Download Micro-developers of rental stock in Delft: finding the real gap in

Micro-developers of rental stock in Delft: finding the real gap in
South Africa’s housing market.
Authors: Blanca Calvo; Claire du Trevou; LenéLe Roux
Co-authors: Stephen Berrisford; Liza Cirolia
Centre for Affordable Housing Finance in Africa (CAHF), PO Box 72624, Parkview,
South Africa, 2122, [email protected]
Figure1:HouseinDelftwithextraroomsbuiltbehindtheoriginalstructurethatwasgovernmentsubsidized
forlow-incomehouseholds.
ABSTRACT
In Cape Town, the second largest metropolitan city in South Africa, is a prominent urban area called Delft.
Delfthasbecomeknownforits‘hellish’[sic]TemporaryRelocationAreas(TRAs),crime,andsprawlingstatesubsidisedresidentialbuiltfabric.Howeveritremainsadesirabletownshipforanumberofresidentsentering
into what is known as the ‘Gap Market’. This is a term used within housing policy discourse referring to
households earning between R3500 and R15 000 per month who neither qualify for the State-subsidised
Housing Scheme nor a mortgage loan from a financial institution, for a newly built house on the market. As
highlighted by CAHF (2015) ‘it is increasingly the case that a wider segment of South Africa’s population is
unabletomeettheirhousingneeds’.TheGapMarketisestimatedtobeapproximately30%ofthepopulation.
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Recentresearch,commissionedbytheCentreforAffordableHousingFinance,revealedinterestinginnovations
andhousingsolutionswithinthepropertymarketthatarebeginningtomeetthedemandoftheGapMarket
population. One of these is the presence of micro-developers in Delft who are renting out rooms, backyard
shacks or demolishing existing structures and replacing them with multi-storey blocks of rental units. The
paper will explore the relationship between the residential property market and the rental housing market,
andelaborateontheuniquerolethesemicro-developersfulfillinallowingaffordableaccesstoCapeTownand
fillingacriticalgapinthehousingcontinuum.
KEYWORDS
Micro-developers;propertymarket;rentalstock;housingcontinuum;innovation.
AUTHOR BIOGRAPHY: Three main authors have written this article, supported by two co-authors.
Blanca Calvo is an architect and urban planner, Lene Le Roux is an urban planner and Claire du
Trevou is also an architect. All three authors work in the fields of housing, participatory planning
and research. The three authors are directors of a non-profit company called Urbanists for Equity.
This research was drawn from a project developed by the Centre for Affordable Housing Finance in
Africa, awarded to Urbanists for Equity.
1.Introduction
Located 30 km from the Cape Town CBD, 11 km from the Cape Town International Airport and 12
km from Bellville, Delft is considered a fairly well-located township - in comparison to other
townships in the city such as Khayelitsha and Mitchell’s Plain. In South Africa, ‘townships’ refer to
suburbs that were developed by government during Apartheid to house non-white people in towns
and cities. Townships have remained rudimentary suburbs as historically they were designed to be
dormitory in nature, with little organic socio-economic investment from the private sector. They
housed the large majority of the urban black population who were racially and economically
oppressed by the Apartheid regime.
In the post-Apartheid era, townships continued to expand through population growth, residing
informally in and adjacent to townships, as well as through the Reconstruction and Development
Programme (RDP) housing delivery system. Since its initiation in 1996 more than three million
houses have been built. Approximately two-thirds of these houses now fall within the RDP resale
market. The research, commissioned by CAHF investigated the time, costs and processes involved
in the transaction value chain for the resale of RDP houses and the sale of other properties in Delft,
to understand more clearly how this market functions. What became apparent was the increasingly
important role that micro-developers play in the rental housing market. This paper aims to use
some of the findings to unpack the current innovations and practices in Delft being used to meet
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the burgeoning, low-income, rental housing demand in South Africa.
2.DelftOverview
Figure2:ImageillustratingthepositionofDelftwithinthebroaderCapeTownMetroContext(Authors)
Delft was designed in the late 1980’s as a township that overlapped formerly designated colored areas and
Khayelitsha township which was designated for black Africans. It was developed through government
subsidizedhousingprojectstoalleviateovercrowdingandpreventinformalsettlementdevelopment(Kuyasa
Fund: 2005). Delft was designed as a mixed development comprising of community facilities, business sites,
open spaces and residential neighborhoods (MLH Architects, 1995). It also had coordinating social plan to
manage and plan in co-operation of the inhabitants. However, today Delft is still a low-income suburb with
limitedsocio-economicamenitiesandopportunities.
