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Investors should diversify assets to ride the affordable housing wave

Institutional investors should look to the robust return opportunities provided by relatively untraditional asset classes such as affordable housing funds, which continue to expand as a result of the unmet high demand for homes, especially in emerging economies.
 
The affordable housing sector is rapidly growing in South Africa and is proving its mettle in terms of solid track records and transparency, coupled with superior returns.
 
Soula Proxenos, Managing Partner at International Housing Solutions, the global private equity provider who pioneered the large-scale investment in the development of affordable housing in South Africa, says investors should cast their vision wider in search of greater returns in industries that have proven themselves over a period of time.
 
“With international investors now starting to invest in Africa, they are bringing with them the knowledge that affordable housing is a proven asset class in emerged markets,” Proxenos says.
 
As noted at the recent Investment Property Databank conference, property has emerged as the warrior asset class, moving into the investment mainstream. Statistics show that investor appetite for various segments of real estate strategies (low risk to high risk) has grown about 20% overall globally since January 2011.
 
While the attraction applies to property in general, the niche sector of the market - the provision of affordable housing - makes even more investment sense.
 
“There exists a tremendous backlog of affordable homes in sub-Saharan Africa, because of the explosive growth of the middle class in the past decade, as well as urbanisation. Investors are right to be cautious, as it requires skilled and experienced operators to mitigate risk; however this hesitance is easily addressed by ensuring due diligence investigations into reputable companies with proven track records.
 
“Some investors looking for good long term investments are very attracted to property. Some shy away from property because it requires longer term investment, but it remains attractive and the sector has delivered far above par each year over the past decade,” Proxenos notes.
 
Currently, IHS is in the process of expanding its footprint into sub-Saharan Africa – following the significant success of its first fund, the US$230 million South African Workforce Housing Fund. So far, IHS through this fund has provided financing for over 28 000 units with a combined total value of more than R8.6 billion.
 
IHS was the first international institutional investor to recognise the potential of developing affordable housing, also called gap housing, in African markets. In doing so, it not only opened up a valuable new sector for its investors, but ensured that thousands of families were able to afford a home of their own and start their journey to wealth creation through property ownership.
 
The company has now received its first multi-million dollar commitments to its second fund from the National Housing Finance Corporation (NHFC), established in 1996 by the National Department of Human Settlements as a Development Finance Institution, with the principal mandate of broadening and deepening access to affordable housing finance for the low-to-middle income South African households; and IFC, a member of the World Bank. The two committed more than half a billion rand to IHS Fund II.
 
“We believe it is time for investors to demand their financial managers at least consider the sector as an investment option. By increasing their exposure away from historically favoured but non-performing assets, investors have an opportunity to start seeing real investment performance.
 
Proxenos says IHS’s investment strategy remains to increase the stock of modestly priced housing, helping to eradicate the huge and growing backlog in sub-Saharan Africa, while offering an investment with great returns. This is a good news story for Africa—evidenced by the growth of the middle class and large scale urbanisation*—however the consequence is a huge deficit in housing stock.  On the continent countries with robust property rights and mortgage markets can address this deficit with private sector investment.
 
“Our second fund offers an attractive investment opportunity and we believe that it will also have a significant positive social impact as did the SA Workforce Housing Fund. We have so far committed more than US$230 million to ensure the large-scale provision of housing stock in the affordable sector in emerging markets, and have seen superior risk-adjusted returns being achieved with the outlook of potentially doubling investors’ capital.”
 
* May 2013 UCT/Unilever Institute Report: 4,000,000 & Rising


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