Manie Annandale is Head: Affordable Housing Development Finance at Nedbank Corporate and Investment Banking. Annandale has an enviable reputation and has been instrumental in growing the Affordable Housing portfolio.
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Social housing represents a critical strategic response to the housing backlog in SA. In addition to expanding the range of rental housing options to lower income households, it is also meant to assist with restructuring cities, reducing spatial inequalities by providing rentals significantly below market levels.

Situated within designated urban restructuring zones supports household social mobility through improving access to economic opportunities and public amenities including transport, schools and health care facilities. The transformative role which social housing plays in SA has resulted in Nedbank in actively participating in the sector, becoming the leading local bank in social housing debt financing.

In 2017, Restructuring Capital Grant (RCG) policy is expected to change with respect to the quantum of the subsidy, as well as the target tenant group, identified through the income band eligibility criteria. This shift is expected to unlock substantial new investment in social housing projects and restore the financial feasibility of development plans, which had been shelved under the existing parameters. Improving the economics of social housing investment will be critical to the achievement of government’s intent to deliver 55 000 social housing units by 2019.

In 2008, when the standard RCG contribution per unit was set at R125 615, public subsidies covered 70% of average development cost. Today, that figure is closer to 60%, implying a greater need for top-up debt funding, since most Social Housing Institutions (SHIs) are not able to contribute much equity. In parallel, however, project yields have dropped substantially over the past decade, with diminishing cash flows reducing institutions abilities to gear new developments.

The reason for the deterioration in operating feasibility is the non-indexing of social housing beneficiary income bands. Occupying at least 30% units in a development, the primary market earns R1 500-3 500, while the secondary market (comprising up to 70% units) earns R3 500-7 500. By law, rentals are required to average R750 in primary market units, reaching a maximum of R2 250 in the secondary market. Maintaining static rentals in nominal terms since 2008 has effectively resulted in SHIs targeting an ever poorer group of households. This reduces their ability to cover escalating operating costs, service debt out of net operating income, and build a cash reserve buffer for longer term expenses.

While the details of policy change are not yet known, recent studies by the National Association of Social Housing Institutions (NASHO) and the Rebel Group suggest that the Restructuring Capital Grant (RCG) may increase to R150-160 000 while the income ceilings for primary and secondary market tenants may move to R5 500 and R10 000 respectively. Indeed, a case could be made to raise the upper threshold to R15 000, since new market rental stock in the more expensive metropolitan areas like Cape Town launches at over R5 000. In these areas, emerging middle class families are often forced into informal shelter or peripheral formal rental, exacerbating inequalities in access to modern urban services.

To ensure that the sector benefits fully from positive policy changes, several policy and implementation challenges will need to be addressed.

The first is the proposed change in VAT dispensation on housing subsidies, which will effectively reduce net receipts by at least R30 000 per unit (combining the RCG and the Institutional Subsidy disbursed by province), completely offsetting the expected RCG increase. This gap would need to be compensated by private capital, pushing up rentals to the detriment of social housing beneficiaries.

The second factor is the need to revisit subsidies and tenant income bands on a regular basis, to ensure escalation in construction and operating costs are reflected in subsidy policy.

Thirdly, government will need to take into account the capacitation needs of the swiftly growing ranks of new SHIs if it intends to leverage private sector debt through its social housing investment. One route to success for young SHIs involves partnership with more established institutions or rental management agents, to ensure effective tenant screening and management from inception.  

Finally, it should be noted that the onerous regulatory restrictions on sale of social housing properties effectively impair their effective value as loan security, resulting in suboptimal levels of commercial lender appetite. This would tend to mostly affect smaller or younger SHIs, since lenders are unable to gain comfort from their aggregate financial position should project cash flows be inadequate.