Gauteng Business News

Send  Share  RSS  Twitter  20 Jul 2010

PROPERTY DEVELOPMENT: Rental Homes Are a Good Option for Property Developers


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Tighter money supply and reluctance by banks to provide mortgage finance without large deposits especially for the middle market households in South Africa makes the provision of rental accommodation an attractive alternative for developers in SA today.

So says Soula Proxenos, Managing Partner of International Housing Solutions, a global private equity funder of affordable housing in SA.

She adds that too many South African property developers are holding onto old fashioned home ownership notions.

She says the notion that homeownership is always the best option is clearly outdated and proved a dangerous model in the US which led the worldwide housing-crash and melt down in financial markets.

“The proponents of homeownership argue that homeowners are happier and higher home ownership improves property values in a neighbourhood.

“Policymakers in countries like the USA and Mexico clearly agree as they allow homeowners to deduct interest payments on their homes from their taxes to incentivise homeownership over rental.

“But interest rate tax relief is considered to be regressive by many people as it rewards people who can afford to take out bigger mortgages by giving them bigger tax breaks.”

She says globally, the USA is the biggest supporter of home ownership in the developed world while Germany is one of the lowest in the world because as their tax code rewards the rental option.

“Given South Africa’s huge housing backlog and the lack of delivery to meet demand, I believe we have a great opportunity to provide both home ownership and rental options. We cannot afford to rely on homeownership alone and in fact we do our fellow citizens a disservice if we rely only on homeownership to solve the backlog.

“It is estimated that there is an affordable housing (incomes of R3,500-R9,000 per month) shortage of 650,000 units and only 25,000-27,000 houses are being built for this target group each year. Affordable rental units in safe areas and developments are also in short supply.

“Based on the report entitled Supply and Demand of Rental Accommodation in South Africa done by Eighty20 for the Social Housing Foundation in July 2008, we would estimate the demand for affordable rental (incomes of R3,500-R9,000 per month) is about 600,000 units and the supply is only about 400,000 units.

“Historically the government has focused its efforts on delivering homes for low income families to own – first under the RDP program and more recently under a similar program renamed ’breaking new ground’.

“By many measures this program has been very successful. When one looks at it from a volume perspective — figures show over 2 million houses have been built as ‘give away’ homes which is very impressive.”

She says both the public and private sector has not sufficiently focussed on making affordable rental housing available.

The demand for rental is huge not only for lower income earners but also among students, migrant and temporary workers.

While property ownership still remains one of the best ways for people to accumulate wealth, people still need homes to live in, even if they cannot afford the costs of buying a home, which despite the lull in the market is still onerous.

Depending on where someone is on their lifecycle rental might be a significantly better option to ownership. This ‘Lifestage’ theory is based on the argument that during early stages of adult life, students, young professionals who want to be career mobile and people with little or unreliable income, it is definitely better to rent than to buy.

Those who cannot afford down payments or payment shocks (like replacing a geyser or paying more on an interest rate increase) should also rent until they can afford to buy even if their income covers the interest cost of a mortgage bond.

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