Developers are choosing to let, not sell, their residential properties
A growing demand for rental accommodation is seeing more and more developers holding on to their stock, and letting it instead of selling.
Although the trend is not new, it is being seen a lot currently, and is predicted to continue growing.
“Developers will hold stock for many of the same reasons that investors purchase in the first place – income and capital appreciation,” says David Cohen, managing director of Signatura Properties.
“Residential property in South Africa is reasonably linked to inflation and is an asset that is not necessarily correlated with other asset classes, such as shares. When markets are doing well, it is reasonable to want to enjoy the capital appreciation that purchasers are receiving by buying at one point, but only paying potentially 18 months to two years later.”
Cohen says the intrinsic value increase due to price inflation is that the unit is worth more than the purchase price on date of transfer.
“Rental income is also inflationary, and allows the owner/developer to enjoy capital appreciation and income.”
He says income was traditionally seen as a benefit of owning commercial and industrial property and the domain of large-listed funds. Although there is “certainly a foray” on the institutional level to enter the residential market, this is not very large and private developers will effectively be the first to market it.
“Rentals are also a good use of capital if the land prices become too inflated, as they are becoming, and future development pipeline is reduced.”
Elaborating on this, Miguel Rodrigues, a director of the Rabie Property Group, says South Africa has in the past tended towards home ownership, but in recent years there has been a growing demand for rental accommodation. This is the norm in Europe, and in some countries like Holland, where the majority of people tend to rent rather than buy.
“The trend towards renting accommodation in South Africa is being driven primarily by the millennials, who have a different attitude towards property and job commitments. They have a greater tendency to job hop and they want to live close to where they work, so many prefer the greater flexibility rental accommodation offers.
“The attraction of rental stock for landlords is that it has a lower risk profile in terms of tenants than commercial developments and office blocks. Commercial buildings tend to have one or a few tenants whereas with residential buildings you can have 100 or more tenants.”
He says this means the likelihood of losing all your residential tenants at the same time when leases expire is unlikely, but this can “easily happen” with a commercial building.
“Although residential rental stock is more admin-intensive, the risk profile is lower and this is why some landlords are looking to diversify their portfolios. There are some big funds which, in fact, only operate in the rental stock market.”
He says although the yields on rental stock tend to be lower in the initial years than commercial developments, requiring the landlord to put in more equity, the capital growth of residential developments – particularly those that are well managed in good areas – tends to be stronger than that of commercial investments.
“Apartment blocks, more than any other residential type, lend themselves to rental stock because the landlord is able to control the whole environment and there are economies of scale.
“This ensures values are protected through good maintenance and management, which is harder to do in group housing and single residential developments where tenants might, for example, not look after the gardens.”
The price of primary residence ownership is becoming less affordable, and Craig Armstrong, of FWJK Developments, says this is why there is increasing demand for rental stock.
“This is why FWJK has initiated the delivery of its New York-style stay small, live big-type apartments to provide housing to fill this affordability gap in the market.
“South Africa has just emerged from a recession and affordability is the key to satisfying this demand.”