The Low Cost Housing Model

Opportunities for savvy investors

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By Cilna Steyn

South Africa is an amazing country, but we’re not without our struggles. Over the past year, the country’s less-than-thriving economy has been in the spotlight. Our history, as well as the current economic situation left this beautiful country with an incredible housing crisis.

According to Stats SA’s July 2016 release, we have close to 16.7 million households in the country, of which close to 2 million households are living in informal rental accommodation. We have made some headway in the past few years, but we still have many households living in informal housing.

The basis of upliftment of a country lays in the socio-economic position of the citizens. With so many people not even living in formal housing, we can hardly expect the economy to strengthen. Now is the time for property investors to step up and address the housing crisis. This will benefit not only the country as a whole, but holds definite financial benefits for the investor.

Low cost housing has never been the most exciting topic of conversation among property investors, as the potential risks of low cost housing tend to overshadow these conversations. The Department of Human Settlements understands that property investors should be placed in a position to benefit from addressing the housing crisis in the country. Low cost units with a rental income of between     R750 and R2000 a month is the accommodation type that is required to address this problem.

The key to success for this investment strategy will be access control and security. Residents of these units needa safe place to live and raise their families. Once an investor has completed one of these developments, for instance the building of a 200-unit complex, all the strategies and plans can be replicated time and time again. The only costs involved in future developments will be professionals such as engineers and builders. If done right, costs involving architects and engineers will reduce the cost in the long run.

It is important to note that the Prevention of Illegal Evictions Act will not allow you to disallow an occupant access to a premises due to non-payment of rent. However, an agreement can be reached between the landlord and the tenant, where the tenant occupies the unit on a type of “pre-paid rental” combined with secure access control. The concept of “pre-paid rental” is foreign in our legal system, and as such should be approached with caution and in conjunction with advice from experts in the field.

Tenant vetting will be completely different in these types of rentals, but the key to success will be vigilant management, paired well drafted lease agreements. This type of investment is obviously a numbers game and to reduce some of the potential legal costs (such as an eviction) there are products in the rental market allowing the investor the opportunity to quantify and mitigate risks more accurately. The perception still exists that the cost of an eviction should somehow be compared with the rental income on the unit, however the court order and the costs of an eviction is exactly the same, regardless of the rental income of the property.

With stringent measures, the number of tenants that will have to be evicted can be drastically reduced and the investor can quantify the risk. This makes provision for those potential unfortunate cases where an eviction order needs to be obtained. With a no-tolerance for non-payment of rental policy, where the investor takes immediate action if rent is not paid, there will still be a risk of eviction, however this could be reduced to about 4 of 5 percent of the occupants. This leaves the remaining occupants feeling safer and more inclined to pay their rent on time.

The low-cost housing-journey is something that should not be embarked on without the support of the correct government departments. Assistance from the Department of Human Settlements is available and should be utilised, paired with potential tax benefits for the investor. Low-cost housing can be an extremely lucrative business, with a direct positive effect on this magnificent country we call home.

 

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