A victim of its own success

By Pauline Larsen

Johannesburg's inner city in the early 1990s was a scary place to be. Crime and grime were rife, companies were moving northwards into the suburbs en masse, and property values were plunging.

The thing to do was escape from the city, not revitalise it.

Into this seemingly inauspicious environment, the Johannesburg Housing Co (JHC) was born in 1995. Its aim was to tackle the overwhelming need for affordable housing in Johannesburg's most notorious neighbourhoods.

Since then, the sustainable business model created by JHC has become something of an inspiration. So much so that last month JHC won a UN World Habitat award (WHA) in recognition of its innovative responses to housing needs.

"Thinking back to the inner city during the early 1990s, anyone who went into housing must have been mad," laughs Neil Fraser, doyen of inner-city revitalis ation and head of urban consulting firm Urban Inc. At the time, he says, there were about 6 000 homeless people living in the city. Shelters provided 1 200 beds and there was no transitional or social housing.

JHC started out with grant funding from the EU and the Flemish government, and later subsidies from the SA government. Its business goal was clear from the beginning.

"We may have been established as a not-for-profit organisation, " says CEO Taffy Adler. "But we decided upfront that we were also going to be a not-for-loss one." Today, the JHC portfolio of 21 buildings is valued at R350m and generates annual turnover of R55m. Arrears are just 1,2% and the vacancy rate 1%. Bad debt write-offs for the past year were a mere R60 000. The portfolio is made up of 2 700 existing units; another 300 are under construction or being planned.

Though JHC hasn't hit on a magic formula for success, its philosophy is simple. Rentals must cover building operating costs and buildings are never subsidis ed. Day-to-day property management is a top priority.

"Too often, the not-for-profit sector gets involved in a good deed' but doesn't examine the logistics, systems or market profile carefully enough," says Adler.

JHC has become a financial innovator along the way. Straightforward grant funding has evolved into sophisticated financial structures. At the R121m Brickfields project in Newtown, JHC has secured a mix of grant, debt, mezzanine debt and equity financing. Financial partners include private funders such as Absa, AngloGold Ashanti and ApexHi, and public funders like the National Housing Finance Corp.

"Brickfields has provided the funding model for the proposed restructuring zone subsidy being finalised by the department of housing," says Adler. "Its funding structure is seen as pioneering in using both public and private financing to ensure affordable rentals."

The JHC portfolio's income yield is a respectable 12%. "We could easily double that if we cut back on community development work and maintenance programmes, or brought buildings on-stream more quickly," he says. "But that's the difference between a pure profit motive and JHC's social goals."

The London-based Building & Social Housing Foundation, which manages the WHA, applauds this social entrepreneurship. "It's one of the things about JHC that we found most remarkable," says international programme officer Silvia Guimaraes. She says another of its strengths is its demonstrated commitment to financial transparency and good governance.

She points to other innovations in the JHC model, such as shifting to mixed-income developments that encourage cross-subsidis ation, which helps compensate for reduced government subsidies. The Brickfields project comprises 30% subsidised units.

But revitalisation's success is its own worst enemy. Escalating property prices and construction costs make providing affordable housing ever more challenging. "In the past nine months we've arrived at property auctions and seen prices climb 50% higher than what we expected," says Adler.

The solution may be to move out of regenerating areas and look for neighbourhoods where value still exists - Westbury is a possibility - but Adler admits it's not easy to supply the lowest end of the income spectrum.

"We're in the fortunate position now of having a sustainable income flow which allows us to look further afield than just the inner city," he says.