By Mayra Hartmann

The lack of affordable housing in South Africa is a well-documented problem. The housing backlog reportedly stands at 2.3 million houses and is growing by around 178 000 houses a year. Neither the public nor the formal private sector appears to be able to close this gap.

Less known are the innovative approaches emerging in the rental housing space, and particularly in townships, where property entrepreneurs are quietly getting on with the business of building houses for people who need a roof over their heads – often with minimal support from financial institutions, investors and the formal real estate sector.

These entrepreneurial property developers – sometimes called micro-developers – operate in townships, areas usually characterised by a lack of development.

High returns, low costs

Some research indicates that they are making a healthy 20% return on investment within their first year. In addition, according to the UCT Nedbank Urban Real Estate Research Unit, their development costs are lower than that of their institutional private sector counterparts.

As the Unit’s Robert McGaffin says in an article in Property 360, “These guys are providing a phenomenal service to their community.” And the emerging industry is creating an army of small enterprises with developers using skilled community members to build the units.

“We are looking at contractors, construction companies, and a host of other professional services such as consultants, lawyers and estate agents, in the communities, who have also thrived in this new market,” says McGaffin.

While some of these micro developers are survivalists, only erecting structures in their own back yards to rent out, there are many opportunity-driven developers who follow a typical and formal property development process, to develop high quality multi-unit dwellings, with the intention to scale with each project.

The potential to plug gaps

These developments hold significant potential to plug an existing gap in the rental market; consisting of those households who earn too much to qualify for free state-subsidised housing but struggle to find safe and affordable housing in the private market. An estimated 3.5 million people (according to the 2011 census data) fall into this category.

Yet, despite this proven demand for their product, township developers often struggle to obtain finance for their developments. The building plan approval process can be lengthy, and they often borrow money from family and friends to finish their developments. Most take out a personal loan from a bank at some point, but as first instalments are usually due after 30 days – and it can take up to three months before tenants are able to move in – this is not an ideal solution.

Part of the problem is that potential funders are unaware of the business opportunity that exists in this market. My research at the UCT Graduate School of Business indicates that this is compounded by a lack of reliable and verifiable information about these businesses. Many township entrepreneurs lack formal business processes such as record keeping and accounting systems.

This makes it difficult for developers to accurately measure profitability and build a verifiable track record, leaving potential investors struggling to evaluate their efforts and calculate a potential return on investment.

About the author

Image credit: Fin24

Image credit: Fin24

Mayra Hartmann is an MBA graduate and Bertha Scholar at the Bertha Centre for Social Entrepreneurship and Innovation at the University of Cape Town’s Graduate School of Business. This article is based on her MBA thesis titled: A descriptive analysis of the financial constraints experienced by entrepreneurial micro developers in Cape Town.

Source: Fin24