12 December 2018
Innovative informal developers offer a solution to South Africa’s housing shortage – yet many investors and those in the property development sector lack insight into its potential.
By Mayra Hartmann
The lack of affordable housing in South Arica is a well-documented problem. The housing backlog reportedly stands at 2.3 million houses and is growing by around 178 000 houses a year. Neither the public nor the formal private sector appears to be able to close this gap.
The consequences of and reasons for this crisis often make news headlines. Less known are the innovative approaches emerging in the rental housing space, and particularly in townships, where property entrepreneurs are quietly getting on with the business of building houses for people who need a roof over their heads – often with minimal support from financial institutions, investors and the formal real estate sector.
These entrepreneurial property developers – sometimes called micro-developers – operate in townships, areas usually characterised by a lack of development. Some research indicates that they are making a healthy 20% return on investment within their first year. In addition, according to the UCT Nedbank Urban Real Estate Research Unit, their development costs are lower than that of their institutional private sector counterparts.
As the Unit’s Robert McGaffin said in an article inProperty 360, “These guys are providing a phenomenal service to their community.” And the emerging industry is creating an army of small enterprises with developers using skilled community members to build the units.
“We are looking at contractors, construction companies, and a host of other professional services such as consultants, lawyers and estate agents, in the communities, who have also thrived in this new market,” said McGaffin.
While some of these micro developers are survivalists, only erecting structures in their own back yards to rent out, there are many opportunity-driven developers who follow a typical and formal property development process, to develop high quality multi-unit dwellings, with the intention to scale with each project.
These developments hold significant potential to plug an existing gap in the rental market; consisting of those households who earn too much to qualify for free state-subsidised housing but struggle to find safe and affordable housing in the private market. An estimated 3.5 million people (according to the 2011 census data) fall into this category. Yet, despite this proven demand for their product, township developers often struggle to obtain finance for their developments. The building plan approval process can be lengthy, and they often borrow money from family and friends to finish their developments. Most take out a personal loan from a bank at some point, but as first instalments are usually due after 30 days – and it can take up to three months before tenants are able to move in – this is not an ideal solution.
Part of the problem is that potential funders are unaware of the business opportunity that exists in this market. My research at the UCT Graduate School of Business indicates that this is compounded by a lack of reliable and verifiable information about these businesses. Many township entrepreneurs lack formal business processes such as record keeping and accounting systems. This makes it difficult for developers to accurately measure profitability and build a verifiable track record, leaving potential investors struggling to evaluate their efforts and calculate a potential return on investment.
Additionally, the mandates of traditional property finance providers and banks do not afford them the luxury of developing finance products catering to this crop of entrepreneurs, who are part property developer part township entrepreneur. Concerns cited are the potential for defaults and construction risk, as well as the strength of the underlying security, which would be required in the case of mortgage loans.
Some of these concerns seem to rest upon misperceptions of the township context. Construction risk, for instance, assumes that construction in the townships is typically of low quality, but this is not necessarily true. In some areas, building inspectors are building a database of local contractors and working closely with them to ensure that they follow the approved plans. This trend towards formalisation means that it can be expected that the construction risk will also decrease.
Creating a more enabling environment for micro developers will require funders that are not only about the numbers – and are able to take a long-term, developmental perspective. Fortunately, there are some organisations that are stepping up to give micro developers a chance, using innovative approaches that combine access to financing with strong networks, and training to provide them with targeted support and advice.
The Trust for Urban Housing Finance (TUHF), for example - which was pioneered by leading South African development finance organisations in Johannesburg - has partnered with other asset managers and commercial banks to finance over R4bn in inner city residential rental property and helped hundreds of property entrepreneurs with their developments over the past decade. TUHF’s pilot project uMaStandi provides micro-developers with tailor made mortgage loan facilities, training and mentorship to help them achieve their goals.
The Development Action Group (DAG) is also experimenting with new approaches. With its Zanethemba initiative it is working with local developers to develop a 3 300m2 piece of land in Khayelitsha into affordable medium-density rental accommodation. DAG project manager Zama Mgwatyu writes in an e-book: “We are testing new ideas here. Then we can start to share the learnings with government, and with financial institutions like banks, who were previously reluctant to work with emerging developers.”
A third example can be found in Hustlenomics, winner of the SAB Foundation Social Innovation and Disability Empowerment Awards 2018, and a social enterprise that gives low income families, who have informal backyard shacks, the opportunity to build durable structures in their place. Using alternative building technology, including interlocking bricks made from recycled materials, the new structures are built at no cost to the owners. They are financed using an innovative shared-home financing model, where rental income, generated from the completed structure, is used to pay off development costs, after which full-ownership of the structure is handed over to the land owner.
Considering the many obstacles facing the delivery of housing and the growing tensions caused by increasing unaffordability, the imperative to build on these innovative approaches and craft effective solutions for all stakeholders could not be clearer. By recognising what is working, empowering at the grassroots and finding ways to mobilise existing resources to scale these successes, we can ensure South Africa makes progress towards meeting the UN’s Sustainable Development Goal 11 (Make cities and human settlements inclusive, safe, resilient and sustainable) and achieve inclusive growth.
Mayra Hartmann is an MBA graduate and Bertha Scholar at the Bertha Centre for Social Entrepreneurship and Innovation at the University of Cape Town’s Graduate School of Business. This article is based on her MBA thesis titled: “A descriptive analysis of the financial constraints experienced by entrepreneurial micro developers in Cape Town”.