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A social impact with financial benefits: Futuregrowth invests R625m in the Gauteng housing market

Futuregrowth Asset Management is doing its part in stimulating the economy of Gauteng with an investment of R625 million into major housing projects in the lower- to middle-income sector. The investment is with housing specialists, the Cosmopolitan Group. The investment results in more than 20 000 Gauteng families becoming first-time home owners, which in turn creates wealth, increases employment opportunities and ultimately leads to real economic growth. David O’Sullivan spoke to Thina Tiyo from Futuregrowth about the investment in the housing market and its long-term benefits from not only a financial perspective, but also a social perspective. – David O’Sullivan

Tina, spell out for us the investment by Futuregrowth Asset Management of R625m in major housing projects, what’s involved here?

The company we funded is called Cosmopolitan Projects. They’re a housing developer and invest in Gauteng. They have a number of developments in and around the Johannesburg CBD and Tshwane, and what they do essentially is build houses for the lower to middle income sector. These are houses ranging in price at about R450 000 and this is really the affordable housing sector, and are for a household that has a gross income of about R10 500 to R30 000. So really it’s first time home owners starting out in the market and effectively building their wealth and being able to start sooner than later.

This is something Futuregrowth Asset Management has done before, you’d know that this is a good investment don’t you; you have a bit of history here?

Yes, exactly we do. We’ve funded Cosmopolitan before, although in that instance we funded them with NURCHA, the National Urban Reconstruction and Housing Agency and that was to fund a specific project namely Protea Glen close to Soweto, but in this instance, this is really the first opportunity we’ve had to actually fund Cosmo for all of their funding for the next eight to ten years. The R675m will be used to effectively build about 20 000 houses for the majority first-time home owners as I mentioned and yes, this is really tuned to help them along their wealth creation journey so to speak.

Is that the reason for doing it; is it part of the social impact?

Exactly, so we really focus on developmental assets, those that have a very high impact and we have funds that are mandated to do investments of that kind. However, in our allocation of these deals we actually allocate across the board to many of our funds and in the end the pension fund clients are the ones benefiting, and even though we are looking for the social returns, we do these at market-related rates, at risk-adjusted rates because ultimately the people that benefit, that being the pension fund clients, at the end, they need to be adequately rewarded, so to speak for the risk that they’re taking on in these investments.

I can see the social return, what’s the financial return?

We do a deep credit due diligence, we look at the financial metrics, we look at the company’s operations. In Cosmo’s case, they have a very strong marketing arm and so that also educates where they build and how they build and where they buy the land to build on, so we’ve looked at that process as well specifically in this instance. We look at management, we want to understand the business intimately and to be able to understand what that level of return that we need to benchmark the investment.

It’s an interesting sector to be in because demand for housing in the lower to middle income sector, it outstrips supply doesn’t it?

Yes, that’s very true. Urbanisation is still a real phenomenon. Johannesburg (Gauteng particularly) is a huge economic hub and so you see people still moving into those areas and Cosmo really looks to build within the CBD area, so that people aren’t using too much of their income in terms of transport costs and where you’re saving and particularly in this economic environment where there are consumers under enormous pressure, living close to places of work is really ideal. Therefore, Cosmo, as I mentioned would look through their marketing where the demand really is, what kind of development would be suitable for that area and that will inform how and where they build.

What specifically does Futuregrowth Investment fund?

The funding is for the next eight to ten years and what Cosmo provides is a full spectrum of services that they provide. In the housing sector, they will buy the land, they will prepare the land, get local council approvals, the town planning, and install external and internal services (sewer pumps, storm water drains, electricals, they do the road networks and so on). Basically our funding will prepare the land up to the point where Cosmo can actually build a house on it for a consumer.

To what extent does Futuregrowth have oversight of the project? Often we’ve seen housing developments in the lower and middle income area being rather shoddy, falling apart, and being substandard. You would obviously want to have good quality houses being built in good areas done properly.

That’s true. We looked at their processes in detail and I think also importantly, Cosmo has been in this space for the past 20 years, they’ve delivered about 18 000 houses to the market and going forward they’re looking at doing 2,000 to 2,500 per year. I think just to add; in the process they have certain warranties and guarantees for the consumer (things like water pipe leaks, electrical problems). Also importantly Cosmo is part of the National Home Builders’ Registration Council, the NHBRC and as part of their membership there, they provide a five-year warrantee on certain aspects of the build. Those controls are in place and we take comfort from that as well. To date we haven’t, to our knowledge heard of a major upset.

We’re talking about houses here, what about other amenities, schools, shopping centres for example, within those communities?

In the developments, I’ll make an example of Watervalspruit, which is a new development that Cosmo is going to undertake as part of this funding. They’ve set aside a certain number of stands for a development of a school, they’ve set aside stands for a retail hub, and they have community development areas. It’s really integrated living, they try and build communities where people are living there, they enjoy living there and it’s close to places of work, and they have schools in the near vicinity. Waterval for example, has a number of schools within a five kilometre radius, they have churches, police stations, so really to make living there as pleasant as possible and to have these things close to the consumer.

Are you not concerned about house price inflation underperforming? I’m looking at a quote here from Andrew Golding, the Chief Executive of the Pam Golding Property Group and he mentions that house price inflation in Gauteng has underperformed the national index in recent years because of the subdued economic environment, what are your thoughts there?

Yes, that is a concern and I think that going back to what you said about the quality of these houses, that in itself, because ultimately the security here for our investment is the house itself. So Cosmo building quality houses, I think that helps to alleviate some of that risk if you think about the fact that there is a huge backlog, so in Gauteng particularly you hear the backlog is about 850 000 units. The backlog really is part and parcel of driving the market in the Gauteng province, so I think yes, it’s a risk, but for the years to come the market will still be growing at quite a good pace.

Are you targeting specifically areas around Gauteng because that’s their economic hub?

Yes and that’s also partly due to Cosmopolitan’s target being in those areas. They have developments in Johannesburg, a number of them; there’s Protea Glen, which is close to Soweto, there’s Windmill Park in the East of Johannesburg and then they also have some developments in Tshwane. Additionally to these houses they have an arm in the group that does rental housing for instance. They have a retirement village, also investments, so it’s really an integrated business with investments over a whole spectrum of housing assets.

It seems to me to be quite a worthy form of investment and I mean that in the best possible sense. There’s a return obviously for you, but at the same time you’re stimulating economic growth, you’re assisting the lower to middle income group. It seems to be a win-win on all levels.

Yes, it really is and I think through our other investments as well, where we fund for example, mortgage lenders, we’re looking at the lower to middle income class and effectively elevating and creating wealth in that sector. These are people who probably wouldn’t have been able to afford houses as soon as they can, but the interventions that these companies are making and trying to supply housing to these people, it’s really great and it’s wealth creation, it’s social upliftment, it’s what this country really needs.

It’s giving people an upward mobility because once they’re first-time homeowners, ultimately they’re able to use that and trade up in the property market.

True and the key is it’s giving it to them sooner than they would have been able to get that point before.

How do you see the longevity of this type of investment?

We previously funded them, as I mentioned for Protea Glen and Soweto and they’ve fully repaid that investment. This R625m loan now is for a five-year term, but after that term we are open to negotiations and so on, but for at least the next five years we are going to be involved with Cosmo and it’s a good business and we haven’t had any issues to date.

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