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Township micro-developers thrive in affordable market

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Entrepreneurs providing ‘a phenomenal service to community’

A new generation of property entrepreneurs is emerging in Cape Town’s townships. They have seen a gap in the property market for low-cost rental accommodation, and have seized the opportunity by building solid bricks-and-mortar developments offering affordable micro-units.

Developments can include up to 10 units, are often double-storey, and vary in size from about 10m² to about 40m². Rents range between R1 500 and R3 000.

“Call it backyarding version 2.0, in that it is bricks and mortar, the accommodation is legal, safe (built according to approved plans) and affordable,” says Zama Mgwatyu, a project manager at the Development Action Group (DAG), an NGO with more than 30 years experience in urban governance, housing and community organising.

In research on the affordable rental market, DAG describes it as “a new type of affordable rental accommodation in townships, mostly located in the backyards of properties”.

In one development, a 24m² micro-flat includes a bathroom and a safe place to park a car and is let for about R1 500 a month to a nurse. It has a window, its own entrance and is on the top floor of the five-unit development.  The inside is painted white and the tenant has a single bed, a cupboard and a table. To the side is a bathroom with a toilet, sink and shower. 

Smaller units, those of 10m² for instance, will have space for a bed and the tenant will use a shared bathroom down the hall. Like the builders of micro-units in Woodstock and New York, developers in places such as Delft and Khayelitsha are following the same economics (“build small and offer affordable”), and their returns can be up to 20% in the first year, says Professor Robert McGaffin, part of the UCT Nedbank Urban Real Estate Research Unit.

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He says returns are more than double what a developer closer to the city can bring in. “These guys are providing a phenomenal service to their community. There is a misconception that everything that happens in the township property market is unregulated, but this is not entirely the case.

“There are certainly developers who have formal plans, but there also some who don’t.”

Mgwatyu says these entrepreneurs have seen a need, “and they are working the market”.

“They operate as individuals and don’t belong to any organisation. It is still an emerging industry, and it is flourishing. They can buy an RDP home, demolish it and build a new place, once housing plans have gone through, and make good returns.”

The units are mostly servicing gap market dwellers – those who earn between R3 500 and R15 000 a month. It is estimated that about 3.5 million households fall into this market. These households include young families, recent graduates and single professionals.

A report written by Lee Middleton, based on research by DAG on the affordable rental market says, the micro-developers are either often employed by another sector completely unrelated to building, and have cobbled together finance from various sources usually excluding traditional property finance, to develop these units as a business proposition.

The developers often don’t wait for policies, permission or subsidies to break new ground themselves. McGaffin says for a chance to get in the market these industrious entrepreneurs will find their own financing – usually unsecured personal loans or money from loan sharks – meaning the interest rates are high.

This is probably the biggest barrier to their success, says McGaffin. To date large financial institutions have not participated in this market, but the Trust for Urban Housing Finance is working with DAG and piloting a finance package aimed at these developers.

The emerging industry is creating “an army of small enterprise”, McGaffin says. The developers use 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.”

Also read: The age of apodment living

The developments work economically because there are generally no vacancies as the demand is so high, there are low levels of non-payment (about 5%) and they are well managed.

Often the developers themselves are the landlords. They either live on the premises or they live close by, and McGaffin says this could be one of the reasons why non-payment levels are so low. Because they are so hands-on, the buildings are also well managed.

Mgwatyu says these entrepreneurs not only provide more, better and safer affordable housing options, but can also help to show the city how to “formalise a mostly informal system for the good of all”.

Creative ideas behind funding

A developer interviewed by DAG said he used savings and a personal loan to purchase his first property, an RDP house in Delft South. He took a personal loan of R35000 (at 26% interest) and repaid it within two years.

He then secured another loan from a bank and pushed his credit card and bank overdraft to the limit to start building his development. To be able to finish the building, he began letting units while he was building.

Tenants paid a reduced rate to live there while he built, but as soon as the development was complete their rents went up to market-related values. About the design of his development, he says he didn’t quite get what he wanted because of municipal building regulations, saying only two of the five units have their own external entrance, and two units share a bathroom.

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