Real Estate Investor Magazine South Africa September/ October 2019 | Page 15

AFFORDABLE ACCOMODATION
A
frica has huge potential as a real estate hot spot with
40,6% of foreign investment directed towards the real
estate, construction and hospitality sectors. McKinsey
and Harvard Business Review data estimates that housing
expenditure will grow from $100 billion in 2008 to $242 bil-
lion at a compound interest rate of 4,5%.
The investment case for any asset class rests on the potential
for above-inflation returns based on large demand. For
affordable accommodation, as a fixed real estate investment,
the large and growing demand for housing outstrips the pace
of supply within the South African (SA) context. The fact that
housing is a government priority is expected to continue drive
demand for decades to come.
As urbanization increases as the demand for clean and safe
housing in the inner cities of SA are on the rise. SA’s urban
population is becoming larger and younger. Predictions
show that nearly 80% of the total population will be living in
an urban area by 2050. This growth combined with massive
housing shortages in urban areas has increased demand. There
is a substantial gap in the housing market for individuals who
earn too much to qualify for social housing, yet too little to
qualify for loans from traditional banks.
Because
of
existing
infrastructure
affordable
accommodation in SA inner cities has become a great
opportunity for investors. The cities are established and
advanced regarding transportation and communication
infrastructure. These investments have a competitive
advantage as they generally require an upgrade rather than
developing a brand-new development.
Many individuals live great distances from their place of
work as a result of the location of the reconstruction and
development programme (RDP) housing. This accommodation
is often around 40km from their employment resulting in 40%
of their income going towards transportation costs.
What is affordable accommodation?
For investors in property funds and indices such as ABSA MSCI
index:
•
Housing aimed at households that can afford monthly
rentals up to R8, 000 per month
•
Housing that is valued up to R800, 000 where the bank
provides end-user finance (such as FLISP)
•
Bonded homes with a sales value deemed ‘affordable’
to those who have a median income of R12,500 –
R17,500 per month
For national government that provides housing subsidies:
•
Households earning between R3,500 to R15,000
per month, earning above the limit to qualify for
government–subsidized housing and who are
required to apply for a mortgage loan to buy a house
(R15,000) on the open market
•
Social housing rental accommodation for households
with stable incomes between R1,500 and R15,000 per
month
For particular areas or contexts which do not rely on fixed
thresholds of affordable values or household incomes:
•
For the stretched middle-income market with
household incomes between R15,000 and R40,000
•
•
•
•
per month
Units being rented or sold for less than the median
value of properties in the area, due to subsidies,
incentives and policies
Households who can access finance or afford the rent
in an area below the current open market rate
For particular groups where developments are aimed
at specific groups not entirely served by the open
market
Student rental accommodation and key service
or essential worker accommodation (e.g. nurses,
teachers, police, etc.)
For an institutional investor who is required to deploy a
significant scale of capital over a longer-term horizon as part
of a diverse portfolio of assets, affordable accommodation can:
•
•
•
•
•
Offer risk-adjusted returns over a longer time period,
due to the high demand
Act as a hedge or counter–cyclical investment, which
is more resilient during downward trends in the
economy as vacancies remain low
Act as a defensive and secure investment as the capital
value of the asset is likely to increase over the medium
to long term if good maintenance and operations are
managed
Offer a more stable investment as the capital and
income growth of the fixed asset is less volatile
compared with equities
Provides stable rental income which can be pegged
to inflation and is more responsive to the state of the
economy
Price growth
Between 2012 and 2015, the affordable housing segment
outperformed the overall housing market. House price growth
of properties in the bottom quartile (i.e. less than R330,000,
excluding RDP houses) nearly doubled that of the second–
highest quartile (R700,000 – R1,135,000)
Affordable housing fund growth
According to the ABSA MSCI Residential Results for 2018, which
tracks affordable housing as a separate category of residential
across 209 property funds.
1.
2.
Affordable accommodation posted a higher income
return than other accommodation (8,9% vs. 6,5%).
Total returns were comparable to other
accommodation (12,3% to 13,4%) despite the
significantly lower costs. This means affordable
housing investments are an option for a wider
number of investors
Affordable investment hot spots
Gauteng - City of Johannesburg CBD including Braamfontein,
Jewel City, New Doornfontein, Newtown, Arcadia, Bertrams,
Hillbrow, Joubert Park, Rosettenville, Springs CBD and Yeoville
Western Cape - Observatory, Salt River, Woodstock, Rugby,
Ysterplaat, Brooklyn, Bellville CBD, Greater Tygerberg Area
Voortrekker Road corridor – Woodstock, Maitland, Goodwood,
Vasco, Parow, Tygerberg, Elsiesriver, Avondale and Bellville
SA Real Estate Investor Magazine SEPTEMBER/OCTOBER 2019
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