The Census 2011 data shows that more than 80% of households live in formal housing and more than 90%
have access to basic services. The community has remained stable in many parts of Delft, in the sense that
familieshavelivedinthesameneighborhoodsformanyyears.SincethedevelopmentofDelftaround1990,
the township has consistently been developed through state intervention. Beneficiaries were given ‘starter
structures’ through the government subsidized housing program. They add-on and extend their houses,
thereby investing in their properties. However, their ability to invest in their houses and surrounds is highly
dependent on the household’s income. As provided by Census 2011, 69% of households earn below $213 a
month and the unemployment rate is approximately 25%. There is also a long-standing history of informal
transacting of houses in the property market, in which the value of houses is inconsistent. The building
standards of ad hoc additions and alterations often fall below the national regulations, which determine
investmentbyformalbankingandnon-bankingfinanceinstitutions.
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3.TheHousingContextanditsChallenges
TheDelftpropertymarkethasbothformalandinformalmarketactivity,referringtotransactionsofresidential
properties.Theyeitherhave(formal)ordonothave(informal)titledeedtransfers.Inthispropertymarketthe
methodoffinancingapurchasealsoplaysasignificantroleinthecharacteristicsofthetransactionthattakes
place. A large majority of completed transactions are cash exchanges, due to the lack of financial tools
availableintheformalfinancingsectorforthisparticularincomebracket.
Since the initiation of the Reconstruction and Development Programme (RDP) by the South African
governmentin1996,morethanthreemillionhouseshavebeenconstructedtomeetthebasichousingneedof
householdsinthecountrythatearnbelow$233permonth(CAHF,2015b;Cirolia,2015).Themajorityofthe
supplyofhouseshasbeenforindividualownershipandhasbeenfullysubsidized.Theintentionwasforthese
RDPhousestobeusedasbasic,starterunitsthatcouldeventuallyberesoldonthepropertymarket,allowing
for upward mobility of households’ socio-economic development. However, there are two challenges
preventingRDPhousesfrombeingreleasedintothepropertymarket.Firstly,thereisabacklogofun-issued
titledeeds,whichhavenotbeengiventobeneficiaries(CAHF,2015a).Secondly,the“Pre-emptiveClause”is
an eight year restriction placed on the sale of a subsidy house, as per the Housing Act of 1997. This
stagnatesthevalueappreciationofRDPhouses.
The ‘gap market’ in South Africa is a term used within housing policy discourse that makes reference to
households earning between R3501 and R15 000 per month; who do not qualify for the Individual Subsidy
Programme (ISP) that provides the RDP house, nor a mortgage bond from a bank or another financial
institution. The Financially Linked Individual Subsidy Programme (FLISP) is a subsidy instrument that was
introduced by government to provide households with an amount of money, relative to their income, that
allowsthemtoapproachthebanksforaloan.AlthoughtheintentionoftheFLISPistoassistthe‘gap’market,
itisunabletoattendtothediversityinhouseholdprofiles,affordabilitylevelsandlendingmechanismsused
bybanksandnon-bankinginstitutionstomeetthehousingdemand.
AshighlightedbyCAHF(2015)‘itisincreasinglythecasethatawidersegmentofSouthAfrica’spopulationis
unabletomeettheirhousingneeds’.CAHF(2015)estimatesthe‘gap’markettoincludeapproximately30%of
thecountry’spopulation.Atthesametime,approximately38%ofhousingstockinthemarketisgovernment
subsidisedhouses,albeitonly24%havetitledeedsregisteredintheSouthAfricanDeedsRegistrar.Thissupply
of houses into the market provides an opportunity to meet the evident demand in the affordable housing
market-ifbanksandothernon-bankingfinanceinstitutionsareabletocaterforthistargetgroup.
