Mezzanine funding playing a key role in social housing

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The social housing sector in South Africa has seen significant changes…

The social housing sector in South Africa has seen significant changes since 1994. The Social Housing Regulatory Authority (SHRA), established in 2010 by the Minister of Human Settlements as per the Social Housing Act, No 16 of 2008, aims to contribute to the national priority of restructuring South African society in order to address structural, economic, social, and spatial dysfunctionalities. The core mandate of the SHRA is to invest into, enable and regulate the social housing sector. Social housing is state-subsidised rental housing targeted at low to medium income groups earning between R1 500 and R15 000 per month. Historically, funding for social housing was limited to Social Housing Institutions (SHIs). For the first time, in 2012, private sector institutions were also eligible to apply for subsidy funding through the SHRA to support the provision of social housing.

The state subsidises social housing in order to ensure provision of rental housing of exceptional quality, at affordable rentals in welllocated areas. This is done through capital grant funding called the Consolidated Capital Grant (CCG). The average cost of construction is R426 000 per unit (including land and bulk services) and the current quantum that the SHRA administers is R271 867 per unit. The grant applicant must provide the remainder of the cost through a mix of loan funding and provision of equity of which Other Delivery Agents (ODAs) are required to provide 20% of the equity. There is thus very clearly a market development and investment case for debt funders in social housing.

Market development case

There is a shortage of affordable rental housing despite significant demand. In a press release statement issued on 22 July 2021, the nine provincial MEC’s of Human Settlements committed to deliver on the 2021/2022 housing delivery target. The department confirmed that it managed to deliver close to 15 000 housing opportunities in the first quarter of 2021, while it spent R3,3 billion of the R4,2 billion transferred to the provinces. R13 billion had been allocated to the provinces to deliver much-needed housing opportunities. Covid-19 further highlighted the stark disparity amongst South Africans, further emphasising the need to accelerate the path to affordable housing delivery targets.

Investment case
Access to finance is one of the most prevalent challenges faced by mid-market companies in South Africa, with banks typically focused on larger corporates. While private equity is one viable option, entrepreneurs are sometimes hesitant to follow this route due to a reluctance to give up equity. Mezzanine debt, on the other hand, is attractive to companies requiring capital because it avoids the significant equity dilution that accompanies traditional private equity. As per the South Africa Housing Market Report 2020, published by the Centre of Affordable Housing Finance in South Africa, apart from government-subsidised housing programmes, there is limited delivery of entry-level properties financed by the private sector, further highlighting the need for the private sector to play a role.

Over the last few years, Tamela has witnessed a surge in interest for mezzanine funding in the sector, which presents opportunities for black-owned accredited SHIs that need a mezzanine funder to fund or fill in a gap. The quantum of the investment opportunity depends on the SHRA grant and SHI equity contribution. In assessing the viability of the transaction, we look for management teams with a good track record in building quality developments, with the aim of improving people’s lives through affordable homes and quality services.

How can we help?

Tamela is one of the few credit-oriented alternative asset managers in Sub-Saharan Africa, with a focus on delivering attractive riskadjusted returns and capital preservation for our investors. Our holistic investment approach and ability to create partnerships with management teams enables us to provide appropriate funding solutions to corporates while ensuring we deliver the promised returns to our clients. For more information, please contact Mandisa Majija, 0745129673/mandisa@tamela.co.za