JSE-listed property counters are set to embrace the residential sector in 2015. The latest company to attest to this is real estate investment trust (REIT) Tower Property Fund.
Tower, with a market capitalisation of R1.4 billion, is on the prowl for residential sector opportunities in a bid to diversify its commercial property portfolio.
Tower CEO Mark Edwards said in the short term, the fund will look at its own portfolio for residential development opportunities. It owns 32 properties valued at a collective R2.2 billion.
For now, its 20 327 square metre flagship mixed-use asset Cape Quarter precinct in Cape Town is showing a strong investment case for residential development.
“We are going into the value-add phase and making our portfolio work optimally. We are looking for pockets of spaces in our portfolio that is underdeveloped space. We have a lot of that at Cape Quarter,” Edwards told Moneyweb.
The company has conducted financial feasibility studies on redeveloping portions of the Cape Quarter precinct to accommodate residential apartments.
Edwards said the precinct is already showing a strong demand for residential units, given its mixed-use nature with 50% of commercial and another 50% of retail space already firmly entrenched.
“The returns from the sales or leasing perspective, which the financial feasibility is showing us, could materially impact our earnings for the good going forward,” he said.
Edwards said residential properties are management intensive, and the fund does have the capacity to take on this property class.
“It [residential sector] obviously brings a new level of management that fortunately we are geared for. Residential properties are very different to commercial properties; they are far more emotional and intensive. That’s why we rather develop new stock from our existing assets,” Edwards added.
In its interim results for the six months ended November 30, 2014, released on Friday, Tower announced distributable earnings to the tune of R63 million with a 42 cents distribution per share.
On the domestic property front, listed counters note that there is a shortage of quality deal-making in terms of acquisitions.
Tower’s strategy is to be acquisitive. During the period it acquired two office properties with the value of R122 million. Post the financial period it announced a further acquisition of three shopping centres.
“We are in that growth phase where we are trying to be as acquisitive as we can and looking for the right properties to bring a quality portfolio,” he said.
Vacancies across its portfolio in the period under review rose to 10% and are expected to drop below 8% once the fund’s newly acquired properties have been transferred. It is currently negotiating a commercial property worth R900 million. Tower’s property value is expected to reach R3.5 billion by May 2015.
South Africa’s pedestrian economic growth (expected to be 2.3% in 2015) has put pressure on the commercial sector, with rental yields being under pressure and vacancies on the up.
Head of listed property funds at Stanlib Keillen Ndlovu in a research note said diversification will be a theme for the listed property sector. “Residential exposure is starting to pick up, and there are talks of a couple of funds looking to create a 100% residential focussed fund,” Ndlovu said.
Industry players estimate that there is a strong case for residential property investments, given that the local listed market has a residential representation of roughly 1%, while the United States boasts more than 10%.
Companies like Arrowhead Properties, Redefine Properties, Vukile Property Fund, Octodec Investments and SA Corporate Real Estate Fund are now incorporating residential properties in their portfolios.