In a highly anticipated move, the Minister of Human Settlements (Lindiwe Sisulu) recently approved key changes to the policy parameters of the Restructuring Capital Grant (RCG). This policy adjustment has resulted in a groundswell of investor interest in the sector, supporting rapid growth in social housing project pipeline to assist with achievement of government targets.
While the vast majority of existing social housing units are owned and operated by accredited Social Housing Institutions (SHIs), profit-motivated companies have also started participating actively in the sector on the basis of the policy shift, leveraging their significant property development capabilities and financial backbone to deliver units at scale. These companies are referred to as Other Delivery Agents (ODAs) in social housing policy.
The changes relate both to the quantum of the subsidy and to beneficiary income bands. Social housing developments serve a mix of primary and secondary market beneficiaries, with at least 30% units reserved for the former group.
While the maximum monthly beneficiary income at first occupation of the units was set at R7 500 a decade ago, this has recently increased to encompass with the Department’s definition of the gap market.
The result is that social housing will reach additional market segments, including lower middle-income households which may find that even they are unable to afford quality accommodation in central metropolitan areas.
RCG parameters, past and present
Notes: Income bands and rentals reflect policy allowances at the time the social housing unit is first occupied
Rental policy in respect of the new parameters is provisional, based on discussions and interactions with key stakeholders
The new parameters have unlocked the financial feasibility of social housing through four channels:
- Reduction in market risk
- Improvement in operating cash flows
- Increase in development value
- Reduction in the debt financing requirement.
Landlords in cities like Johannesburg and Cape Town have been finding it increasing difficult to source primary market beneficiaries with stable incomes and adequate credit scores earning less than R3 500.
The previous income range for this social housing category is below the national minimum wage of R3 500. Since at least 30% of the units in a social housing development must be occupied by tenants in this category, this market reality has been a significant hurdle for investors to overcome.
Secondly, increased rentals will allow for a more sustainable cash flow position, allowing both for adequate debt service and landlord provision for longer term asset management requirements such as larger maintenance items and recapitalisation of ageing units.
Thirdly, higher levels of net rental income per unit will translate into higher development value. Commercial lenders set limits on their exposures to individual properties, this is measured as a percentage of property’s value, in order to ensure that the debt is fully recovered in the event of default or foreclosure. Higher property values imply that lenders can offer larger loans without breaching their exposure limits.
Finally, larger capital grants reduce the requirement for debt financing. A typical social housing unit costs approximately R400 000 to build, of which approximately R270 000 is now covered in grants (RCG and provincial subsidies). The balance has to be financed through loans and ranges from R90 000, for ODAs (which must contribute at least 10% equity), to R130 000, for SHIs (no equity requirement contribution). At R30 000 per unit less than previously, this range may be more feasible for lenders to finance.
While financial feasibility is crucial for new social housing developments, so too are the property and asset management capabilities of the landlord. These protect the cash flows and longer term value of the property: crucial from an investor perspective.
New entrants to social housing should consider creating strong partnerships with established SHIs and property managers, that have a deeper insight into sector nuances and particular market risks, some of these have already played out in spectacular fashion in recent media coverage.
Social housing is particularly vulnerable to rental boycotts and social unrest related to tenant expectations. Jabulani Views in Soweto and Steen Villa in Cape Town have both recently been in the media as tenants protested violently over evictions linked to arrears. Revisions to policy parameters will not eliminate these risks.
As political and economic volatility heightens and the recession deepens, the impact of job shedding and falling real disposable income will be felt most severely in lower income households, which will experience intense pressure to meet their financial obligations.
High household indebtedness will further compound the problem. Tenants falling behind in rent payments may reach out for assistance to political groups, who favour aggressive land redistribution, or view that they are entitled to free housing. This could result in landlords finding themselves embroiled in lengthy and costly legal processes. For this reason, prudent lenders will look very carefully at the teams and processes put in place to manage these risks.