DRAFT KWAZULU-NATAL HUMAN SETTLEMENTS PERSPECTIVE 2010

1. INTRODUCTION This Perspective broadly reviews the current public housing needs in South Africa and KZN Province on the one hand and Government housing programmes to address some of these needs on the other hand. The purpose of the review is to clarify what role the INSTITUTION can play in adding value and in supporting selected programmes. Specific programmes which can make a difference will be selected for support. A very focused approached should be followed by the INSTITUTION that will ensure a significant impact sooner rather than later. Most of the information is available from published resources such as the FinMark Trust using 2006 or earlier data. As a result, all data should be treated as indicative. 2. BACKGROUND A total of 2.8 million housing units have been provided since 1994 under the different housing programmes in South Africa. The demand for housing during 1994 was estimated at 3 million. Currently the housing demand is estimated at 2.2 million, (implying that the demand has since 1994 grown to 5 million). The annual production rate of housing units is about 200,000, not reaching the national target of 250,000 units. The KZN Province has delivered a total number of 600,000 housing units since 1994. In terms of the quantity, this would have been an even greater achievement, were it not for all the complaints about the quality.

Typical RDP Sites & Services Scheme

An Informal Settlement

However, it is clear that the housing subsidy system does not respond very well to the challenges of scale, affordability and sustainability. The broader housing policy environment in which DFIs operate (see Annexures) is such that opportunities for delivery other than through the national housing subsidy scheme cannot be easily seized. Some believe that the current subsidy and housing financing arrangements are constraining market functioning rather than enabling it to happen. The worldwide recession also added to the woes through pushing interest rates upwards, reduce
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available credit and support from groups such as DIGH (Dutch International Stigting for Housing Guarantees). A significant gap in the housing financing framework relates to infrastructure finance. eThekwini Municipality opted for a top-up contribution to add on to the housing subsidy. There are many human settlements in which this is arguably a major challenge, and yet the housing finance framework has no capacity to deal with this. Certainly the demands of infrastructure constitute a significant pressure on the sustainability of human settlements at the local level. The human settlements financing framework must therefore also consider the capacity and role of funders such as DFIs. South Africas current housing sector suffers problems of scale (not enough housing is being delivered - whether in the subsidy or non-subsidy markets and backlogs persist and grow), affordability (too expensive for many households and municipalities), and sustainability (national budgetary resources do not match the demand as currently expressed and within the time-frames hoped for). Another outcome of the housing programme is the displacing of low income households to outlying areas due to the nature of RDP housing schemes. Established squatter settlements in good localities offer many benefits to low income households and will therefore remain popular and a permanent feature of the South African public housing scene. The financing framework will have to be reviewed to explicitly address the challenges of scale, affordability and sustainability. Policy interventions should respond more precisely to this diversity in financial capacity. Policy must also promote effective mixing of public, private and individual resources, using public resources to gear private investment; and private investment to gear individual investment. Finally, policy must not be limited to the financing of housing, but also address the issue of balanced human settlements including components such as infrastructure, as well as social and economic services. After fifteen years of delivery during which time more than two and a half million subsidized houses were delivered, South Africa still have about the same backlog if compared to that of 1994. The housing sector faces at least four main challenges: y Scale: Whilst the housing budget has been utilized and even exceeded, the delivery rate struggles to reach the targeted 250,000 units. Even at this projected rate, it will not be possible to eradicate the backlog by 2014 as had been hoped. While the backlog may be addressed by 2020, as per the Millennium Development Goals commitment, this does not take into account population growth, which suggests that informal settlements will persist for much longer. Currently, a) 1.1 million households live in informal settlements b) 1.7 million households in the subsidy range and c) just under 1 million households outside the subsidy range live in inadequate or overcrowded conditions.
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Affordability gap: For households not eligible for subsidies (those who earn more than R3,500 or do not satisfy the other criteria), the cheapest newly built house costs about R230,000, affordable at current rates to a household earning about R9,000 per month. Twenty percent of South Africas population (about 2.3 million households) earn between R3,500 and R9,000: key public sector workers and labourers. They are too rich to be legible for a subsidy but too poor to buy new housing. Just under half of these live in inadequate housing conditions. As a result of the increased demand, prices have been rising so that even the resale market is becoming less affordable. Also for many households within the subsidy brackets, the national housing solution (small detached RDP house), imply unaffordable recurrent cost to the household. Therefore backyard renting of informal structures in RDP projects is a solution to both the owner in the form of additional income from rental and to the tenant via lower rental. Sustainability: In overcoming the rate of delivery, the budget would be insufficient to meet the backlog plus new growth. It is estimated that average government subsidised house costs anywhere between R90,000 and R160,000 to build (including land, bulk and connector infrastructure and housing). Assuming the projected delivery rate of 250,000 houses per year, the annual budgetary implication is somewhere between R22.5 billion - R40 billion. Even if government were to combine the housing and infrastructure subsidies together, and provide land for free, a budgetary shortfall would still exist. One way to sustain the current arrangement is to build fewer houses - and this may be untenable given the constitutional commitment. Thus the only way out is to adopt a smarter solution and to use budgets more efficiently through improved designs.