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4.Therentalmarket
TherentalmarketinDelftfunctionsinformally.Bothmicro-developersandRDPhouseownerswhorentout
rooms and backyard shacks are considered ‘landlords’. A micro-developer refers to those formal and/or
informalpropertyownerswhohavebuiltasmallnumberofflatsonaproperty.Thisiscurrentlybeingdoneby
meansofpurchasingoldsubsidyhousesonbiggerlandparcelswhichwerebuiltpre-1990.Atthesametime,
onamuchsmallerscale,individualpropertyowners,notwillingorabletodemolishandrebuildentirely,are
buildingextensionsforrent,asanadditionalsourceofincome.Therentalsarecompetitivebutaffordable,toa
burgeoninglower-middleincomeclass,accesstorelativelywell-locatedhousing.Thismarketisabletomeet
thecleardemandforrentalaccommodationinDelft,aswellasitbeingalivelihoodstrategyformanypeople
whoarenotpermanentlyemployedandhaveverylittleotherincomeforthehousehold.
Figure3:IllustratestheaverageageandgenderofthedifferentactorsinterviewedinDelft.
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The map in Figure 3, illustrates the average age and gender of the different actors interviewed,
within the different sub-places of Delft. From the average ages, it is clear that landlords tend to be
an older generation than the renters, who are typically in their 30’s. This is indicative of an
emerging rental market, appealing to a younger, working generation. In Figure x, it can be noted
that the average income of renters is higher than all other actors, except the landlords. If more
affordable housing was on the market, some renters may earn enough to qualify for a mortgage
bond. The smallest mortgage loan offered by banks are around $6667.
A number of renters interviewed are hesitant to acquire a mortgage loan, for fear they may lose
their job, and then be left with a large amount of debt. Some have simply never considered
applying for a mortgage or buying a house. Many simply enjoy the mobility renting allows them, as
well as affordable access to the city’s economic opportunities.
Figure4:Showsthenumberofresidentsperhouseholdandhouseholdincome.
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The second map, Figure 4, indicates the average number of residents per household, the
percentage of residents contributing to the average household income, as well as the average
household income. Across all sub-places, less than half of the inhabitants are contributing to the
household income. The average income of the landlords is substantially higher than the other actor
groups; despite having similar percentages of income contributors to other actors. Figure5:ContextualmapofDelftwithhistoricalgrowthofthetownship.
The above map, Figure 5, is a diagrammatical illustration of how far residents of Delft have to
travel in order to find actors and access administrative offices that are critical to a transaction
process. This includes lawyers, conveyancers and administrative offices such as the Deeds Office
and the Department of Human Settlements. One registered estate agent stated that she uses the
same lawyer for all her clients and travels to Cape Town CBD on behalf of her clients to acquire the
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housing subsidy from the Department of Human Settlements (if this is possible); and to manage the
clearance certificates and title deeds transfer. For many residents of Delft, it is a long and
expensive journey to travel to Cape Town CBD to manage the administrative component of a
property transfer.
The interviews revealed that this is a fairly regular cash flow, with tenants typically paying their
rental contribution on time every month. This additional income stream has the potential to be
viewed as an underlying asset against which one could borrow. This indicates the potential of
properties in Delft to be mortgaged to fund further additions and alterations.
Micro-developers and informal estate agents acknowledge that due to the limited property and land
use law enforcement in the area, they are able to operate and develop in Delft without needing to
follow property, land use and building regulations. Most landlords do not draw up formal lease
agreements or request a deposit to be paid when a tenant moves in. Although most landlords are
lenient on rental payments, in that payment can be made anytime during the month, and if a
tenant defaults on rent, late or additional payment is negotiated. Although this is beneficial for
renters seeking accommodation and micro-developers who are able to meet this demand; it creates
insecurity of tenure. Within the rental property development market, a number of factors are determined before a
developer would invest in this market. The price of the property to be developed must be between
R90 000 –R200 000 for it to be a feasible investment. The area within Delft, chosen to develop in,
must have relatively low-crime levels and there must be a rental target market already present.
According to the property developer, it is easy for a rental property developer to do well in Delft.
At this stage, developers even work together and financially support each other to develop their
properties. Theyassisteachotherinfindinglandandpoolmoneytohelpbuildnewunits. This shows that
the market is still young and open to expand. As told by the property developer interviewed, “when
the flats were completed, I already had people standing at the gate, wanting to move in…”
This is also evident in the map shown, Figure 6, which shows the percentage of households in
different areas of Delft that are renting accommodation. In 2011, the number of respondents to the
Census, indicates that Delft South (31%) and The Hague (21%) and the greatest percentage of
households renting; followed by Voorbrug (20%) and Roosendal (19%); and lastly Eindhoven (16%)
and Delft SP (15%).
