JSE-listed Transcend Residential Property Fund, which services the low-to-middle-income segment of SA’s affordable rental market, expects its portfolio performance metrics to improve amid a challenging environment.
Transcend is a specialist residential real estate investment trust (Reit) with a portfolio of 21 properties, and more than 4,000 residential units valued at R2.22bn in Gauteng and Cape Town.
Its properties are close to major metropoles, transport corridors and places of work, with rentals ranging from R4,500-R8,000 a month. Some of its properties include Ekhaya Jabulani (Soweto), Birchwood Village (Chartwell), Tradewinds (Ferndale) and Vanguard Village (Cape Town).
The company, borne from the International Housing Solution’s (IHS) first SA Workforce Housing Fund 1, listed on the alternative exchange in December 2016 with a portfolio of more than 2,000 units. In February 2020, it listed on the JSE main board as a residential real estate investment trust (Reit).
Transcend’s main business is to acquire income generating residential properties that are quality affordable and lifestyle enhancing in high growth urban areas.
Business Day spoke to CEO Myles Kritzinger to unpack the investment asset class.
What is Transcend’s value proposition?
We offer quality affordable housing in “pretty” schemes offering aspirational living in good localities. We prefer to own complexes 100% as we believe to operate this asset class optimally you need economies of scale. In our books that is schemes with 150-300 units.
Our occupancy levels were nearly 98%, collections were above 95% with arrears as a percentage of revenue sitting at 0.5% at the end of March.
On the sales side, as is the case with Birchwood Village in Chartwell, we look for opportunities to extract value from individual units. Here, we have sold 200 of the 300 units. We bought these units at a 9.5% yield, and we can fetch 35%-40% premium — for units bought at R700,000 for example, we achieve just under R1m.
Having the optionality to sale and rent properties gives us flexibility depending on the market at any given time. Distribution for our shareholders remains key, and our units are selling at healthy premiums.
How are rising interest rates affecting sales of your units?
Banks are no longer lending more than 100%, but they are supportive in our market — below R1m and this gives us a competitive edge. To help buyers, our development sales prices are inclusive of bond and property transfer costs. We have also seen an uptick in sales where we offer incentives such as free levies for specified periods, occasional inclusion of appliances and uninterruptible power supply (UPS) inverters.
What does sustainability mean for Transcend?
We encompass all three pillars of sustainability namely environmental, social and governance (ESG). We believe having an inclusive approach with all stakeholders, and implementing what needs to be done, we should have a sustainable business in future regardless of the environment we operate in. By its very nature, our business promotes social — we provide quality affordable housing in secure environments close to economic hubs.
About 75% of our portfolio is green retrofit accredited under the International Finance Corporation (IFC) Edge Certification. It means our buildings become 20% more efficient than the baseline of utility consumption such as water and electricity, as well as materials incorporated in the building. Our units have features like dual flush toilets, and we use solar PV and heat pumps for geysers. This enables us to pass saving onto tenants.
Why is the residential rental sector not attracting capital flows?
The sector lacks scale along with lag in investment data to attract big institutional investors like pension funds. Demand due to chronic shortage of quality rental stock in good localities remains high. Unlike in the UK and the US, SA’s residential listed property sector is small, accounting for about 3% of the whole sector. The delisting of the only other residential Reit, Indluplace Properties, makes it tricky as Transcend becomes the only business of reference.
We have big players in the market and we have to figure out how to consolidate to provide institutional investors with meaningful opportunities. In the past five years, our focus was educating institutional investors about what Transcend does and what the residential rental market offers in terms of returns. Based on rental collections and demand in our portfolio, we think Transcend makes for compelling investment.
What challenges do you face as a Reit?
Access to capital at the right price supportive of an asset class that is beginning to mature. The past five years have been challenging for the listed property sector, with many counters trading at massive discount to net asset value (NAV).
I do not think where stocks are trading now is reflective of true value — and to raise equity at a price that supports any meaningful growth is tough because capital is raised at discount to NAV. It is difficult to raise equity at prices conducive to our business and investment model as well as the asset class.
The cost of delivery for affordable developments and making them profitable has become expensive, coupled with local municipalities’ lack of effective and efficient execution when it comes to approvals and making sure sites are serviced. Delays of six to 12 months on development projects have huge material value, which result in increased landholding costs.
What keeps you awake at night?
Rising municipal rates and taxes, as well as utility costs like sewage, which has doubled. The volatility and uncertainty of what council will charge at asset level regardless of its locality, makes it hard to do business and it feels like one is constantly playing catch-up. The affordable rental sector is under financial pressure from an affordability perspective.
As an example, sewage increases mean an additional R200-R500 a month — and this is in addition to water and electricity, as well as rental escalations, which become exorbitant for tenants to keep paying.
What is your outlook?
The outlook is uncertain, but we are confident that our portfolio performance metrics like occupancies will keep rising. There are wonderful opportunities for residential rental ownership in SA.
I believe with institutional capital this sector could become hugely meaningful in terms of delivering quality product to an underserviced market. It has potential to offer consistent and stable returns to investors with more support from capital allocators.
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