Affordable housing is the place to be

Arrowhead snaffles an opportunity in residential rentals.

Massive demand for quality rentals at affordable levels has motivated Arrowhead Properties (JSE:AWB) to step into the fray of residential property.

The listed property company may have only published a maiden annual report but its management team comprises property experts of long standing within the industry. They have a reputation for diversification and high yields, while aiming to provide shareholders with sustainable revenue sources to support above average quarterly distributions.

Thus the acquisition of a residential property portfolio worth R406m earlier this week came as no surprise and follows Arrowhead’s JSE conversion to Real Investment Trust (REITS) in July. This also coincided with its cautionary announcement to shareholders of the acquisition, originally intended at R500m. 

Property seller Jika Properties, which will remain property manager for two years, will receive a cash settlement once due diligence has been completed. This disposal of 36 properties comprises a total of 1089 affordable housing units, which are spread across a gross lettable area of just over 79 000m in Johannesburg.

Mark Kaplan, chief operating officer at Arrowhead Properties says this transaction is in line with the company’s low risk and high yield investment strategy.

Commenting on the diversification of this fund, Neil Gopal, CEO of South African Property Owners Association (SAPOA) says this is an exciting venture in the SA property sector. “As long as the apartment supply in a particular market remains low, and demand continues to rise, residential REITs should do well.”

Various motivating factors contributed to this acquisition, adds Arrowhead’s CEO Gerald Leissner. “A visit to a US Reits convention earlier this year, where residential property represents 15% of the total listed sector, drew our attention to optimum investment opportunities within SA’s affordable residential market.”  He says only 1% of the local sector comprises residential property, which is dominated by Premium Properties and Octodec Investments.

Leissner says that this acquisition of the first residential portfolio suitable for listing will not only enhance Arrowhead’s asset base, but will also help in developing its residential offering to the market.

Quality property management and tenant selection lies at the core of consistently high distributions of top performers in this sector. Arrowhead announced a guaranteed return of no less than 10% in year one and 10.8% in year two following this acquisition. It has prioritised management stability as part of the deal.

Also confirming the importance of superior property management is portfolio manager, Anton de Goede of Coronation Fund Managers, who says: “Arrowhead Properties’ acquisition of residential property fits the company’s strategy of acquiring high yielding assets. However, it will require intensive property management which will need to be done very well at all levels.” 

Paul Lapham, CEO of Jika Properties, which has been retained as property manager for the first two years, says: “Keeping things simple with as little as possible disruption to occupants who are tenants in good standing, is of top priority.” Lapham says this disposal represents about a quarter of Jika’s total assets, and is ideally suited to improving Jika’s portfolio toward holding equal proportions of inner city, town and student accommodation.  

The acquisition of the 1089 quality units is spread across high demand geographical areas, and will each be occupied by up to three residents, says Arrowhead CFO Imraan Suleman. The risk is relatively small when compared to single tenanted large buildings in other market segments, such as industrial and commercial.  “Jika Properties will manage this portfolio for the first two years, but Arrowhead may consider the incorporation of this management contract on an internal basis in the future,” says Suleman.

Arrowhead’s confidence in the local housing market, especially when considering stock shortages of affordable units in and around city precincts, is set to lead the way for more residential specialised funds in the future.

*Anna-Marie Smith is a freelance property writer with an interest in residential and commercial development. 


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