Since 2014, the team at The Housing Hub (THH) explored the business potential of the formation of a Real Estate Investment Trust (REIT). Less than 1% of the value of property funds (REITs) listed on the Johannesburg Stock Exchange (JSE) is made up by residential property. In 2012 the JSE adopted the worldwide-accepted REIT structure for property funds, effectively replacing previous outdated structures like property unit trusts and loan stock funds. The newly adopted REIT structure allows for, amongst other things, residential rental property to be listed and to be supported by institutions from all over the world.
REIT’s allow investors to own property in a hassle-free way. In a REIT structure, rental income is distributed on a monthly or quarterly basis to investors. Directors appointed by the REIT oversee the rental administration and maintenance of buildings – these functions are typically outsourced to external specialists with proven track records in the same industry. It is important to note that a large portfolio could be managed on an outsourced basis.
In today’s demanding economic environment, investors are keen to invest in quality rental property that provides an inflation linked passive income stream. At THH REIT, we are setting up a large portfolio of residential stock. We follow a development strategy that allows for a large equity stake owned by us early on in the life of the REIT. The difference between conservatively achievable Yield Rates of 17%+ (seventeen percent plus) during year one and 7,5%+ (seven comma five percent plus) Yield Rates acceptable by institutional investors, creates an impressive business opportunity.
During the 1960’s and 1970’s Johannesburg used to be a world-class destination. Built on the discovery of gold in the late 1800’s, the city rapidly developed to become the financial stronghold of South Africa. With political strive during the 1980’s the city became isolated, politicized and disorganized. Urban decay set in during the 1990’s and continued during the early 2 000’s. Exponential urbanization and massive demand changed this trend. Specifically in the residential rental market massive demand became obvious.
Today we find the Inner City of Johannesburg making large strides towards renewal. The city is literally changing from a former commercial and industrial city to a residential city. Young people from all over South Africa and the rest of Africa now come to Johannesburg to find a new home and an initial foothold from where they could study, work and do business. Life is coming back to Johannesburg. The city fathers managed to clean up the city; they brought back good security, etc. The result is a vibrant and positive influx of mostly young people. Various precincts are in the process of getting re-developed. Johannesburg is fast regaining its former status as a prominent African and world-class city. The streets of the Inner City are fast becoming the preferred place for young people to socialize. Restaurants, nightclubs, hotels, retail shops and specifically residential complexes are becoming increasingly popular as people return to the city. Trendy brand names also find their way back to the Inner City. There is a ‘revival’ happening on our doorstep. This process creates all sorts of opportunities. We now have the opportunity to become part of this ‘revival’ process. Our research indicates that hundreds of buildings are available to be re-commissioned, this time, as trendy and sought after residential complexes.
The Johannesburg inner city and inner-city areas of most metropolitan areas in Africa find themselves at an early stage of revival. Positive momentum created by early pioneers now allows for accelerated delivery of small and trendy residential units. The current young and trendy vibe at inner-city areas can be compared with destinations worldwide – in this instance with an African influence. Amenities are available in close proximity and typically range from trendy hair salons to bars, clubs, restaurants, etc. Our research indicates that the rental market between R2,500 and R4,500 per tenant per month is alive and well and that we now see the beginning of an upward curve providing for literally thousands of units to be introduced at inner-city areas during the foreseeable future. While we could find no evidence of saturation in this segment we observed an increasingly sophisticated market in demand of technology and trendy accommodation.
With the introduction of the Credit Act in South Africa and banking rules that were changed in the wake of a banking crisis in 2008, most young South Africans with disposable income are not in a position to buy homes. The only option these people are left with is to rent accommodation. Johannesburg is not the only city experiencing increased rental demand – all major metropolitan areas throughout South Africa are confronted with the same situation. Demand for rental accommodation in larger towns e.g. Polokwane (Pietersburg), Rustenburg, Nelspruit (Mbombela), Richards Bay, etc. also by far outstrips supply. The rental accommodation market in all major cities grew exponentially over the past few years – research indicates that this trend will continue over the medium and long term. Inner-city areas in South Africa investigated by THH, include but is not limited to Johannesburg, Pretoria, Cape Town, Durban, Port Elizabeth, East London and Bloemfontein.
The rebuilding of the City of Johannesburg not only creates numerous jobs; it provides much needed accommodation at affordable prices. Over the past few years, rental accommodation has become increasingly expensive and people typically commute for several hours per day to and from their workplace. We can provide critically needed residential accommodation at affordable prices. The acquisition of already built structures and by further densification these buildings, provides for competitively priced rental units. Our buildings can be found in close proximity to schools, universities, colleges, etc. We also cater for ‘working class’ tenants with numerous large employers close to the Inner City of Johannesburg. Accommodation provided by us typically provides for an initial foothold from where tenants could explore other alternatives.
