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Affordable property market: rental units on the rise

To address shortages in the market.

The affordable housing market, which many property developers shied away from for many years, is now starting to amass strong interest on the back of demand for housing solutions.

The investment case for this segment of the property market is strong and the huge demand for affordable housing is starting to make property fundamentals attractive.

The affordable housing and former township market showed better property fundamentals in 2014 in light of the house price growth recorded.

Figures from FNB suggest that in 2014, the house price index for former townships rose to 9.5%, up from 2013’s 6.5%. The market has outperformed major metros of Cape Town, Johannesburg, Tshwane, Nelson Mandela Bay and eThekwini, which showed a growth rate of 6.8%.

FNB household and property sector strategist John Loos says former township properties remain affordable, with individuals in the market chasing after value.

Affordable rental housing

Not only value is important for this market, but also affordability, which developers are starting to offer through unique housing solutions. One of the developers is the City of Johannesburg’s entity the Johannesburg Social Housing Company (Joshco) which offers affordable rental housing to individuals earning between R3 500 and R7 000 per month.

Individuals Joshco targets do not qualify for RDP housing at the lower-end or a bond to purchase property. Rory Gallocher, who has been at the helm of Joscho for ten years, says the market is not producing housing solutions for these individuals, which he refers to as the “gap market”.

“About 20% to 30% are low earners of less than R3 500, which is extremely low in the South African market. A lot of people [who apply for Joshco apartments] earn their income through hustling, selling stuff and through small businesses… they don’t necessarily have a pay slip,” Gallocher explains.

Housing solutions

Apartment units vary in cost, with rental prices ranging from R840 up to R3 500 per month for a one and two bedroom unit with a kitchen, lounge and bath based in Soweto, Roodepoort and larger parts of the inner city. In the inner city, Joshco redevelops buildings, some of which used to be commercial, into residential units.  

It recently broke ground on a R200 million housing project in Dobsonville, Soweto, where 502 rental housing units were rented out for R750 to R2 000 per month. Completion is expected to be in December 2016.

Besides Dobsonville, Joshco has 17 pending projects, some which are in the process of being completed and waiting for tenders to be awarded.

Some of the pending developments are located along the Golden Highway in Devland, Lombardy East Lombardy/Alexandra, Orlando in Soweto, Randburg, Turffontein and more.

The idea is to build housing units closer to central business districts where job opportunities exist to cut traveling time for Joshco tenants.

Gallocher says the roll out of apartment units depends on the performance of Johannesburg’s economy.

“We will produce more houses if the economy of the city is more. We will produce less housing if the economy is less. The demand and the sustainability of the Joshco housing programme will be greater if the economy grows faster,” he says.

Another factor is that Joshco depends on the contribution made by its tenants. Because Joshco is a municipal entity, it does not have the scope to increase rentals haphazardly compared with private players.

“You can only increase your rental to keep pace with inflation in theory. We do recommend that we move the income target up; we can’t retain the R7 500 for ten years… it has to go up,” says Gallocher.

Even on the returns it makes on development, Joscho is limited. Other players are gunning for returns in their affordable housing developments of up to 14%, Joscho “never tried to get a project to make a return of more than 10%”.

Despite shortages of units being a key theme of this market, there are signs that more affordable units will be rolled out to the market. The Department of Human Settlements is targeting 80 000 affordable housing units in the next four years. Since its inception in 2004, Joscho has constructed about 7 500 units and has a target of more than 13 600 units by the end of June 2017.

For the department’s housing targets to materialise, R10 billion is needed to fund the units, says Gallocher. “It is a realistic target from a demand point of view. It is challenging from a supply side as resources are needed to fund these,” he adds. 

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