The South African residential property sector delivered a total return of 12.3% last year, comprising 3% capital growth and a 9% income return.
This is according to the inaugural results publication from Absa Commercial Property Finance and MSCI, and puts South Africa in third position behind Germany and the Netherlands in terms of total return (see chart below).
Source: MSCI Global Intel
The South African returns are ungeared investments in local currency and are based on a sample of 12 property portfolios holding residential assets with a total value of R17.8 billion. It includes 368 properties and almost 45 000 units – predominantly in the affordable housing market – and covers private as well as listed funds.
Although residential property is an internationally accepted asset class, local institutional investors have shied away from it until about five years ago when institutional investors got on board and began to invest in the sector.
Phil Barttram, executive director at MSCI, says the return is “not too shabby” given local market conditions and the fact that it is a fairly new sector.
“What it is telling us is that the market sees the asset class as slightly more risky, as reflected by the requirement for higher income return and net operating income yields, but not substantially more risky than the other asset classes,” he says.
The return is in line with the performance of local industrial and retail sectors, and outstripped the 10.3% total return for the office segment in 2017.
While there are wide-ranging views around the definition of affordable housing, the MSCI analysis only considers the asset and not the circumstances of the tenant. Against this background, affordable housing broadly incorporates rental values of up to R8 000 a month and capital values of up to R800 000 per unit.
The net operating income yield (rentals less costs to run the building as a percentage of capital deployed) for the residential sector was 8.2% in 2017, compared to 4.7% for Japan, 4.2% for the US and a global average of 3.8%.
Barttram says the relatively higher income yield may be a reflection of a perception of risk. It is a fairly new sector and investors may be expecting a premium in return.
Looking more broadly at the total returns across commercial sectors – which includes the residential sector in other countries – Spain was the top performing country across MSCI’s analysis in 2017 at 14.5%, compared to South Africa’s 11.7%.
The residential sector in other markets doesn’t generally mimic the composition of the South African market with its focus on affordable housing.
Barttram says commercial assets around the world are currently experiencing their lowest income returns in recent history.
Amelia Dieperink, Absa’s head of affordable housing, says the development of a local residential total return enables a consistent comparison across markets.
The latest MSCI results will constitute almost 5% of the MSCI South Africa Annual Index and provides a demonstration of the sector’s growing value to investors, she adds.
- Moneyweb
