Though Indluplace Properties was off to a strong start in the first two weeks following its listing by the Arrowhead stable in mid-2015, the JSE’s first purely rental housing play hasn’t quite lived up to expectations since then. By the end of 2016, the share price was down about 10% from its post-listing high of R11.65.
However, over the past three months the stock has recovered most of these losses and appears poised for further gains following a major acquisition announced earlier this month. The R475m Diluculo transaction will increase the size of Indluplace’s portfolio by 24% to nearly 7,000 rental flats.
It is the first sizeable deal clinched by the company since it bought nine high-rise apartment buildings in Hillbrow and Joubert Park in the Johannesburg inner city for R420m about 18 months ago.
Analysts ascribe last year’s disappointing share price performance to, among other
things, growth constraints on the back of rising interest rates.
Stanlib property analyst Ahmed Motara says higher funding costs made it difficult for the company to bulk up its assets with yield-enhancing deals. He says the company’s relatively small size (market cap of R2.75bn) and lack of liquidity have been other issues.
“Management’s guidance of 5.5%-6.5% dividend growth for the year ending September (excluding new acquisitions) is also marginally below my expectations, and reflective of a tough operating environment,” says Motara.
Indluplace CEO Carel de Wit concedes that the company has until now been unable to execute on its growth ambitions — but says this was not because of a shortage of stock.
“Last year we had to can a R700m deal because we couldn’t secure debt at the right [price] following the dip in our share price on the back of Nenegate.”
De Wit believes the transaction to acquire Diluculo underlines the potential to grow assets aggressively over time. “We have only scratched the surface, and we haven’t even started exploring deals in other provinces yet.” He is confident that Indluplace will be able to secure bank debt to fund the Diluculo transaction given the company’s low loan-to-value ratio of only 8%.
The portfolio consists of 1,319 residential units and was acquired at a 10.5% yield. The bachelor, one-and two-bedroom units are in seven townhouse complexes and inner city blocks in Gauteng and one property in Bloemfontein. The average rental is R4,000/month.
The acquisition, if approved by the competition commission, will take Indluplace’s total portfolio to 6,830 residential units across 125 properties, valued at R2.875bn.
The enlarged portfolio will be spread across the Johannesburg and Pretoria inner cities, the East and West Rand, Midrand, Centurion, Soweto, Vanderbijlpark and Bloemfontein (see graph).
De Wit says Diluculo is a good fit for the existing portfolio, as it is also varied in terms of location, building and unit type.
“We are catering for a diverse tenant market with a household income of anything between R3,000/month and R17,000/month,” De Wit says. For instance, bachelor flats in Indluplace’s Geraldine Court in Joubert Park in downtown Johannesburg fetch R1,800/month, while two-bedroom units at its Summer Place townhouse complex in Centurion are let for R6,000/month.
De Wit says perceptions that the affordable housing market is characterised by delinquent tenants and high rental arrears is nonsense.
“Our bad debt and arrears book is almost nonexistent. And we have never had to evict a single tenant.”
He says as long as the right property management people are on the ground and effective credit vetting and rental collection systems are in place, the housing market is a lower-risk bet than the office market.
De Wit refers to commercial landlords, many of whom are battling with high vacancies and downward rental reversions on lease renewals.
“Demand for affordable accommodation in secure, clean and well-managed buildings far outstrips supply. That’s underscored by our low portfolio vacancy of 3.2% and annual rental escalations of a healthy 6%.”
Indluplace is trading at a dividend yield of around 9%, which offers a decent premium to the sector’s average of 7.2%.
The company is one of only a few property counters that pay out dividends on a quarterly basis, which is no doubt appealing to income-dependent investors.