Aligned interests: the case for institutional investment into multifamily residential rental in South Africa

South Africa’s multifamily residential rental sector is an increasingly robust, demonstrably resilient, and qualitatively rewarding sector bringing positive, stable returns to investors and promising a pipeline of developments that surpass ESG expectations while delivering high quality accommodation to a market that is currently underserved. The offering has shifted in recent years from simple accommodation for rent to a full lifestyle concept known as ‘convenience living’ with access to a suite of additional amenities. The market has responded such that vacancies and arrears are moderate and manageable. At the local level, these developments are contributing to urban regeneration and a positive fiscal benefit to their local authorities, supporting good urban management and changing the face of South African cities.

According to StatsSA, 4.5 million households (23% of South Africa’s population) rent the homes they live in. Of this population, 15% (about 685,000) households rent their home in a block of flats – an effective 3.5% of the total South African population.1 This [flats / apartments] segment is used as a proxy for multifamily residential rental in this report (note: flat living also includes student housing and housing for senior citizens, neither of which fall into the multifamily rental definition). The figure for 2023 is up 9% on the 631,000 households who reported renting their flats in 2018, suggesting the delivery of 54,000 new rental units in blocks of flats, in the five-year period.

With thirteen members owning and operating over 75,000 units in South Africa, the South African Multifamily Residential Rental Association (‘SAMRRA’) represents an estimated 11% of the multifamily rental market, across close to 550 separate properties. Like their counterparts in the UK, multifamily residential rental or ‘build-to-rent’ developers are particular about the market they are developing – well-located, amenity-rich, solidly managed, good value for money. This housing type is unique in the wider private rental sector, and historically, has not been well-tracked by analysts.

There are at least five reasons for investors to diversify and grow their portfolios by investing in this asset class:

1. Demand: The units attract quality demand with low levels of default and low vacancies that are themselves easily filled with an established waiting list.

2. Supply: Multifamily residential developers and landlords are trailblazing a new form of rental that has been gaining popularity in the United States, Australia, Europe and the UK – leveraging off the latent value in South Africa’s wider real estate market and the improved performance of residential over office and commercial property.

3. ESG: Multifamily scores high across all ESG metrics both in terms of risk management and impact, offering investors comfort that they will be able to themselves fulfil their ESG goals.

4. Experience: With over 75,000 units currently under management among the SAMRRA membership, property management expertise is developing, leveraging the benefits of evolving technology, and maximizing on economies of scale.

5. Quality, track record and pipeline: MSCI reports that the multifamily residential rental sector consistently outperforms office and commercial real estate and is second only to industrial real estate primarily on a risk relative return basis.

In 2022, residential property was the only sector to record improved NOI yield, raising its performance above retail and on par with the all-property figure. While cap rates are somewhat higher than for other asset classes, MSCI believes this suggests the need for a re-pricing, offering further opportunities for new investors. A pipeline of developments suggests that the sub-sector is only growing, honing its experience and building a new style of urban living across South Africa.

A significant barrier to investment in the multifamily residential rental sector, however, is the very limited availability of data on size, character and track record of performance, and segmented by quality, type, and target. Various data sources that do exist offer market data in the aggregate, but do not isolate the multifamily residential market specifically, and do not distinguish between sub-segments of the private rental sector overall.  International experience has demonstrated real differences in performance between sub-markets that warrants a more detailed tracking and analysis. Investing in this as a collective, the multifamily sector in South Africa could substantiate the case for investment and attract needed capital into its plans for growth, which the demand-side of the market could readily absorb.

This report was prepared with the support and funding of the South African Multifamily Residential Rental Association (SAMRRA), Divercity Urban Property Group, and Absa Commercial Property.