Property stocks have taken a significant hit during the pandemic where retail and commercial property – and even some industrial property holdings – were affected. In contrast, lower-income affordable housing and inner-city housing have performed better than most other property markets in South Africa over the same period.
Changes in the way we work catalysed by the pandemic as well as South Africa’s urban densification imperative are some of the trends driving this performance says Paul Jackson, CEO at Trust for Urban Housing Finance (TUHF) and these trends are shaping urban regeneration in South Africa, boosting the residential property market in inner cities.
The urban densification imperative
Urban densification is a national imperative says Jackson. It is happening as part of a natural demographic trend that happens as countries develop. It is also happening at a much larger scale than people may believe. According to the Centre for Development and Enterprise (CDE), 70% of South Africa’s population will be urbanised by 2030, with more than 60% urbanised already.
“South Africa’s urban development and the current approach to making housing investments have contributed to enormous and unsustainable urban sprawl as people continue to flock to urban areas and inner cities” he says. “Urban densification must be managed carefully to avoid creating urban decay in the process.”
“Meeting this challenge cannot be done with the traditional property development approach of building single, large scale and often comparatively expensive projects on the periphery of our cities. With the existing urban landscape of most inner cities already under space pressures, urban densification must take the form of many less expansive projects that rely on ordinary people with local knowledge for their success, In our business, we are seeing small and medium-sized developers taking up opportunities to develop projects between R1 million and R100 million, and we expect this phenomenon will continue.”
The changing world of work
National lockdown restrictions catalysed the adoption of work-from-home strategies for many traditionally office-based employees. Even with restrictions easing, many companies are either not returning to the office or are reducing office space to reduce costs.
“The result is that we are seeing office and retail space remaining disused, or no longer fully tenanted. And as such, many large, listed organisations and investors who own commercial properties in inner cities are either looking to sell or transform their building stock into residential or mixed-use developments,” indicates Jackson.
TUHF believes that small and medium-sized entrepreneurs can capitalise on this trend as unwanted commercial space in inner cities becomes available for conversion.
“Inner cities are multi-sector economies that, when managed well, attract pedestrians, commercial activity and reliable tenants while stimulating new businesses. As ordinary South Africans remain under financial pressure, and as working from home becomes part of the “new normal”, people seek affordable, decent accommodation with access to physical and social infrastructure.”
In the longer term, reduced commuting time and costs will also continue to drive urban densification trends. The daily commute, for example, sees 20% to 40% of South Africans spending two to three hours of their day and 30% of their monthly income on getting to and from work. As people increasingly move to the inner cities to reduce their living costs and/or gain access to better facilities and amenities, the opportunity to invest in inner-city rejuvenation and refurbishment projects makes both short- and long-term sense.
“There’s room for smaller players in this space to take advantage of this trend by investing in multiple small projects – around twenty units at a time – and refurbish or repurpose existing buildings rather than investing in large-scale green fields projects that require sizeable tracts of open land to build,” says Jackson.
A positive fiscal impact
The final driver behind inner-city investment is the knock-on effect on the greater economy.
Jackson suggests that while RDP housing developments certainly serve an important purpose, these developments often have a net negative fiscal impact. “They require additional services and ancillary infrastructure development in areas that have none, and people living in these developments often struggle to pay for services such as utilities, rates and taxes.”
In contrast, a certain level of urban densification is necessary for economic and social action. It contributes to economic development at a micro level, which is by its nature inclusive. Stimulating the economy in localised spaces – one city block at a time – is critical to uplifting people from poverty. As South Africa’s economy seeks to recover from the impact of the pandemic, this kind of inclusive growth will be crucial.
“This is what we refer to as impact through scale – developments that bode real benefits in transformation through diversity, accessibility and economic inclusion. We therefore expect to see more investment in mixed-use developments in inner cities that are underpinned by this ethos and include retail, entertainment, educational and faith-based facilities rather than purely housing-focused developments.”
TUHF’s impact through scale approach has been developed based on proven results of sustainable investments and returns, while still being aimed at stimulating micro-economies in the immediate surroundings of a development so that urban densification largely has a net positive fiscal impact. This not only stimulates economic growth but attracts people that are more likely to be able to pay for services, rates, and taxes. These projects also require less upfront investment, as they make use of existing infrastructure that can be refurbished or improved.
“People are already investing in inner cities, financing important urban development to create urban densification projects. It is a phenomenon that is already shaping our urban areas. The market trend is extraordinarily positive, and for government and private investors, the opportunity lies in helping to ensure that these investments are regularised and contribute to inclusive wealth creation,” he concludes.