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Arrowhead’s residential subsidiary set to list next month

Bringing a property portfolio worth R1.5bn to the market.

The listing spree of South Africa’s listed property sector over the last two years will continue, this time with Arrowhead Properties (Arrowhead) set to list its residential property portfolio on the JSE.

Arrowhead will bring a real estate investment trust (REIT) to the market by June called Indluplace Properties boasting a residential portfolio worth R1.5 billion.  

Arrowhead’s chief operating officer Mark Kaplan says the company will lodge formal submissions to the JSE on Thursday for the listing, in which it will subsequently embark on a capital raising exercise of around R400 million.  

Kaplan says its residential subsidiary will trade at a lower yield than Arrowhead.  

Arrowhead has been acquisitive in the build up to the listing.  For the six months to March 31, the company concluded five residential acquisitions worth R257 million. Some of the properties are for student accommodation and others located in CBD nodes. 

Post the period under review, Arrowhead acquired 60 additional properties valued at R832 million, bringing its residential exposure by value across the portfolio to 20%.

“For the past six months the residential sector has been the best and we continue to get better margins on that,” Kaplan says. It is Arrowhead’s acquisitive strategy which saw the counter report a 19% growth in distributions of 74.49 cents per combined unit, which head of listed property funds at Stanlib Keillen Ndlovu says it is ahead of guidance and market expectations.  

“Arrowhead continues to surprise on the upside. The forward distribution guidance of 11.82% growth is also impressive… Arrowhead now also has meaningful exposure to the residential sector which has favourable demand-supply characteristics,” Ndlovu told Moneyweb.

The residential listing is a breakthrough for the property sector; given that exposure to the residential sector by property counters is relatively small. 

Arrowhead’s move is expected to be followed by other property companies which are starting to put the residential sector on their agenda. Lucrative opportunities across commercial sectors (retail, office and industrial) have been drying up says Arrowhead’s financial director Imraan Suleman. This has forced many counters to diversify in a bid for growth.

There is a strong investment case for the sector, as Suleman in the past has indicated that the local listed market has a residential representation of roughly 1%, while the US boasts more than 10%. The US is considered as a mature REIT market.

Before Arrowhead’s piqued interest in the residential space, Octodec Investments was considered as a first mover with a significant exposure to the residential sector. Others like SA Corporate Real Estate Fund, Tower Property Fund, Freedom Property Fund, Redefine Properties and more, are getting in on the act.

However, residential sector investments are still viewed as having low yields and are management intensive. On the latter concern, Arrowhead is currently experiencing this. Arrowhead had to cancel its lease with Ruimsig based Monash University at its residential complex due to non-payment of rent where 333 apartments are used for student accommodation.

“We want possession of those [apartment] units and it is going to take time to relet the apartments. But we will relet those units based on the demand in the area,” Suleman says.

Despite this challenge, Kaplan says the portfolio is still strongly positioned for growth. “We have a diverse portfolio and the risk is less than that of peers. We have a core portfolio that is growing faster than that of peers,” he says.

 

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