Affordable Housing Institute : South Africa

While (as noted in yesterday’s post) the capacity of the state machinery to facilitate housing delivery has been called to question, Rand Merchant Bank and First National Bank both announced new projects. 

RMB’s project involves a loan agreement with the Dutch Development Bank (FMO) in the Netherlands for 33 million Euros, and the French Development Agency (AFD) for 40 million Euros.  This funding will be directed towards the development of 15 000 homes and the extension of end user finance to over 1000 low income earners.  The Mail and Guardian reports that thirteen housing delivery projects have been approved, using a risk model that focuses on key risk-management factors such as home ownership education, community involvement, ‘rigorous quality control and the vetting of credit’.  Another 37 projects are in the pipeline.

In terms of RMB’s model, the 33 million Euro loan from FMO will focus on project funding while the 40 million Euro loan from AFD will provide risk underwriting for the bank so that it can extend its end user finance further down market.

FNB’s project involves a joint R800 million commercial property and housing finance deal to build over 3000 homes in a new Soweto suburb to be known as Glen Ridge (currently known as Protea Glen Ext 16).  This is on top of FNB’s Cosmo City project involving R368 million in the building of over 1000 affordable houses (all three bedroom, one bathroom, at an average cost of R168 000 each).  In total, the bank reports that they’ve invested R1.17 billion in affordable housing this year. 

Like the RMB approach, the FNB investment is both for property development (R300 million of the Glen Ridge project will be for this) and end user finance (R500 million at Glen Ridge). FNB also reports that they are involved with a non-profit micro finance organisation providing loans to low income earners in Khayelitsha, Cape Town, for home improvement purposes.

This is all very exciting, and feeds quite critically into the need for affordable housing supply so banks can meet their Financial Sector Charter housing targets.  And yet, other news reports a slow down in the housing tender index.  Industry insight reports that “the slowdown in the supply of housing defelpoments started in the 1^st quarter of 2005 as an increasing number of developers struggled with obstacles such as the price and availiablity of land, legislative bottlenecks at municipal level, a slowdown in property sales off plan (causes by higher house prices that erode affordagbility) and skills shortages that delay project completions, to name but a few”.  At the same time, demand for smaller homes has accelerated from 62% of homes passed with smaller square meterage in 2005 to 81% in 2006).

An interesting article in the Business Day highlights an issue I’ve raised previously in this spot: that unlike the Financial Sector Charter which encourages service delivery to the poor, the Construction Charter focuses primarily on internal ownership and management arrangements of the construction industry.  The Construction Charter does not provide “an incentive for building contractors who build in [the low income] sector of the market.  Social infrastructure spend only gets scant mention in the corporate social investment chapter of the charter and counts only five points towards a total of 100 points on the scorecard, which is used to measure overall empowerment performance.”  When contractors can realise double digit profit margins in the development of large scale commercial projects, low cost housing project profit margins of 3% are not enough to encourage engagement in this sector. 

A forecasting director at the Bureau of Economic Research suggests that profit margins need to be pushed up – however, this would add to the cost of construction and undermine affordability.  Rather, it would seem a rethink of the Construction Charter would be in order.

Without this, the banks fears that they’ll have nothing to fund will certainly be realised.  Speaking to the Business Day, Banking Association housing task team head Jopie von Honschooten argued that the supply of land and new housing stock is “the biggest single stumbling block in the process of low cost housing”.  Standard bank concurs, and fears that while delivery is happening now, the consequence of the supply shortages will be felt from June of next year (2007).  To this, ABSA has suggested that the secondary (resale) market will be one of their focus areas.  This is perhaps also the FNB strategy in supporting the Khayelitsha micro lender in offering home improvement loans.

Tomorrow: Property market dynamics