The SA affordable housing sector

The South African affordable housing sector (usually defined as those units priced between R200,000 and R500,000) stands right now at a juncture that could lead to a high, a middle or a low road over the next three to five years. So says Dr Willie Els, MD of Inframax Holdings and one of the few housing specialists around today with affordable housing development experience going back over 30 years.

Until quite recently, said Els, the residential property development boom (driven by strong economic growth, consumer and investor confidence, a plentiful supply of development capital and end-user finance and reasonably low interest rates) led to most South African developers moving into the mid range and upmarket housing sectors. Here, he said, it was possible to make satisfactory profits without becoming involved in difficult socio-political and community issues.

However, as demand for this type of upmarket housing cooled as a result of a weaker economic performance, reduced consumer confidence, rising interest rates, rapidly rising land prices, approval bottlenecks and electricity supply problems, an increasing number of larger developers turned their focus to the affordable housing market.

This trend, said Els, was further encouraged by the strong incentive of the MOU between the banks and the government in which the banks made a firm commitment to invest an initial R42 billion (with more to come) into the affordable housing market, mostly in the form of development capital and end-user mortgage finance.

As a consequence, said Els, Inframax and other large developers made “considerable” commitments and investments in large affordable housing projects to support the Banks/Government MOU and to meet the growing demand for affordable housing in South Africa.

Just as hope for the future began to grow, the global economic downturn and the liquidity crisis in the international banking system which precipitated it, has, said Els, negatively impacted the property markets internationally and in SA. In this country, said Els, the major downturn in demand had been felt most in the mid-range to upmarket residential property sectors, while demand in affordable housing (although also negatively impacted) had remained reasonably strong.

Els repeated, however, that the development of affordable housing, so critical to SA’s future, now stands at the crossroads which, as indicated, could lead to a high, middle or low road.

The vast majority of units in the affordable market, said Els, are purchased via bond finance - and it is here that developers are now up against both a “rock and a hard place”.

The rock is the very high deposits - anything from 10% to 30% - now being called for by the banks. This, said Els, is a very different scenario from that which prevailed previously when 100% or 110% bonds (the latter covering not only the cost of the house, but also the additional costs such as transfer fees) were quite common. Just how difficult such high deposits can be for the borrower, Els said, becomes apparent when one realises that a couple trying to buy a home valued at, say, R300,000 will probably have to find a deposit of anything from R30,000 to R90,000. As this couple is probably earning a combined salary around R12,000 per month, it can, he said, be understood that accumulating a deposit of this size is for them virtually impossible.

The “hard place” confronting developers, one which is even more difficult to deal with, he said, is that the banks are now applying far more stringent lending criteria, which in effect are scuppering over 80% of the bond applications in the affordable sector.

“The banks,” said Els, “appear to be working on hard and fast formulae, the details of which they have as yet not divulged to developers. We are, therefore, still unsure what the future holds.”

What concerns him, said Els, is that the banks’ stringent criteria are either indicative of a credit crunch in the SA banking system, or could be a smokescreen to hide their innate reluctance to get involved again in the affordable housing market - despite high level assurances that this is their intention and despite the extensive work done at community level to reduce these risks.

“It is possible,” said Els, “that tough criteria are an understandable reaction to the sub-prime crisis and the huge shortage of funds worldwide - but it does look as if the traditional fear of the affordable market is once again influencing those responsible for issuing the loans.

“On the one hand we have banks at a strategic level claiming to be an enthusiastic supporter of affordable housing development. On the other hand we have their management at the operational level doing all they can to reduce exposure there.”

Els stressed that the high deposit problem can be countered by various methodologies e.g. employer assistance, collateral guarantees, deposit replacement insurance, etc., but the tough lending criteria right now could leave the entire affordable housing sector high and dry.

This could, said Els, be a disaster for those developers who have now invested heavily in land and infrastructure for affordable projects.

“If the banks are shying off affordable housing because they fear non-payment, perhaps,” said Els, “they should be reminded that the days of politically motivated boycotts are past and there is, in my experience, a strong desire in the townships now to start owning property.”

“Inframax,” he said, “is itching to expand its affordable housing delivery in a big way because this can satisfy both our need to generate returns and our sincere desire to contribute to South Africa’s socio-economic stability at this fundamental level. This is a market in which we can create “social capital” and that is something which Inframax genuinely wants to do.”

The massive public spending on infrastructure, said Els, has the environment from which developers can work.

“Let us hope that end user finance difficulties do not derail these very worthwhile efforts because if they do we could find ourselves on a low road to nowhere. Right now, it seems the best we can hope for is to travel a middle road with limited Bank funding available to selected, guaranteed borrowers. However, we are all hoping this will change and that efficient lending on a large scale will put the affordable sector onto the high road which leads not only to the adequate provision of housing for a major sector of the market, but also to greater socio-economic stability in our society.”

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