He says research by institutions and by Catalyst, which is aiming to list South Africa's first residential property income fund, Habitat Property Investments, in November, clearly shows houses have outperformed other asset classes since the 1980s.

He says a report by Investec Securities covering the period from 1981 to 2002 shows an 18.5% total return was achieved by houses.

"This compares with returns of 16.2% for JSE-listed equities, and 14% for bonds and cash over the same period. The Investec report also shows that even over a shorter period, from 1994 to 2002, houses delivered the best return," Boonzaaier said

This was 18.2%, ahead of equities at 13,1%, bonds at 15.9%, cash at 13% and property loan stock companies at 14.9%. Boonzaaier says Absa, which is expecting average house price growth of 18% in nominal terms this year, is forecasting residential rental growth of 7.5% to 10.5% over the next 15 years.

He says Rode and Associates is expecting growth in flat rentals of 9.2% yearly for the next five years in contrast to about 7% yearly for office and industrial rentals.

"Increased demand for rental units is being fuelled by strong growth in house values.

Other forces driving growth in the residential market include the increase in investor demand due to strong historical performance, a net shortage of properties, the lower interest rate environment, and the increasing entry of previously disadvantaged communities into the formal housing market.

"Rapid urbanisation, continued growth in real disposable incomes and an expectation of a decrease in average number of inhabitants per household are further influences."

He says these factors reduce the risk profile of a residential property fund like Habitat. Habitat's rental income is derived from a larger spread of individual tenants and the individual properties are far more liquid than those in a commercial portfolio.

"Residential rental growth is expected to outpace commercial growth by a wide margin over the next couple of years - and that will come at a lower level of risk to the investor. Moreover, residential property does not follow the same economic cycle as commercial property, giving the investor appealing diversification benefits," Boonzaaier says.

Habitat, structured as a property loan stock company with a yield of 12% and a projected total annual return of more than 20%, will have an initial portfolio worth around R400 million and will look to grow that rapidly to R1 billion, he says.

"It plugs a gap in South Africa's property investment sector. Residential property currently plays no part in the South African listed property sector. In contrast, it makes up 26% of all listed property in the United States and 10% in Europe. The largest listed residential fund in the US is worth more than $7 billion.

Habitat is investing in existing and new residential properties, including medium and high density flats, houses and townhouses, and some student accommodation, to secure a growing rental income stream and capital growth. The initial portfolio is spread across Gauteng, the Western Cape and KwaZulu-Natal