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Is affordable housing a good investment?

Jun 9, 2017 | Featured, Property Investment

Experts say demand outweighs supply of homes in the R400,000-R800,000 price bracket. This trend is expected to continue

Buying an affordable home as an investment can seem like a good way to get into the property market, but units at this price often come with complexities related to sales finance. However, for investors willing to take the plunge, there are good returns to be had. The RE/MAX National Housing Report for Q1 2017 showed that in the period, 29.6% of housing sales were in the under-R400,000 price bracket; another 26.76% of homes sold were in the R400,000-R800,000 price bracket.

The report used housing statistics from Lightstone, a property information and statistic provider. “The data brings to light the high demand for affordable housing in SA, a sector of the market that continues to thrive,” says Adrian Goslett, regional director and CEO of RE/MAX in Southern Africa. However, while there is a great deal of activity in the affordable housing segment, this does not necessarily equate to a good opportunity for investors. This is because at the lower end of “affordable”, there are a number of government interventions and subsidies, and home buyers tend to hold on to their property for life.

INVESTING IN AFFORDABLE HOUSING

What features can an investor look for in this market? Says Lategan: “Locality, locality and again locality.” Investors should look at what amenities are being developed, or at what is already available in the area, he says. “When buying a property for an investment for rental purposes, we would recommend considering the area in which you buy, what the population is, what the housing needs are, etc. We do, however, believe that there is a huge gap in both rental and home ownership in this affordable housing market, so there are still many opportunities available.” Power agrees that location and availability of amenities and services are important, but says the most critical point is affordability. “We can build the most beautiful homes with the best features at good selling prices, but if the market cannot afford homes, your development is a dead duck. Developers therefore need to do extensive market research prior to proceeding with new developments.”

“There is a huge gap in both rental and home ownership in this affordable housing market, so there are still many opportunities available” 

Wikus Lategan, CEO, Calgro M3

Potential investors would be wise to do the same. Instead of offering the bare minimum standard amenities and fittings, Power says, the company’s philosophy is to value engineer and maximise economies of scale to include “as many as possible standard features”. This is done to protect against home buyers purchasing homes without essential standard features such as cupboards, ovens and hobs, alarm systems, burglar bars and gates, and after a few months, defaulting on their bonds because of additional loans taken out for these items.

The affordable housing market remains extremely price sensitive, he says, and even though all the major banks are providing bonds to this market, a small increase in price can have a detrimental effect on bond approvals. “A R5,000 increase in prices may seem small to a developer, but could be the difference between a bond approval and decline,” Power says. To participate in the affordable market, you cannot only be focused on profits, he says. “You have to have a passion for the people and honestly want to uplift communities.”

““In developments such as Pelican Park, we have seen increased values of 30%-40% over the past three to four years”
Gary Power, marketing director, Power Developments

GAP HOUSING

Gap housing, for example, caters to the shortfall between the residential units provided by the government and houses delivered by the private sector. It targets people who typically earn between R3,500 and R15,000 a month and therefore do not qualify for grants or home loans. This income “is too little to enable them to participate in the private property market, yet too much to qualify for state assistance”, according to the government. Buyers of these houses are helped financially by the National Housing Finance Corporation through the Finance Linked Individual Subsidy Programme, which gives all qualifying beneficiaries the certainty of being granted loans or bonds by financial institutions. “[The duration of] general residential ownership in SA is seven years, and that extends to 13 years in the affordable market,” says Wikus Lategan, the CEO of property developer Calgro M3. “In the gap market, it is almost permanent.” In this article, we are looking at affordable housing in the R400,000-R800,000 bracket — which represents housing that investors can buy to let or sell.

AFFORDABLE MODEL

Power Developments marketing director Gary Power says that although the company’s developments are not targeted at investors directly, investors certainly can buy or sell units. Completed are Pelican Park, with 1,100 homes in the R350,000-R800,000 market; The Vines, with 83 affordable homes selling for between R426,000 and R750,000; and Belle Vue Estate, with 197 affordable homes selling for between R399,000 and R800,000. “In terms of sales and signing offers to purchase, we sell between 30 and 60 units per month,” he says. “Unfortunately, the finalisation of the sale is still up to bonds and affordability and therefore actual confirmed sales were in the region of 10 to 30 units per month over the past three to four years. “In developments such as Pelican Park, we have seen increased values of 30%-40% over the past three to four years.”

DEMAND

He says this market continues to challenge the status quo of SA’s economy and the world recession, illustrating the huge need in this market in the country. “Demand continues to outweigh supply and will continue along this trend for many years to come.” Some of the houses in Power Developments’ estates are earmarked for gap housing, and this, Power says, creates a type of synergy with the higher priced units.

CROSS-SUBSIDISATION

“Cross-subsidisation in terms of enhancing lower-priced and entry-level houses while increasing prices of top-end homes in mixed-use and integrated developments also ensures increased values.” Lategan paints a similar picture. “All our current developments fall within this space [R400,000-R800,000]. More than 80% of our product falls below the R600,000 mark. We currently have more than 7,500 units under construction, where 90% fall below the R600,000 mark and they are all sold.” He says that cross-subsidisation is also important to Calgro M3’s business model. “At Calgro M3, we partner with the government on some of our developments to provide fully subsidised housing in the same development where we are also focused on the private sector. “We also receive Urban Settlement Development Grant funding from the government for infrastructure, but this should be a value added benefit that gets passed back to the end owner if it becomes applicable.”

Credits: Photos: Supplied, Words: Georgina Guedes

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