Real estate investor carves profitable niche in African affordable housing

Rob Wesselo

Interview with Rob Wesselo

Lives in: South Africa

While many real estate developers avoid affordable housing, Johannesburg-based International Housing Solutions (IHS) has crafted a profitable model for such projects in South Africa and beyond. In a conversation with Jeanette Clark, IHS managing director Rob Wesselo discusses the reliability of lower-income tenants as rent payers compared to wealthier ones, reveals the firm’s sweet spot for development size, and explains his cautious stance on investing in Johannesburg’s 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 government efforts, including the Reconstruction and Development Programme and its evolution into the Breaking New Ground Policy, the shortfall has grown to over 2 million units.

Interventions like the First Home Finance subsidy address affordability, but housing stock remains low, with total units in the affordable housing segment declining over the past five years. According to the Centre for Affordable Housing Finance in Africa (CAHF), it would be rare to see a private developer building housing units that would sell for less than R750,00 (about US$40,800) as these developers “feel the project costing is not viable” with inadequate profit margins.

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

According to IHS managing director Rob Wesselo – who joined the firm in 2010 after a career as an attorney and roles in property development firms and the 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 homes with prices starting at R630,000 (about $34,700). The firm earns revenue for its funds through the sales of individual units and rental income. Additionally, for developments where units are rented out, IHS sells the entire development at the end of a fund’s lifecycle.

To date, IHS has raised over US$740 million across six funds and launched a listed real estate investment trust (REIT). It has also expanded into Namibia, Botswana, and Kenya.

The DFIs who invest in IHS’ funds may be impact investors but they still expect a proper return on their investment, often on par with commercial returns, explains Wesselo. He says the returns vary from fund to fund, but declines to disclose specific figures. However, a case study by the Impact Investing Institute reveals that IHS’ Fund II South Africa has a target gross internal rate of return (IRR) – the annualised effective compounded return rate – 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 for people’s lives post-construction. “It is such a nice, feely-touchy asset,” he notes. “I was a lawyer before I got into this, and the differences are huge. I just like the reality of the asset class and love the way, particularly in our market, the way it impacts people.”

A reliable market, if managed properly

Wesselo says affordable housing is a vast market and with high demand. IHS hasn’t faced significant issues with non-payment or occupancy. Even amidst the Covid-19 pandemic, occupancy rates remained robust, never falling below 89%. He points to TPN Credit Bureau data that shows individuals with lower incomes tend to be more consistent in making rent payments, whereas those earning R25,000 (about US$1,360) or more often have poorer payment records.

However, he emphasises the necessity of conducting thorough credit checks on potential tenants and effective property management, without which things can “go horribly wrong”. IHS operates a dedicated property management business with over 200 staff members. Managing thousands of tenants across its portfolio, Wesselo describes property management as the “hard part” and “a very hands-on business”.

Country-specific dynamics

Across all markets, IHS has found its “sweet spot” in developing apartment blocks ranging from 200 to 400 units. Despite initial scepticism in some countries, the demand for these units has been strong. “We were told [for example] that Namibians won’t live in these [apartments]. At the end of the day, it is all about [the] price point. If you can create quality amenities in places for people to be safe, we have found that the demand is high.”

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

For example, in the realm of standalone homes, typically more suitable for outright sale rather than rental, smaller plots of 350m2 to 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 constructing apartment buildings up to eight stories high, which are taller than those in its other markets.

An IHS development in Cape Town, South Africa

Despite difficult conditions in South Africa, including the shortage of electricity supply, Wesselo maintains that IHS still sees the country as a viable market for continued operations. He notes significant growth potential in neighbouring Namibia, buoyed by successful oil exploration off its coast.

Wesselo describes Kenya as a dynamic economy that, despite fiscal challenges, has experienced strong growth. There has also been notable rise in house prices in the East African country. However, he points out a key difference: unlike in IHS’s other markets, Kenya’s mortgage industry is notably underdeveloped. The limited access to mortgages means that Kenya is predominantly a rental market

Changing investor sentiment

The industry has come a long way, says Wesselo. In the firm’s early days, local South African investors didn’t understand the asset class. Global investors, on the other hand, recognised the potential returns from affordable housing but remained cautious about South Africa as an investment destination.

Sentiment has changed to the extent that IHS now counts large pension funds like the Namibian Government Institutions Pension Fund (GIPF) amongst the investors in its funds.

Since making ‘green’ affordable housing its focus, IHS’ investor base expanded even further to include impact and ESG investors with a climate focus. For example, some of the cornerstone investors in the company’s IHS Kenya Green Affordable Housing Fund are the UK Climate Resilience Programme, the European Investment Bank, and the International Finance Corporation (IFC). All the units built by IHS are certified green, aligning with the EDGE standard devised by the IFC in 2016. The EDGE standard focuses on three areas: water usage, electricity consumption, and the materials used in construction.

Red flags in affordable housing

However, not every affordable housing project is guaranteed to succeed.

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

A stark example of these risks occurred in August 2023, when a fire in a neglected building in the CBD claimed over 70 lives. The incident highlighted the desperate shortage of viable housing options, with many abandoned buildings illegally occupied and rented out by criminal syndicates. Earlier this year the City of Johannesburg’s Group Forensics and Investigation Services had 188 active cases open involving such hijacked buildings. Additionally, Wesselo points out that some South African local authorities, including Johannesburg, do not adjust utility prices for affordable and social housing developments. “You could be paying the same sewerage costs in an apartment in the CBD as what a huge house in Bryanston is paying,” he says.

These conditions, Wesselo argues, create systemic risks in the area because it could lead to insurers not covering developments and banks not providing funding.

IHS also avoids large-scale government projects, such as military housing. These projects often stall due to challenges in securing adequately serviced land capable of accommodating large numbers of units (often above 10,000), elevating the risk beyond the company’s comfort level. “We had a project in our first fund where we waited over ten years for electricity, [which] was [already] certified to be there,” Wesselo recalls.

IHS managing director Rob Wesselo’s contact information

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