Is Octodec safe as houses?

Property stocks that offer access to the lucrative income streams from student and affordable rental housing portfolios are few and far between.

In fact, residential property represents less than 2% of the assets owned and managed by the JSE’s real estate investment trust (Reit) sector. 

And there are no longer any specialist rental housing plays listed on the local bourse after Transcend Residential Property Fund and Indluplace Properties were recently swallowed up by two diversified Reits — Emira Property Fund and SA Corporate Real Estate respectively.

Octodec Investments, which was founded by the Wapnick family more than 25 years ago, owns and operates one of the largest rental housing portfolios in Gauteng. So it’s no surprise that the company has a loyal following of boutique asset managers and retail investors, despite its small-cap status.

The Reit, which has a large exposure to the inner cities of Tshwane and Joburg, has a market cap of only R2.5bn, which excludes it from key listed indices such as the benchmark all property index. That means it doesn’t necessarily garner support from the bigger institutional investors.

Still, its portfolio of more than 9,000 rental apartments offers investors the opportunity to diversify their real estate exposure away from the usual mix of office, retail and industrial buildings, as it tends to have different demand and growth drivers.

Octodec doesn’t invest exclusively in residential bricks and mortar, but rental housing represents 34% of its R11bn portfolio and is an important income growth sweetener.

The Reit’s portfolio is further split among inner-city retail (24%), shopping centres (12%), offices (18%), industrial (7%) and parking (5%).

As Naeem Tilly, portfolio manager & head of research at Sesfikile Capital, puts it: “Though Octodec does not specialise in one single sector, it has a significant residential portfolio which is performing exceptionally well.”

Tilly says that while some may perceive the company’s exposure to the Joburg and Tshwane CBDs as risky, Octodec has proved itself to be one of the best managers of assets in these nodes. “The company’s track record in inner cities spans decades. Few people understand and manage assets in these areas as well as Octodec.”

In addition, it’s hard to ignore the Reit's value proposition. Tilly says Octodec trades at one of the highest distributable income yields in the Reit sector, at about 17.5%.

Results released this month underscore the strength of its residential portfolio, which spans 65 buildings that cater mostly for low- and middle-income families in the inner cities of Tshwane and Joburg, as well as a large student development near the University of Pretoria.

The residential portfolio achieved a decent 5.1% year-on-year rental growth for the six months to end-February. That compares with 1.7% and 2.7% like-for-like rental growth recorded respectively by Octodec’s inner-city retail and suburban shopping centres over the same period. Rentals in the office portfolio dropped by 2.1%.

Octodec MD Jeffrey Wapnick says rental income growth of 3.1% came primarily on the back of an improved residential performance. “It demonstrates the resilience of Octodec’s housing portfolio, considering the significant pressure that high interest rates and unemployment levels have placed on South African consumers,” he says.

At The Fields, Octodec’s student housing development in Hatfield, vacancies dropped from 23% to 7% (by April) after the government-backed National Student Financial Aid Scheme finally approved policy changes earlier this year. 

Though Octodec does not specialise in one single sector, it has a significant residential portfolio which is performing exceptionally well

—  Naeem Tilly

However, vacancies have increased in some of the company’s Joburg buildings near Lilian Ngoyi Street; these are undergoing repairs after last July’s gas explosion in the area.

Wapnick adds that the Joburg CBD has become a tougher environment for landlords than the Tshwane CBD due to local council issues, poor municipal service delivery and water and electricity outages.

Another worry is rising vacancies at the 47,470m² Killarney Mall just off the M1 near Houghton, which is Octodec’s largest retail asset after Woodmead Value Mart.

Nearly 18% of the centre is standing empty. Wapnick concedes that efforts to reposition the mall in recent years haven’t been successful. “We are still trying to work out who the shopper is and how to adjust the tenant mix accordingly. A sale or a refurbishment is on the cards.”

Despite Octodec achieving an overall uptick in rental revenue, distributable income per share dropped by 6.4%, primarily due to higher property and administration expenses across the portfolio.

Wapnick hopes to contain operating costs as the company continues to introduce backup power and water solutions across its portfolio. 

“Most importantly,” says Wapnick, “we have maintained dividend payouts at last year’s 60c a share.” 

This week, Octodec was trading at R9.60, which is nearly 40% below its pre-pandemic levels of R15 and a discount to NAV of a sizeable 60%. 

Some analysts say there’s a reason the stock is so cheap. Luqman Hamid, portfolio manager at Ninety One, says the yield is attractive but comes with a fair amount of risk. “The residential portfolio has started to rebound, but Octodec’s shopping centres, offices and industrial buildings continue to be under pressure.”

Hamid adds that Octodec’s loan-to-value of 38.5% is elevated and the company doesn’t offer a rand hedge quality. “So its portfolio is largely at the mercy of the local economy,” he says.