By Jo Ferris-Davies
On May 24, the Equal Spaces Project and the National Association of Social Housing Organizations held a full day workshop in Johannesburg for social housing institutions (SHIs) interested in developing for profit housing within their overall housing portfolio. Key financial institutions and representatives of the Social Housing Regulatory Authority also participated. It was a remarkable meeting – on a number of different levels. The financial concepts being bandied required a very sophisticated knowledge base. The materials were dense and it was a challenge to keep up with the discussion and its implications while also facilitating the discussions.
The South African SHIs had several reasons for considering portfolio diversification despite some potential risks. First, like social housing providers everywhere, they want to grow their business without government funding. Second, with additional cash flows from for profit housing, they can develop more affordable housing or very importantly re-invest into their own maintenance and capital reserves. Most SHIs have very inadequate capital reserves for long term maintenance of their housing so this is very compelling notion. Finally, it provides the sector with greater access to lenders – by extending relationships to the equity investment market.
The local consultant engaged by the Equal Spaces Project focused her presentation on for profit affordable rentals as the best alternative to diversify an SHI’s portfolio. In South Africa, office and commercial space are risky investments. Middle and affluent residential are also risky with high vacancy and default rates. Development and sales of housing are particularly difficult due to a down turn in the local economy here in South Africa. Overall reported mortgage numbers declined significantly in 2016 due to affordability and down payment issues. Developers are of the opinion that only one in four potential purchasers can secure a mortgage.
The remaining sweet spot for diversification is affordable rental housing. Broadly speaking when looking across the country, rents need to be targeted in the $350 to $800/ month range. This in the housing “gap” between government subsidized housing and private market ownership. Especially attractive are one and two bedroom units as people choose to share the space to make the unit more affordable. Often, “non-traditional” households lease these units.
Recognizing that housing development is a boom or bust sector, it was advised that SHIs build up their capabilities by developing affordable rental units. With an appropriate development and marketing infrastructure in place, the SHI could transition into housing sales when the market.is strong.
Social housing providers in South Africa, as is the case elsewhere, have very weak equity positions. This is a huge challenge for providers wanting to develop for profit affordable housing to diversify their portfolio. The workshop considered layering financial instruments with several tranches of equity investments. This model definitely has risks. The SHI has to secure the right investment at the right price in the right neighborhood close to transportation. And, they must have the ability to efficiently manage the housing minimizing any bad debts and vacancies.
When I asked the question “is it worth proceeding based on these very real risks” – the answer provided was it was a greater risk to not proceed. Heady times indeed.
As a next step we will follow up with SHIs to encourage them over the next six months to prepare a business model to develop affordable for profit housing rentals. We will offer to critique these before organizing a workshop with actual equity investors who will hear each “pitch” and provide feedback to the SHIs. This will help them develop partnership relationships with investors. We intend to support four or five SHIs to take a leadership role for the sector.
Finally, I would like to thank Steve Pomeroy from Focus Consulting in Ottawa who provided support to the project on a volunteer basis working very closely with our South African financial consultant.