Need to refine policies and to reprioritize budgets. Backlogs need to be redefined in order to ensure that it can be achieved. Aiming at unachievable targets which are moving consistently out of the radar screen, are not in our best interest. Higher densities need to be targeted and policies will have to be
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streamlined and it needs to become more flexible. The latter will improve the overall sustainability to the national fiscus. It can improve the urban footprint and affordability, which will increase urban efficiencies and improve living conditions for the lower income communities. Planning legislation including township establishment / environmental approvals as well as the release of government land also need urgent reviews. The newly established Housing Development Agency (HDA) aims at improving the release of land, including state land, for major projects. A more fundamental question that needs to be answered is whether the provision of housing to unemployed people is sustainable over the longer term? Employment creation and income generating opportunities and not housing alone, will therefore have to become a central part of the solution. Existing municipal and provincial rental stock dating from before 1994 is estimated at 200,000 units with an additional 1,000,000 hostel beds, the latter which are mainly in a state of bad repair. The delivery of new rental housing has been insignificant due to mainly the lack of supportive policy over the past decade. Total delivery since 1994 is estimated at 30,000 units. This should have happened through mainly 15 Social Housing Institutions (SHIs) whilst the demand is growing significantly at 5.5% p.a. The focus of rental delivery and future demand is in the metropolitan areas. Annexure II lists the factors which work against higher densities in South Africa. It is not a surprise to see why higher density solutions are insignificantly disappearing in the broader picture. An issue of concern is the broad generalizations about higher densities coming from professionals and sometimes fueled by pseudo-scientific reports. See Annexure IV on the reasons why higher densities should be promoted.

Issues that constrained delivery in the rental housing sector are:

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y y y y y y y y y y

Past national policy void and insufficient subsidy support Availability and access to land Project start-up time and costs Lack of capacity in the social housing institutions, many started from a zero basis Uncertain role for municipalities Affordability constraints and marginal nature of projects Long lead time to reach required stock level (600 units) for financial breakeven of SHIs Lack of funding and volatile interest rates Macro economic conditions (recession, inflation, etc.) leading to ever-increasing building costs and tightening of credit supply Perceptions about social problems in higher density housing.

Government accepted a new policy (Breaking New Ground) during 2006 to provide substantial subsidy support to social (rental) housing mainly for the income group of between R 2,500 - R 7,500 pm and tested it with pilot programmes. The general feedback is positive, but building costs pushed the affordability beyond the reach of a major portion of low income households. A new programme, the Community Residential Units programme was initiated by government to reach down into the lower income groups with municipal driven rental projects. Although the idea is commendable, the jury is still out on how it is applied. The design and O&M (landlord capacity) at municipalities are points of grave concern. It is widely believed that these new policy instruments will be able to support the delivery of rental housing at a more significant scale. The national target for rental units is 20,000 units per annum (20092014). However, it is envisaged that the new Social Housing Act and policies will be implemented to add momentum to this new drive.

3. HOUSING NEEDS Below is a FinMark Trust (2009) summary of the housing environment:

About 65% of households fall within the housing subsidy bracket, earning below R 3,500 pm and about 41% below R 1,500 pm. A major portion of the total housing demand is coming from the lowest income groups which will remain a challenge. KZN Housing Needs per district as per the Provincial Housing Strategy:

According to the above table, traditional houses are not being regarded as part of formal housing supply. But in reviewing policy it could be regarded as part of supply. In further analyzing the above table it can be concluded that the current critical shortfall is made up by the last two columns which represents the total for informal housing units. The latter critical shortfall at this stage is therefore 225,796 units which is 26% of the total estimate backlog for the Province as a whole. Government should become smarter and redefine housing backlogs to focus on critical shortfalls, as opposed to aim at unachievable targets. The low income rental demand should be derived from the last 3 columns (totaling 291,689) as these represent the total theoretical rental market. Should the rental demand be set at 20% of the latter, then it can be calculated at about 58,338 units for the Province. The following table provides a breakdown of the critical housing shortfalls and rental demand estimates for each district:
KZN District eThekwini Metro Ugu District Umgundgundlovu District Uthukela District Umzinyati District Amajuba District Zululand District Umkhanyakude District Uthungulu District Ilembe District Sisonke District KWAZULU-NATAL TOTAL Critical Housing Shortfall (R0-3500 pm) 150,391 6,287 21,544 4,037 2,014 7,634 3,876 3,851 8,397 13,860 3,905 225,796 Total Rental Demand (R0-3500 pm) 35,766 2,210 5,935 1,337 870 2,333 1,433 1,423 2,397 3,501 1,134 58,338

The above table provides an indication of the critical housing shortfall and potential rental market. The housing shortfall is for the household income group of R 3,500 pm and below where affordability is always problematic. If the minimum practical rent for CRU type subsidized units is R 450 pm, then the required income is at the least R 1,500 pm (if 25% is used as norm). A significant portion of this demand earns below R 1,500 pm (or 55.8%) which will therefore fall outside the scope of any rental programme, due to the national housing delivery systems inability to serve this lower end of the market. This effectively means that the KZN demand decreases to 25,785 for the income category R 1,500 to R 3,500 pm. Similarly, the rental demand for the income group from R 3,500 pm and upward is estimated at more than 100,000 for the Province (KZN represents 20% of SAs population and national rental demand is estimated at 650 000).
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Data from various sources indicates that the rental sector is significant, accounting for roughly 20% of all households in South Africa. The majority households that pay rent are poor or low-income. Roughly 55% of all renters have an income of less than R3,500 per month while a further 22% earn between R3,500 and R7,500 (2008). A further 27% earns below R 1500 per month. Data on dwelling conditions, which indicates that over 40% of tenant households live in what could be characterized as slum conditions, which points to significant need for affordable, better quality accommodation. In addition, there is significant unmet demand for affordable accommodation in key urban centres. Both private landlords and social housing institutions report exceptionally low vacancy rates. New social housing projects released onto the market in centres such as Johannesburg, Durban, Port Elizabeth and East London are typically over-subscribed often by a factor of ten. Private landlords offering more affordable accommodation in inner city Johannesburg do not have to look for tenants. Demand in that market is characterized by property owners as insatiable, a bottomless pit and rentals have increased significantly over the past few years. Whilst buoyant demand conditions are very helpful, they are on their own not sufficient to encourage required levels of investment in the sector, particularly from private investors. Market participants, including landlords, financiers and property managers, have noted several constraints that act to reduce the attractiveness of the sector as an investment destination, particularly to smaller investors who typically play an important role in rental markets globally. These constraints include a poorly aligned combination of regulations and legal institutions that together create a lengthy and expensive process relating to evictions, inefficient and expensive municipal service delivery and delays in unlocking access to properties in inner cities that could potentially augment the stock of rental units. On the positive side, the private sector is helped significantly by the favourable tax treatment associated with Urban Restructuring Zones while the social housing sector is poised to grow strongly given the realignment of social housing policy. In that regard, policymakers have explicitly identified encouraging greater private sector involvement as a policy objective. Various other developments in social housing policy are noteworthy. The upper income band used to identify the subsidy target market has been increased from R3,500 to R7,500 per month, the subsidy amount has been dramatically increased and efforts have been made to streamline the administration of the subsidy system.

