Economist predicts high-rise apartments for Joburg's growing population

Pension funds in South Africa do not have any exposure to the residential property market but this is likely to change in the future, according to property economist Francois Viruly.

Viruly, the head of the school of construction economics and management at Wits University, said last week that as far as he knew, South Africa was the only developing country where government pension funds were not heavily invested in residential property.

However, Viruly had no doubt that South Africa would have listed residential property funds in the future, adding that two such funds were already in the making.

The Catalyst property group intended to launch South Africa's first listed residential fund, to be called Habitat Property Investments, in 2004 but the plan was scrapped due to a lack of institutional interest.

Andre Stadler, the managing director of Catalyst Fund Managers, said the company was not working on any residential fund listing.

Stadler said the key limitation of a listed residential fund was that it was competing with other investment options on a yield basis. The yields of commercial property funds were on a par with long-term bonds, but residential funds could not achieve that yield.

Stadler said residential funds also operated differently to commercial property funds, which added to the risk.

There was no benchmark for rentals and the management intensity of a residential fund required a specific platform to do it efficiently from a cost viewpoint.

Stadler said South African pension funds had been invested in the residential property market about 30 years ago but rent control had put a huge damper on those investments.

Speaking at an SA Property Owners' Association brokers forum, Viruly said forecasts suggested the population of Gauteng would grow by between 10 million and 20 million people by about 2040 and the example of what had happened in other cities, such as Sao Paulo in Brazil, meant high-rise apartments would become more prevalent.

Viruly said developers could choose how high-rise residential apartments were structured in South Africa.

These could be integrated developments with retail and other business opportunities attached to them, turning them into an asset class.

"I have no doubt in the next 10 years this is going to happen. If we do it properly, we can create an asset class."

Viruly said the risk in the commercial property market currently was that rentals were stalling and operating costs were "going through the roof".

Operating costs were moving beyond 40 percent of gross rentals to about 50 percent, he said, because of steep increases in electricity tariffs, rates and taxes and other related municipal charges.

He said the only way to get around this was to raise rentals but there was resistance from tenants, and rising vacancies.

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