Kutoane Kutoane, CEO of GPF

Housing remains one of the biggest issues for the South African government, with millions of people still awaiting sustainable housing, as evidenced by the R3.7-billion earmarked by Trevor Manuel in his latest Budget for low-income housing projects.

In Gauteng the problem is particularly severe, with people having flooded to the economic hub of the country in search of work. In an effort to combat this, in 2003 the Gauteng Department of Housing created the Gauteng Partnership Fund (GPF), with a view to encouraging further investment in low-income housing.

Kutoane Kutoane, chief executive of the GPF, says the idea behind the fund was to entice the private sector, especially the major banks, to get involved in affordable or low-income housing projects.

“The banks tended to be reluctant to fund in this market, so we wanted to provide them with some sort of risk-mitigating mechanism where the government or public funds would take up to about 30% of high-risk capital injection into the project,” says Kutoane.

Five years later and the GPF has gone from strength to strength, helping to finance and mitigate risk on a series of major housing projects in the nation’s economic capital.

Kutoane says the GPF is quite different from other development finance institutions in that it was created as a special intervention mechanism which initially had a finite life as a means of making the low-income housing market more transparent to the banks.

While there have been some inroads, Kutoane says there is still more work that needs to be done. He notes that the GPF reviewed its business model last year to ensure that it could effectively respond to information it gathers from its investment partners.

“We think there is still a bigger role the GPF could be playing in the market, while the other finance institutions would be more based on commercial principles and are expected to be self-sustaining,” says Kutoane.

Some may think that RDP housing would be the GPF’s main target, however Kutoane notes that one of the biggest problems has actually been ‘gap funding’, those people that earn above the RDP threshold but still find it difficult to obtain a loan through a bank.

“Gap funding consists of income groups from between R2,500 per month to R10,000 a month. That is the kind of income range that we have been concentrating on in terms of our         Kliptown Social Housing Programme     programme,” he says.

So are the GPF’s partners always large financial institutions, or can smaller players also benefit from working with the fund to develop affordable housing?

Kutoane says that the GPF has not excluded any potential partners, but says its relationships with banking institutions have been born out of convenience, as the bigger institutions would be more under pressure from the public and the government to participate in the market.

“Besides banks, we are currently talking with private equity companies, like Sanlam Private Equity, and Eskom Pension Fund and other similar kinds of institutions to come on board by way of providing some affordably-priced equity money,” he adds.

The GPF’s involvement helps to mitigate risks for its partners by taking the first loss position in the funding arrangement, so in the eventuality of a customer defaulting on their loan, the GPF would make a loss before its partners.

“The repayment of GPF’s fund is tied directly with the repayment of the bank portion, which is the debt portion. If there is a shortfall, obviously GPF would probably be paid last, but our funding ranges from anything from 7 years to maximum 15 years,” says Kutoane.

Essentially, the idea is that the GPF’s partners will buy out the fund’s stake in the venture when they refinance the projects. This has already happened with one of the GPF’s projects with Standard Bank, where the bank subsequently bought out the GPF's stake and refinanced the project with debt.

That move by Standard Bank signalled an achievement for the GPF, as it proved that commercial banks were willing to take on risk in the low-income housing market without requiring public funds as a cushion.

The GPF has worked on various projects across Gauteng, such as the Kliptown Social Housing Programme (pictured above); the conversion of old hostels into family dwelling units around Roodeport, and a number of housing projects with the Ekhuruleni Development Corporation.

Many of these projects have been funded by the GPF working with large financial institutions, however, Kutoane says the fund has also been working hard to attract more private business as well.

“We have been concentrating on bringing in more private developers or investors who want to buy some of these old buildings in the inner city and convert them into building units, as we could also back them up with equity,” says Kutoane.

“We emphasise the newcomers, like your emerging black enterprises and entrepreneurs who thinks they could take risk alongside the public funds in this market and we have seen some interest, especially in and around the inner-city,” he adds.

The Gauteng Partnership Fund will not risk more than 10% of its total fund (currently about R450m) on any single project, meaning the highest exposure to a project it would make would be about R45m. It has provided funding from R500,000, though as a rule most investments start from between R2 to R3m.

Kutoane notes that the GPF has also begun to focus on mixed-housing developments, for which it has a minimum requirement that at least 20% of the houses provided are available to its target market of low-income earners.

GPF funded just such a project, Hlanganani Village, near Sharon Park in Springs, with Standard Bank, with the bank also creating affordable loans to help households earning at least R6 000 per month to buy the apartments.

That move was made before the current financial crisis, however, and Kutoane notes that the investment climate is markedly different now from a year ago. “Most banks are now actually pulling back in terms of exposing themselves in that (low-income housing) market,” he says.

The result of this, says Kutoane, could be a revision of the way the fund operates. A new strategy could possibly see increased funding to the GPF to cover 40% or even 50% of a project’s cost, as opposed to the current 30% level, he adds.

However much the GPF is required to fund going forward, the goal is eventually for its partners to begin taking on such projects, and the subsequent risk, without recourse to funding from the GPF.

While Kutoane sees lots of potential for the GPF, his greatest achievement would be the end of the fund, which would indicate the commercial sector was willing to bear the risk of low-income housing on its own without recourse to government funding.

Undoubtedly while the climate in South Africa’s housing market is not as sunny as it once was, with millions still in need of proper housing but earning above the RDP threshold, there is still strong need for the GPF, and still good returns to be made for its partners.