At THH, we are now in a position to create a large residential portfolio in the Inner City of Johannesburg. We now participate in a fast growing industry. Our biggest constraint at this point is the availability of capital to fund growth. When well funded, we will be in an ideal position to create a legacy. A large rental portfolio can, in the years to come, play a significant role in the lives of people in search of education, jobs and other opportunities. We must invest in the youth and in the future of Africa. We can now, in a positive way, be part of the revival of Johannesburg. With these projects we will continue to contribute, in a meaningful way, to the lives of many people. A large portfolio makes a lot of business sense – more importantly it will make a lasting impression on a young and dynamic market.
Previously known as loan stock funds and property unit trusts, listed income funds changed to become REITS as required by the JSE. REIT structures and criteria in South Africa are now in line with REITs elsewhere in the world. REITs across the world form part of an internationally defined and regulated industry. During 2012 the JSE finally conformed to worldwide REIT requirements.
Being accepted as the appropriate structure, the current dispensation opened up a host of possibilities in the formal South African property market. What attracted us at THH, is that residential stock can now be accommodated in a REIT.
Our business strategy is to accumulate rental stock over the shortest possible period of time. For various reasons our main focus falls on residential stock. A recently introduced Credit Act in South Africa turned the residential property industry upside down. It became increasingly difficult for young people to purchase property. Rental stock is now in demand. Net rental income will be paid over on a monthly basis to THH REIT.
Investors own shares in THH REIT and receive their pro-rata allocation of rental income on a monthly or quarterly basis. Critical mass required before a REIT listing on the JSE exceeds (in terms of total portfolio value) R2 billion. The THH strategy is to reach this milestone in the shortest possible period of time. Our aggressive strategy is based on the current window of opportunity available in this sector.
After listing, investors could liquidate their positions as and when required. A REIT investment allows for the holding of a trouble-free individual property portfolio. This ‘passive’ income generator now becomes increasingly popular. It is expected that rental income will increase annually well above the SA CPIX currently at 5% (five percent) – to be conservative and for purposes of financial modeling we used an annual inflation rate of 6% (six percent).
Our carefully analysed marketing strategy forms an integral part of our larger business strategy and allows for a position of price-leadership based on a relative small unit per tenant (18m2 per bachelor unit or 30m2 per two bedroom unit). These small units provide us with an optimal usage of space based on optimal densification. Densification combined with the use of existing structures (which in todays terms are highly expensive to build) allows us to provide a superior product right at the bottom end of the affordable scale.
THH successfully formed an incubator from where different forms of rental projects can be developed. At THH, we effectively identify and accumulate ‘high-yield’ rental stock. We are of opinion that our current focus, the densification of Inner City buildings, will successfully take us to the THH REIT listing, from where more advanced business strategies could be unlocked.
Our business strategy is based on the outsourcing of core functions. During the development and construction phases of projects we rely on the substantial input from our consultants. Rental administration will also be outsourced to reputable rental administrators such as Zelri Properties with whom we recently forged a formal relationship. While we endeavor to maintain tight control, our outsourcing model allows for low overheads in a potentially highly profitable environment.
Our unique competitive advantage can be found in a combination of utilizing existing structures and the optimal densification of buildings during a refurbishment process.
Over the next few years The Housing Hub can build up a large residential portfolio in the form of a REIT structure that can be listed on the JSE (Johannesburg Stock Exchange). Our unique strategy to acquire existing buildings and to re-develop these buildings into small apartments allow for a relative risk-free opportunity. Passive income, where rental income is distributed on a monthly or quarterly basis, forms part of our strategy. At the time of the REIT listing, a portion of the residential portfolio controlled and owned by investors and The Housing Hub, could be liquidated. High returns on the initial investment could be realized with this opportunity being pursued.
More importantly, thousands of young and single people migrating to Johannesburg and other cities can be accommodated. With these apartments available, people in need of housing can be accommodated and in doing so, find an initial foothold from where they could study, find a job and explore numerous opportunities. This initiative allows for an important contribution in the development of fast changing cities and South Africa as a whole. Contributors and investors with this initiative become part of an initiative that supports a truly African renaissance and the revival of previously beautiful cities. This is a legacy we could leave to future generations to work and prosper from. Lets do it.