Real estate investor carves out profitable niche in affordable housing in Africa

by MMC
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Rob Wesselo

Interview with Rob Wesselo

Lives in: South Africa

While many property developers shy away from affordable housing, Johannesburg-based International Housing Solutions (IHS) has developed a cost-effective model for such projects in South Africa and beyond. In a conversation with Jeanette ClarkIHS Managing Director Rob Wesselo discusses the reliability of low-income tenants as rent payers compared to wealthier tenants, reveals the company’s sweet spot for development size and explains its position prudent when it comes to investing in the Johannesburg CBD.

South Africa faces a persistent housing shortage, partly due to apartheid-era policies. In 1994, the housing deficit was estimated at 1.2 million units. Despite the government’s efforts, notably the reconstruction and development program and its evolution towards innovation policy, the deficit has widened. increased to over 2 million units.

Interventions such as the First Home Finance grant target affordability, but housing stock remains low, with the total number of units in the affordable housing segment declining over the past five years. According to Center for Affordable Housing Finance in Africa (CAHF)It would be rare to see a private developer constructing housing that would sell for less than R750,000 (approximately US$40,800), as these developers “believe the cost of the project is not viable” with insufficient profit margins.

Defying industry norms, Johannesburg-based private equity fund manager International Housing Solutions (IHS), however, has built a model for profitably developing affordable housing in South Africa and beyond. The company was founded in 2005 by Cathal Conaty who realized the potential of affordable housing as an investable asset class.

According to IHS managing director Rob Wesselo – who joined the firm in 2010 after a career as a lawyer and roles in property development companies and real estate divisions of major South African banks – affordable housing is a defensive asset class with good growth potential.

IHS raises money from investors, such as development finance institutions (DFIs) and pension funds, to build affordable housing at prices starting at R630,000 (about $34,700). The company earns revenue from its funds through the sale of individual units and rental income. Additionally, for developments in which units are rented, IHS sells the entire development at the end of a fund’s life cycle.

To date, IHS has raised more than 740 million US dollars through six funds and launched a listed real estate investment trust (REIT). It also extended to Namibia, BotswanaAnd Kenya.

DFIs investing in IHS funds may be impact investors, but they still expect an appropriate return on investment, often comparable to commercial returns, Wesselo says. He says returns vary from fund to fund, but declines to disclose specific numbers. However, a case study by the Impact Investing Institute reveals that IHS’s Fund II South Africa has a target gross internal rate of return (IRR) – the annualized effective compound rate of return – of between 20% and 22%.

Wesselo says his passion for real estate stems from its tangible nature: the bricks and mortar that become the backdrop to people’s lives after construction. “It’s such a nice, sensitive asset,” he notes. “I was a lawyer before getting into this profession, and the differences are enormous. I just love the reality of this asset class and I love how it impacts people, especially in our market.

A reliable market, if properly managed

Wesselo says affordable housing is a large market with high demand. IHS has not faced significant non-payment or occupancy issues. Even amid the Covid-19 pandemic, occupancy rates remained robust, never falling below 89%. He cites TPN Credit Bureau data which shows that individuals with lower incomes tend to be more regular in paying their rent, while those earning 25,000 rand (about $1,360) or more often have poorer payment history.

However, he highlights the need for thorough credit checks on potential tenants and effective property management, without which things can go “horribly wrong”. IHS operates an activity dedicated to real estate management with more than 200 employees. Managing thousands of tenants across his portfolio, Wesselo describes property management as the “hardest part” and “a very hands-on business”.

Country-specific dynamics

In all markets, IHS has found its “sweet spot” by developing residential buildings ranging from 200 to 400 units. Despite initial skepticism from some countries, demand for these units has remained strong. “We were told (for example) that Namibians would not live in these (apartments). Ultimately, it’s all about price. If you can create quality equipment in places that keep people safe, we’ve found that the demand is high.

While this may be a reliable strategy for the four countries where it operates, the company tries to understand each market and adapt to economic conditions and residents’ preferences.

For example, in the area of ​​individual houses, generally more suitable for sale rather than rental, smaller plots of 350 m22 at 400m2 with a 200m2 house are particularly popular in South Africa, Namibia and Botswana. In Kenya, due to land availability and costs, IHS focuses on building apartment buildings of up to eight stories, which are taller than those in its other markets.

An IHS development in Cape Town, South Africa

Despite the challenging conditions in South Africa, including the electricity shortage, Wesselo maintains that IHS still views the country as a viable market for continued operations. He notes significant growth potential in neighboring Namibia, supported by the success oil exploration off its coast.

Wesselo describes Kenya as a dynamic economy that, despite fiscal challenges, has experienced strong growth. There has also been a notable rise in property prices in the East African country. However, he highlights a key difference: unlike other IHS markets, Kenya’s mortgage sector is particularly underdeveloped. Limited access to mortgages means Kenya is primarily a rental market

Changing Investor Sentiment

The industry has come a long way, Wesselo says. In the early days of the business, local South African investors did not understand this asset class. Global investors, on the other hand, have recognized the potential returns from affordable housing, but have remained cautious about South Africa as an investment destination.

Sentiment has changed as IHS now counts large pension funds such as the Namibian Government Institutions Pension Fund (GIPF) among its investors.

Since “green” affordable housing became its focus, IHS’s investor base has further expanded to include climate-focused impact and ESG investors. For example, some of the major investors in the company’s IHS Kenya Green Affordable Housing Fund are the UK Climate Resilience Program, the European Investment Bank and the International Finance Corporation (IFC). All units built by IHS are certified green, in accordance with the EDGE standard developed by the IFC in 2016. The EDGE standard focuses on three areas: water consumption, electricity consumption and materials used in construction .

Red flags in affordable housing

However, not all affordable housing projects are guaranteed to be successful.

Wesselo specifically mentions avoiding investment in city center projects in Johannesburg’s central business district (CBD). Despite the dire need for affordable or social housing in the region, the risks – amplified by poor municipal management and inadequate services – are too great.

A striking example of these risks occurred in August 2023, when a fire in neglected building in the CBD left more than 70 dead. The incident highlighted the desperate shortage of viable housing options, with many abandoned buildings illegally occupied and rented by criminal syndicates. Earlier this year, the City of Johannesburg Forensic and Investigation Services Unit had 188 active cases open involving such hijacked buildings. Furthermore, Wesselo points out that some South African local authorities, notably Johannesburg, do not adjust utility prices for affordable and social housing projects. “You could pay the same sanitation costs in a CBD apartment as a huge house in Bryanston,” he says.

According to Wesselo, these conditions create systemic risks in the region, as they could lead to insurers not covering developments and banks not providing financing.

IHS also avoids large-scale government projects, such as military housing. These projects often fail due to the difficulties encountered in obtaining sufficiently serviced land capable of accommodating a large number of units (often in excess of 10,000), elevating the risk beyond the company’s comfort level. “We had a project in our first fund where we waited more than ten years for electricity, (which) was (already) certified,” Wesselo recalls.

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