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Figure6:ThepercentageofhouseholdsindifferentareasofDelftthatarerentingaccommodation.
5.SomeKeyFindings
Thefindingsoftheresearchilluminatedsomekeyfeaturesandconsiderationsthatcharacterizetheproperty
marketinDelftandhowitoperates.Theseare:
•
The perspective on risk is similar between lenders and households, and that is the level of affordability
frombothendstobeabletorepayloans.Howeverthegrowingneedforaccommodationhasestablished
arentalmarketwhichrevealsapracticeofregularmonthlypaymentsforhousing.
•
The methods of financing by micro-developers to build and rent out flats in Delft show an incremental
system of market-driven housing delivery. This includes lending from building supply stores, taking our
personal loans, getting assistance from other micro-developers as they work together, and asking
relativesforfinancialsupport.
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3.Conclusion
Fromtheresearch,anumberofpracticalsolutionsarosefromDelftthatmetboththeresidentialpropertyand
rentalmarket,aswellasthelivelihoodneedsofthepopulation.Forexample,thesurveyresultsalsoshowthat
people are capable of paying rent and servicing their credit accounts regularly, as long as the payment
amountsareaffordablewithintheirincomestream.Meanwhile,landlordswithroomsorbackyardshacksthey
rentout,areabletomeetadefinitedemandforrentalaccommodationwhilstmeetingtheirlivelihoodneeds.
Micro-developers are the leading innovators in the property market in Delft. Although developers need to
haverelativelylargesumofcapitaltoimprovethepropertiestheybuy,inordertobuildrentalunits,oncethis
initialinvestmentismadetheyareguaranteedaregular,sustainableandprofitableincomestream.Themicrodeveloperinterviewedfortheresearchkeepsa‘receiptbook’tomanagehisrentalincome.Hestatesthatthis
incomepaysoffhisdebtandallowshimtosavetowardaseconddevelopment.Howeverthisincomestream
couldalsobeusedasanassetagainstwhichhecouldborrowfromalendinginstitute.Thereisopportunityin
this sector for an innovative tool that will not only help activate a more vigorous rental market, but also
stimulate the densification of Delft. Investing in the rental market could also allow micro-developers to
incrementallymoveintothemoreformalandsecuredpropertymarket.
3.1Recommandations
The rental market and the micro-developers that are pushing the innovation in this market segment
should be considered by potential investors. As understood by existing investors such as TUHF, the
asset is not necessarily the fixed asset (i.e. the land and building) but the income stream of the
developer/landlord. Therefore, a secure loan is given because the rental income is sufficient to
service the mortgage bond and grow the value of the immovable property over time. A property
finance tool is therefore developed in such a way that it takes into account the future potential
and not the historical value of the investment.
A title deeds management service that is able to service Delft would extensively help to relieve the
transaction blockages around title deeds. It will also allow for property owners to more easily and
affordably manage their own title deeds.
The service costs of some of the actors, such as the lawyers, and property valuers could also be
subsidised by an interested stakeholder, in order to reduce the cost of following a more regulated
system.
Further investigation into the affordability levels and credit-worthiness of households in Delft may
reveal a target market able to pay off a secured loan. Certain actors such as renters and landlords
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prove to have regular and sufficient income, despite necessarily being formally and permanently
employed.
Property developers in the rental market segment are at the forefront of innovation and the
mechanisms they use to successfully transact and develop properties in a profitable way. There is a
need to expand on the housing continuum in order provide a range of affordable housing options.
This will help to unlock the market as more people will be able to move along the spectrum of
housing typologies in accordance with their livelihoods situation. The methods of financing by
micro-developers to build and rent out flats in Delft show an incremental system of market-driven
housing delivery.
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Acknowledgement
Theauthorsthanktheprojectteam,theresidentsandpropertymarketactorsofDelft.Theauthorsalsothank
theprojectcoordinatorsLizaCiroliaandStephenBerrisford;KeciaRustandAdelaideSteedleyfromtheCentre
forAffordableHousingFinance(CAHF),andIllanaMeltzerfromEighty20.
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