How to invest in SA's inner cities

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13 Sep 2013

If you've ever dreamed of making your fortune in property, you may want to take a few lessons from some of South Africa's most savvy, streetwise and brave property entrepreneurs - many of whom have gone from rags to riches with success stories to inspire us all.

TUHF is involved in urban regeneration specialising in rental housing and inner city lending, and has to date financed over 17 000 units in the inner cities of South Africa.

These individuals had ideas and dreams of transforming run-down inner city buildings into decent accommodation that were made a reality with the help of Trust for Urban Housing Finance (TUHF), which in June celebrated 10 years of a 'good business, doing good'.

Paul Jackson CEO of TUHF says they are involved in urban regeneration specialising in rental housing and inner city lending, and have to date financed over 17 000 units in the inner cities of South Africa.

He says they see South Africa as the gateway to Africa and urban regeneration is important not just for our cities, but for the continent as a whole. While providing safe and affordable housing, their projects also create jobs and bring commerce and entrepreneurship back to the cities.

TUHF finances property transactions in red-lined inner cities with a head office in Braamfontein and regional branches in Durban and Port Elizabeth.

Their strategy is to concentrate on small areas, creating buoyant residential property markets in the inner cities. "As a result, we have an in-depth understanding of inner city property markets and are well networked within the inner cities, making it possible for us to deliver a better service to our clients," he says.

So what would a potential investor hoping to become a property entrepreneur need to know? Property24 asked Paul Jackson some questions on how to go about starting an inner city property portfolio and what it takes to succeed.

What type of properties would TUHF typically finance?

Their strategy is to concentrate on small areas, creating buoyant residential property markets in the inner cities.

TUHF specialises in lending money to reasonably priced housing projects in areas of urban decline where commercial banks do not tread. "We give preference to small and medium-sized apartment buildings that are safe and clean and will offer good returns, " says Jackson.

Mortgage finance ranges from R100 000 to R30 million, for the purpose of creating residential accommodation for the affordable rental market. This might involve upgrading or refurbishing an existing residential building, or converting an existing office or other building for residential use or for new build developments. 

Jackson says for a new or emerging entrepreneur, they would recommend that a semi-detached house or  2 to 4 duplex would be suitable to begin with, and thereafter to grow their property portfolio with this as a starting point.

What areas and parts of the country are in need of more affordable housing and might be identified as hotspots for entrepreneurs to focus on?

Building before refurbishment. TUHF specialises in lending money to reasonably priced housing projects in areas of urban decline where commercial banks do not tread.

TUHF finances in the inner cities of Johannesburg, KwaZulu-Natal and Port Elizabeth. To name a few places, Jackson says Yeoville, Joubert Park, Hillbrow, Bellevue, Doornfontein, Brixton, Brakpan, Durban, Pietermaritzburg, Pinetown, Uitenhage and Port Elizabeth Central.

As the densification of South Africa's inner cities continues, urban regeneration has become imperative, says Jackson. "With as much as 20% to 30% of an individual's income being spent on transport costs, the demand for housing in the inner cities remains large and deep. "

In the inner cities, there are already existing transport routes, unused infrastructure and water articulation resources. He says the need for well located housing that integrates communities and is in close proximity to places of work, education, health, social and other amenities is becoming extremely popular and the inner cities can fulfil these requirements.

It is only a matter of time before people say "this is the type of place where I want to live".

Can anyone approach TUHF for finance?

Building after it had been refurbished. Mortgage finance ranges from R100 000 to R30 million, for the purpose of creating residential accommodation for the affordable rental market.

Jackson says their clients come from all backgrounds and walks of life. Some are niche commercial operations but many are individuals who have taken a particular interest in a building or area in which they live. "We deal with people from all races, education and language backgrounds, from domestic workers to CEOs of multinational organisations," he says.

To meet TUHF's basic lending criteria would involve the candidate identifying an opportunity in the market and preferably having a deed of sale for the building. "The candidate should have a keen interest in property or property ownership, have a good understanding of the area which they would like to invest in, and most importantly have the right characteristics such as honesty, reliability, be hardworking, ideally have some experience in managing such properties, and must have the good of the inner city at heart," says Jackson.

When considering a loan application, TUHF looks at the collateral value of the building and will lend to a maximum of 80% of the collateral value, he explains. TUHF also looks at the cash flow of the individual or business and requires that the ratio of net income after expenses to loan repayment be 1:3.

"We provide loans that are flexible and tailored to meet the requirements of applicants up to a 15-year term, with interest and raising fees charged at market-related rates," he says.

For someone wishing to enter the affordable housing space, what would be your advice?

Jackson has the following pointers for would-be inner city entrepreneurs:

  • Choose an area of investment
  • Research the area
  • Identify the buildings right for you; if you are a new entrepreneur rather go small and grow big, don't over extend yourself until you are experienced
  • Do the work - walk the streets, attend auctions, speak to brokers, get to know the people residing in an area
  • Get the deal
  • Always have a clear idea what you are looking for i.e. price vs. product requirements
  • Be patient: "Buildings are like buses, there will always be another one"
  • Hard work pays off

Does TUHF provide support, guidance or risk management advice to those who get funding?

Support, guidance and risk management for new entrepreneurs is at the heart of what we do, says Jackson. "TUHF ensures that there is a good fit between the borrower and the building, and between the financial demands of the purchase and the expected rentals.

In this way, he says advice extends to "showing the clients potential buildings that we think will be suitable for them, assisting in realistic purchase prices, providing information on market trends and the feasibility of the building."

He says they introduce new clients to existing clients who have experience and can pass on valuable lessons of failure and success as well as a network of contacts within the industry.

"TUHF finances transactions and not wishes so we believe that no client or building is too small for our business," says Jackson.

Once developed, would these properties typically be rental properties? Would they be resold or managed as part of a rental portfolio?

He says properties financed by TUHF usually form part of a client's rental portfolio and are managed by the client to offer returns and provide a suitable and sustainable income, allowing the client to invest in further property opportunities.

“We are committed to continuing with these projects which will contribute in a positive manner towards a better South Africa for all,” says Jackson. - Julia Hinton 

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