Affordable housing is becoming increasingly unaffordable but changes in how we finance the sector may just be the breath of fresh air that is desperately needed.
The shape of finance in the affordable housing sector is welcoming a few new developments and other (older) but increasingly successful methods that are set to change the landscape of how the sector will be financed in future.
Traditionally affordable housing has been largely financed through partnerships with government where subsidies are awarded to construction companies to develop housing for the lower income brackets. These homes are then often distributed free or supplied at a discount to people based on their needs. A basic government subsidy – Finance Linked Individual Subsidy Programme or FLISP – is also available for those in the gap market looking to buy their first homes, but the reality is it does not do enough to address the real cost of housing in South Africa, and is only available in limited circumstances and as such does not reach as wide a market as it intended.
In July this year government sought to rectify the problem with the FLISP by expanding the qualification categories in terms of income and what kind of homes the FLISP is available for. The upper threshold for successful financing was changed from R15 000 a month to R22 000 a month. FLISP is also now available for pension or provident fund backed loans and on deed of sale style transactions where the deed of sale is not lodged immediately but after the payment of a number of instalments. The amount of money available through the FLISP has also increased for those at the lower end of the category who earn between R3 501 and R3 700, earning R121 626 towards their first home – this is not a loan and does not need to be paid back.
The aim is to put the power for where lower income earners live back into their own hands. Instead of waiting for developers to put up homes that they must just accept, the new larger loans will see the affordable housing market become increasingly dominated by market forces, supply and demand and what each developer can offer the consumer. The FLISP has also made the affordable housing market far more attractive to financial institutions which, due to the deposit element of the FLISP, regard the sector as an increasingly stable avenue for investment.
One company that has been at the forefront of investing in the affordable housing sector is TUHF. Founded in 2003 and arising out of a collaboration of three housing finance companies that includes ICHUT, NHFC and NURCHA, TUHF provides loans for residential rental property developments from refurbishments in inner-city Johannesburg to backyard landlords looking to add on an extra room.
By looking at residential property in the same way that most financial institutions look at commercial property, TUHF has been able to grow a loan book worth about R2.7-billion, according to Paul Jackson, CEO at TUHF.
In choosing where to issue loans TUFH evaluates each loan on the basis of its potential future earnings rather than on the potential future earnings of the owner, as is done with most residential style investments. This has allowed numerous new entrepreneurial companies to begin flourishing in areas that had once been badly underfunded.
“The extent of the loan is influenced by the income/cash flows from the project that the loan can support. Clients qualify on the basis of presenting a well thought out, well researched business case, based on knowledge of their area and hard work,” explains Jackson.
For TUHF it is the character of the future landlord, more than their ability to raise funds that makes a bigger difference.
“A property entrepreneur who is considered as a good investment to TUHF has to be entrepreneurial and hardworking, open-minded and willing to take advice, self-disciplined in that they manage cash flows of the property in the interest that will benefit the property, instead of using the cash inflow for personal use. Also have integrity to do the right thing in terms of property management, ensuring the property is compliant and safe for tenants, demonstrate ability and willingness to pay on time and they must be committed and involved,” explains Jackson.
This approach has had a number of successes with Jackson explaining that the inner-city of Johannesburg is being comprehensively redefined through this introduction of liquidity to ordinary people. The company has a policy of ‘massive-small’ – a goal to see affordable housing altered through a huge number of small companies thereby changing the landscape of affordable housing, making more properties available for rent while also empowering as many people as possible.
“The loan book currently comprises 33 037 residential units, 598 buildings and about 350 entrepreneurs assisted. TUHF’s clients vary in their level of experience from starter, and emerging to established property entrepreneurs,” says Jackson.
“The level of investment deployed by TUHF in the inner cities has enabled TUHF to speak to its social partners such as, the local authorities and business organisations, to forge closer partnerships and better cooperation resulting in our inner cities being claimed back from the decay that would eventually fall upon them,” he adds
With TUHF and the banks seemingly now willing to grant loans in the affordable housing sector and the FLISP being extended, lower income earners have never been more empowered to make decisions as to where they will buy and what housing stock will actually sell. This should hopefully open up more opportunities for construction companies, increase the quality of work being done at that level and stimulate the economy.