Annexure FACTORS UNDERMINING HIGHER DENSITY HOUSING IN SA 1. Cultural mindset of South Africans with a relative short urban history and memory which rather promotes the idea of extensive land needs and a traditional anti-urban viewpoint. Available space at the back of the yard is used for sub-letting. 2. The pro sub-urban mindset in following aspirations of higher income groups. 3. The attitude of planners and authorities as part of the regulatory system. Although there is a marked improvement lately, it will take some time and successful projects to eradicate negative perceptions. 4. Attitude of design specialists which is non-integrative in terms of finding solutions:y Engineers opt for conventional conservative approaches to design. y Planners are against higher-rise living due to reported social problems. 5. Abuse of DFA and other legislation by planners to motivate any type of development. Any development is seen as positive by government. 6. Silo mentality of national departments, lack of cross communication and leadership. 7. Specialist nature of separate national support programmes which reduces coherency and overall efficiency. 8. Politically, a precedent has been created that sets the individual house as the standard. Any deviation can be seen as lower quality and will be met with resistance. 9. Availability of land on the periphery of the City serves as an attraction for low income housing projects. 10. The latter must be coupled with the fact that public sector subsidized projects are dependent on cheap land and therefore less input cost to improve its viability. 11. The structuring of housing subsidies is such that it requires large projects to achieve economy of scale to ensure the projects profitability. 12. Housing policy requires minimum standards (site sizes and housing unit sizes) which promotes lower densities. 13. Other Government policies promote urban sprawl such as the building of highways and extensive transport networks. 14. Land tax also promotes less intense development. 15. Planners and engineers only recently started to realise that higher densities might not be more costly than lower density developments. Usually the full project lifecycle picture, in terms of costs and benefits, is not available. It is argued that the high cost of prime land is inhibiting higher densities. 16. Weak land use management at municipalities does not support higher densities and curbing of sprawl. This is not conducive to corridor and nodal strategies in spatial planning. Zoning bye-laws in general do not promote creative solutions. 17. A lack of well designed higher density projects that can serve as an example of what is possible and to demonstrate its acceptability to communities.
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Annexure DENSITY GUIDELINES

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Annexure WHY SHOULD WE PROMOTE BETTER PLANNED HIGHER DENSITIES IN GOOD LOCALITIES? 1. 2. 3. Improved legibility and identity of development. Human scale development, pedestrian orientated. Safety made easier through improved design enabling better surveillance, territoriality and control over outdoor spaces. Empowerment of and comfort to residents, reduced need to travel. Aesthetics and quality development made easier. Quality environment - less pollution. Urban system efficiencies including municipal affordability. Better densities for the benefit of social and economic services. The way in which location and density manifest in urban environments profoundly impacts the form and functioning of cities. Public transport becomes more viable at higher densities coupled with corridor and nodal developments. Infrastructure provision and maintenance (as a result of shorter service length per unit) are more cost effectively both in terms of initial capital cost as well as long term maintenance and operational cost. The impacts of current settlement design norms militates against demand-side management, resource efficiency and sustainability. There are more opportunities to promote green building in higher densities. Consumption of less land and reduced threat to consumption of agriculture land. Affordability to residents - especially with regard to individual transport cost. Improved sustainability to national government - better solution. Employment generation specialization/diversification. intense developments promote

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12. 13. 14. 15. 16.

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Annexure HOUSING DEVELOPMENT FINANCE AND SUPPORT INSTITUTIONS 1) The National Housing Finance Corporation (NHFC) was set up by the Department of Housing with a mandate to ensure that every South African with a regular source of income is able to gain access to finance, to acquire and improve a home of his or her own. The Corporation acts as a wholesale funder & facilitating access to housing finance for low and moderate income communities. 2) Rural Housing Loan Fund (RHLF) - Provide loans to retailers that advance loans to individual rural dwellers for improvements to housing. It had a wide impact (at least 300 000 micro loans) since inception in 2000. 3) National Urban Reconstruction and Housing Association (NURCHA) is a construction finance company that supports the national programme to house all South Africans in sustainable human settlements. Nurcha provides bridging finance to contractors and developers involved in the construction of subsidy and affordable housing, community facilities and infrastructure. Nurcha is a section 21 company (not for gain) and is funded by the South African Government in partnership with the Soros Foundation, various overseas donors, etc. 4) The Trust for Urban Housing Finance (TUHF) is a finance company aimed at providing short and medium-term loans to Property Entrepreneurs looking to purchase or improve residential rental buildings within South Africa's inner cities. 5) Dutch International Guarantees for Housing (DIGH) - provides guarantees for lenders that develop rental stock and other housing as well as start-up loans. 6) The Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden (FMO) mission is to provide capital, share knowledge and create partnerships. Their clients are ambitious entrepreneurs and financial institutions - often in lowincome countries. With banks and other institutions they create access to a full range of financial products. FMO is a public-private development bank. Both the Dutch State and large Dutch banks are major shareholders. 7) The Social Housing Foundation (SHF) is a section 21 Company which was established in 1997 by the National Housing. The organization was established to develop and build capacity for social housing institutions and to develop a policy framework for the social housing sector. Now transformed into the Social Housing Regulatory Authority (SHRA). 8) National Association of Social Housing Organisations (NASHO) is a membership-based federation of 16 social housing institutions with one affiliated member, collectively owning and/or managing 23,044 units and operating throughout the country. 9) Housing Development Agency (HDA) came into being in 2009 in response to the need for a state organisation to fast-track the acquisition and release of land for human settlement developments.
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