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Is there a pony in the room?

So you’ve  heard the story about the twins with opposite dispositions to a room full of manure? No? Well the pessimist looks at the manure gloomily and can only see a pile of dung. The optimist on the other hand casts the manure gaily into the air and intones: “with all this manure there must be pony here somewhere!”

So when we are faced with the prospect of  a specialist residential fund listing on the JSE our response  may have more to do with how we observe the manure in the room than anything else. And yes folks there is manure in the room.

TPNhave announced troubling stats indicating that “tenant payment behaviour has deteriorated for the first time in 24 months” Rental Payment Monitor Q2 2011.

To be precise they cite that “higher unemployment, high household debt and a substantial increase in the cost of electricity, fuel and food, all of which affect monthly expenses and hence the ability to pay rent.”  And yet there is a pony since they also point out that rental stock is lacking for the below R3000 and R3000-R7000 per month, brackets.

There’s more: International Housing Solutions (IHS) South African managing partner Rob Wesselo commented: “it has to happen sooner rather than later (a listing of a housing fund.), given that housing is the only sector of the broader SA real estate market where demand outstrips supply, particularly in the R200 000 – R600 000 market.”

(Wesselo) “Blames a lack of performance data from which analysts and fund managers can base profit and earnings forecasts” Financial Mail.  Again the ‘good news’ is that we haveTPNdoing just that, for example:

Tenants in the below R3 000 rental bracket are now the worst performing, with just 72% in good standing, (only 58% are in the Paid on Time category, while 18% are in the Did not Pay category). Unfortunately, tenants in the above R12 000 category are not faring much better with 74% in good standing (57% Paid on Time and 16% in Did not Pay). Tenants in the R3 000 – R7 000 category remain the best performing, where 83% are in good standing (70% Paid on Time and only 8% Did not Pay).

Yet the potential remains for enormous growth, since 68% of South Africa’s total population can afford housing priced between R250 000 and R700 000 according to the Affordable Land & Housing Data Centre. Yet only 14% of all new home registrations in 2010 fell into this category.

Wesslo does admit that rental defaulting and arrears in the affordable housing market are cause for concern among potential investors. “However, if you build the right product and manage your portfolio well, arrears and vacancies can be kept to a minimum” he told the Financial Mail.

But just when you thought it was safe, enter the Consumer Protection Act. Among other things the CPA allows the tenant to terminate a lease, at will, with only 20 business days notice, despite an appropriate penalty.  This leaves the landlord with a cash flow impact as levies and mortgages are owed. Throw in the Municipal Act , – though not done deal, and investors feel weak at the knees.

But Jeffery Wapnick from Premium Properties sees a Pony. Premium Properties owns some 2000 units in inner cityPretoriaandJohannesburg. Wapnick reckons that there are few risks involved with Residential and Retail, and other sectors.  Premium Properties experience has been that the eviction and replacement of Defaulting residential tenants is simpler that corporate ones.

So how far are we to realising a housing focused fund on the JSE? Well that brings us back to Jeff Wapnicks Premium Properties where only 40% of the fund covers residential market. There was the Kwami Residential Fund in late 2010, which Gerald Leissner (CEO of ApexHi Properties) said at the time that he was unable to put together a portfolio of sufficient capacity and liquidity to attract institutional investors.

Are we are just not ripe for such investment.  Or is there a lesson to learn from theUShousing funds. TheUStoo has a market for affordable residential rentals. And despite the economic down turn, Housing Fund Equity Residential, aChicagobased Standard and &Poor 500 member has a market cap of R125bn.  That’s almost the size of  the whole of the SA listed property sector in total.

Regardless, squinting back at some detail:  according to theTPN’s Rental Payment Monitor Q2 2011: the best performing Tenants in Good Standing are in theEastern Capeat 87% (71% Paid On Time, 16% Paid Late) whereasGautengis the worst performing province with only 75% of Tenant in Good Standing.  That could help you see where the manure is. On the other hand (IHS’s) nearly R2Billion SA Workforce Housing Fund has all the potential of listing with it’s offshore private equity investors partnering to develop 35 000 residential units by December 2011. There must be Pony here somewhere.