R40bn in property assets and over 75,000 residential units across the country. SAMRRA works to showcase its members as reliable and accessible players in their fields.
The association is also supported by a skilled executive committee, which includes people whose careers have been focussed on delivering multifamily housing themselves. They include Kritzinger, Houss CEO Vanessa Perfect, former executive director of Cosmopolitan Projects & Central Developments Property Group Kgothatso Meka, founder and executive director of Africrest Properties Justin Blend and CEO of Divercity Urban Property Group, Carel Kleynhans.
Jewel City, Johannesburg CBD, Courtesy of Divercity Urban Property Group
WHAT IS MULTIFAMILY RENTAL HOUSING
Multifamily residential properties are housing units built for rent, not for sale. These commonly include apartment buildings and multiple housing units within a single complex or estate. Institutional investors may own these large-scale rental properties and then have them managed by professional and specialist residential property operators. These residential units are separate from the different variations of social housing such as gap and breaking new ground (BNG) houses which were previously called Reconstruction and Development Programme (RDP) houses. These rental units also must not be mixed up with the housing units which developers build and then deliver to the homeowner market for sale.
While multifamily residential is a hot draw in large markets such as the US and Western Europe, institutional investment in SA multifamily housing is, however, still relatively small.
Circa Lynwood, International Housing Solutions
Germany’s overall residential market is the largest in Europe given its population of 84.5-million people and multifamily residential accounted for around 46% at the end of 2021. It accounted for 39% in Ireland, 34% in Sweden and 30% in Canada. In the US, which is the world’s largest economy, it accounted for 39%. But in SA, it accounts for around 2% of the property market. T Nevertheless, the runway for South Africa’s multifamily residential market is impressive and exciting, Kritzinger says.
“There is a mounting demand for quality, affordable housing in SA that provides safety and amenities, seldom offered by residential developments in the past. Demand is accelerating with rapid urbanisation, a growing middle class, affordability constraints, decreasing household sizes and a shortage of housing supply,” he says.
The goal of SAMRRA is to support inclusive investment, consistent returns and stakeholder satisfaction.
“Our association represents businesses that deliver quality, well-managed rental housing, driving sustainable and social value for all stakeholders. By ensuring investors’ interests are protected, SAMRRA aims to generate additional investor interest in multifamily housing and grow the sector.”
About a third of South Africans rent homes. This number is expected to rise relatively quickly while the rental industry is expected to be better regulated and to attract professional developers and managing agents for the rollout of housing units.
It already compares favourably with economies like Germany where half of the people living there rent properties and the US where about one third of households rent.
The formation of SAMRRA is in line with international best practice including what we see in the US which has an enormous multifamily rental industry.
Based in Washington, D.C., the National Multifamily Housing Council (NMHC) explains that it is an association which “brings rental housers and suppliers come together to help meet America’s housing needs by creating inclusive and resilient communities where people build their lives”.
“NMHC provides a forum for leadership and advocacy that promotes thriving rental housing communities for all,” it says.
WHO INVESTS IN MULTI FAMILY HOUSING AND WHY YOU SHOULD
Historically, Development Finance Institutions (DFIs) have invested in multifamily properties. SAMRRA is looking to widen investor interest.
Kritzinger explains that residential property in SA has not yet matured as an investment class. As a result, there is a lack of data about residential properties.
“We don’t have a track record for many assets because accurate data has not been collected for a long periods of time for different properties. But multifamily is now becoming a ‘commercial’ property type and as investors get to understand the risks and returns of the asset class, the more institutions will enter the market. Not only have we seen the formation of specialist residential funds, other investment platforms and counters which have access to institutions’ capital are now diversifying into multifamily,” says Kritzinger.
Multifamily residential property is being better understood in 2024 than before, and new investors are being drawn to it because it offers consistent and stable returns which are often backed by cash. Multifamily residential presents a huge investment opportunity with a long runway in an underserviced market. Not only does the investor have access to an investment which can be sustained for years; it also achieves a social impact.
As the multifamily residential property asset class matures, analysts will study real estate metrics which help to predict returns. These include capitalisation (cap) rates. The capitalisation rate is calculated by dividing a property’s net operating income by the current market value. This ratio, expressed as a percentage, is an estimation of an investor’s potential return on a real estate investment. If the cap rate for a property is 7.5%, it then means that the property generates a return of 7.5% on the investment, based solely on its income-producing potential. Analysts are studying what residential cap rates are compared with those of other asset classes such as office, retail and industrial. As more residential property transactions are concluded, spreads between residential and office cap rates can be calculated.
Some of SAMRRA’s members also specialise in office and other property type to residential conversions as opposed to owning residential apartment blocks built from scratch. These members include the likes of Africrest Properties, which has completed superb work in repurposing buildings to create the likes of The Maverick in Sandton and The Apollo and The Alpha, both in Sunninghill and Live Easy which has redeveloped buildings in Randburg, Rivonia, Fourways and the Johannesburg CBD as well as places like Arcadia and Church Square in Pretoria. Divercity Urban Property Group converted Jewl City in Johannesburg’s CBD into a thriving and modern neighbourhood.
WHY PEOPLE MIGHT CHOOSE TO RENT
Choosing to rent is becoming more popular for a range of reasons. By renting a property, you are free of several financial costs and stresses like having to dedicate time to maintaining a house. You don’t have to pay a bond, rates and insurance. Research has also found that millennials and Generation Z members may prefer more fluid and flexible living positions.
Some people will commute to a rental apartment for their work Monday to Friday. They will spend weekends at a house in a different city with their families.
Stanley Park, Oakdene, International Housing Solutions
The cost of buying a home is also restrictive for many South Africans especially in multi-use commercial nodes. Many corporates employ thousands of professionals in Sandton, Bryanston, Rosebank and Menlyn for example, but these people may find renting an apartment or house far for affordable than buying a home. Cape Town’s business nodes like Claremont and the City Bowl exhibit house and apartment prices which are often only affordable for the well-heeled.
WHAT DOES THE FUTURE OF MULTIFAMILY LOOK LIKE
Multi-family rental residential can become a larger part of commercial real estate, relatively quickly, with the assistance of bodies like SAMRRA. Housing is the largest part of real estate in any country and this part of why it offers so much in terms of returns on a sustained basis if processes are professionalised, best practice is followed and talented and hardworking people collaborate to drive a fruitful future which uplifts society.
Better education and greater transparency will drive growth. There are specialist operators who set industry best practice and standards but to establish more players, including more women and black entrepreneurs and professionals, a variation stakeholders need to understand and to appreciate the sector.
Collaboration and partnerships will ensure broader skills transfer. Proptech tools will also improve efficiencies.
“This is a high-touch asset class with a multitude of individual leases for example. Landlords are also dealing with individual people as tenants. This requires lots of operational care compared with other asset classes. Proptech is being developed as a huge solution to efficiency, but it does need to be balanced with human intervention and judgement,” he says.
This is partner content for the South African Multifamily Residential Rental Association (SAMRRA).
