The resilience of residential property during the pandemic and strong demand for housing near workplaces suggest this sector deserves more love from institutional investors.
Bond originator ooba says it has almost been business as usual in 2020.
Applications for home loans "are very much still on the up", with as many as 55% of bond applications being from first-time buyers, said ooba CEO Rhys Dyer. This is up from 40% at the end of 2019. Most applications are still in the R750,000-R2m range.
The residential property market fell off a cliff in April as SA went into lockdown, with applications 70% off March figures, but volumes have increased since June.
Despite increasing urban populations, particularly in Gauteng, residential property is in its infancy as a listed investment. Most institutional investors invest heavily in property companies with office and shopping mall portfolios.
Investors can get exposure to JSE-listed housing developer Calgro M3, but it's difficult to get exposure to rental stock. There are only two residential property funds on the JSE - Indluplace Properties and Transcend. Of Octodec Investments' R12.6bn portfolio, 25.6% is residential property by lettable area.
A few other funds are beginning to develop, co-invest in or buy residential assets, including Emira and Attacq, but their exposure to residential property is still small.
The residential sector makes up about 20% of global property indices. But in SA, commercial property analysts and fund managers said investors just haven't believed in the investment case for residential property.
Evan Robins, a fund manager at Old Mutual Investment Group, said that in the past decade institutions have backed multibillion-rand overhauls of shopping centres such as Mall of Africa, as well as big office developments such as Discovery's new head office in Sandton and Redefine Towers in Rosebank, Johannesburg.
Investors have also backed industrial fund Equites, personal storage provider Stor-Age Property Reit and Fortress, which owns warehouses and distribution centres.
But the performance of malls has been on the wane amid weak consumer spending. As Keillen Ndlovu, head of listed property funds at Stanlib, pointed out, SA is over-shopped, ranking 12th in the world in terms of shopping malls per capita.
The head of research at Meago Asset Management, Ryan Eichstadt, said: "With everything happening in the sector, and the relative 'immateriality' of residential, we haven't been too focused on the sector."
Robins said residential "is attractive medium term, as people will always need a place to stay. It does not have the structural challenges of some other property asset classes. The headwinds are more severe for other types of property" - for example, the challenge to office spaces from the work-from-home movement.
"I don't see a structural challenge specific to residential," he said, other than the economy, which affects all property asset classes.
Divercity recently launched Jewel City, a R1.8bn mixed-use development, with phase one including 1,200 apartments.
Carel Kleynhans, CEO of Divercity Urban Property Fund and executive director at Ithemba Property Development, said: "Jewel City alone won't be enough to get the institutional investor market informed about the merits of affordable residential as an asset class, but it is helping raise awareness.
"The biggest contribution of Jewel City in this respect is that it is helping institutional investors think differently about what they conceive of as affordable residential rental. It doesn't have to be rows of dreary flat blocks on the urban periphery, it can be something much more interesting and liveable, like Jewel City," he said.
Kleynhans said residential property has a "massively defensive income stream". Companies may be reluctant to take up new office space and mall owners might be struggling to get rent from tenants in a depressed economy that is being strangled by a pandemic, but people tend to pay rent for where they live.
The group's project pipeline is 65% weighted towards "affordable residential".
"Some South Africans might have moved into cheaper premises, but they still tend to pay their rent. This is especially true in the inner city, where our tenants have been very conscientious," he said.
Divercity collected 97% of its rent for January, February and March. Rental payments declined in April and May, before improving in June and July. It collected 95% in August and expects the same rate of collection in September.
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