[TOP STORY] Providing gap capital for student accommodation

SIMON BROWN: I’m chatting now with Vusi Mahlangu. He is a partner at Tamela Capital Partners. Vusi, I appreciate the early morning time. You and your team recently provided some capital for student accommodation in Stellenbosch. This is purpose-built for students. I’m seeing a lot of it. I’m up here in in Johannesburg around Braamfontein, UJ and Wits, where a fair bit has been focused on dedicated student accommodation.

VUSI MAHLANGU: Good morning. Yes, you are correct. I think this is purpose-built student accommodation for students who are mostly at universities. All that means is that it provides an all instances facility for a student, so things like internet, study areas, transport, security. Those are some of the things that make this slightly different just any normal flat which has been been converted. If you actually go to one of those facilities, it has a feel and look of being actually inside a student residence, as opposed to just renting a flat that is close to a university.

SIMON BROWN: And in this case the accommodation is called The Digs, which kind of sums it up per perfectly. From an investment perspective, accommodation, shelter call it what you will, is typically fairly resilient. We all need to live somewhere. I imagine [for] student accommodation [it is] even more so. You put it right next to the university. There are always going to be new students every year. It’s going to be fairly resilient, notwithstanding the pandemic that we saw in 2020 and 2021. Outside of that, it’s a fairly resilient sector to operate in.

VUSI MAHLANGU: Absolutely. One of the things that’s quite interesting is that even in the height of the pandemic when students were not going on campus, and one would have expected them to want to go back home, actually they didn’t want to go back home. If you just imagine that you were an 18-year-old looking forward to leave home to go and stay on their own, the attractiveness of actually having your own space and the fact that this accommodation caters for all of a student’s needs actually made it very resilient during Covid. So we found students who stayed. They had access to the internet. They had a community around them, and could have as normal a life as one could have even during Covid.

I think the income absolutely is not correlated to most properties. Some of the models there charge over a 12-month period, some charge over 10 months. But there is a general requirement or general occupancy that is quite high. I think the…at some stage were close to 100% in terms of occupancy rates.

SIMON BROWN: And the investments that you make from Tamela Capital Partners, this is debt funding, not equity at all?

VUSI MAHLANGU: That is correct. If you just think about South Africa in the world, debt or private debt is one of those asset classes gaining a bit of momentum. So we are not equity providers, but we are actually debt providers, and we require those entities or those businesses where the party has capital and the bank is willing to give them some capital – but there is a shortfall. Unfortunately the shortfall, you can’t not complete the project or you cannot complete the acquisition or you cannot buy the plan because you are short of 10%, 20%, 30% of what’s required. This is precisely where we come in.

We want to provide that additional funding [to what] you can otherwise raise from a traditional bank, also using your own equity or even selling shares to raise that capital.

SIMON BROWN: Okay. I was wondering how you fitted in with the banks. Do you then work with the banks, or are you still working with the companies? For example, a bank would say, well, he has 70%, and then approach you? Or do the banks kind of work in … with you?

VUSI MAHLANGU: It’s a combination of both. On some of the transactions that we look at, the party will come to us and say, “I’ve raised 70% from the bank, so I need 30%. I’ve 10% of my own”.

On some of the transactions we are the ones who say to the party, “This is how much we can provide, how much do you have? Jointly let’s approach a bank to see if we can unlock or raise senior funding”. So our model is quite flexible. We work with both of those models.

SIMON BROWN: And your criteria, your key criteria for investing. Obviously you want return on capital, you need certainty of the ability to pay back. But there must, I suppose, be certain sort of tick boxes, management perhaps, maybe certain sectors that you like to operate in.

VUSI MAHLANGU: I think you’ve highlighted what I think is probably the more important aspect of what we do. I think there are two aspects: there’s the qualitative stuff and the quantitative stuff. I think in the quantitative everybody understands numbers and modeling. But the qualitative is where we spend a fair bit of focus and energy just trying to make sure, firstly, that we understand the space. Do we understand the management team, and is it a management team that we think over the next five to six years we could work with? Our starting point is precisely there.

So we spend a fair bit of time looking at their background, who they are, what they’ve done, what they want to do. And then once we are comfortable around those qualitative aspects of a management team and the business, only then do we go and look at the numbers.

We do obviously have parameters that we want to look at. One of the important ones for us is valuations. If you can imagine where we play in the capital structure, going back to that example of the 70% being senior and the 30% to be funded, it makes a big difference what the 30% or what that 100% is worth. So we do spend some time making sure that we have an understanding of how that company’s value, how that project is going to be funded from a cost point of view – just to make sure that what we are putting in is actually not overpaying for an asset. There is a good saying that you make money when you exit an investment, as opposed to when you make the investment. We firmly believe in that philosophy.

SIMON BROWN: I like the point, and I like the point of ‘people first, numbers second’. They’re both very important, but people [come] first and then the numbers.

We’ll leave it there. Vusi Mahlangu, partner at Tamela Capital Partners, I appreciate the early morning insight.

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