The furore over the sale of the Tafelberg site by the Western Cape Department of Public Works has highlighted key issues regarding affordable housing and integration. The debate has highlighted how poorly equipped we are at visioning a housing future outside of the relatively static parameters of our housing policy. That policy could be characterized as one that sees the State providing for the needs of households who earn below a given income threshold, with the private sector meeting the needs of those who are deemed to earn enough to afford what private developers can deliver.

With regard to affordable rental, in the social housing sector the State provides an institutional grant to accredited social housing institutions who must abide by a set of criteria with regard to the market they serve, the rent they charge and the minimum norms and standards associated with the units they deliver. In line with current policy, beneficiary households should earn between R3 500 and R7 500 per month, and should spend roughly 25% of their household income on rentals. Unit sizes can vary but must not be less than 30 square metres. An additional grant is available for developments in so-called restructuring zones to promote integration and urban regeneration. Together, the institutional subsidy and restructuring grant currently amount to roughly R235 000 per unit. In addition, social housing projects often access land on preferential terms that are not accounted in the capital subsidy amount granted.

While the cash and land subsidy is material, the experience of social housing institutions is that they simply cannot get the numbers to work within the current policy parameters. Construction costs currently come in at roughly R12 000 per square metre. These are high admittedly, but are unlikely to come down given the need align the look and feel of the development with that of other stock in well-located and often relatively expensive neighborhoods in which social housing projects are developed. Management costs, including security, tenant liaison and short and long term maintenance, are also high and average approximately R1000 per unit per month.

Given these two parameters alone, the required rentals are simply not affordable to the target market. By way of example, a 30 square metre unit would cost R360 000 to build. In the best case scenario we can assume the land is made available free, and that the social housing institution receives a grant of R235 000 per unit. That would leave a shortfall of R125 000 per unit which the social housing institution would have to fund. If the institution borrowed money at prime (currently at 10.5%) over ten years – the most common term offered to residential developers – monthly bond repayments per unit would be in excess of R1 680. Together with management costs, the rental of R2 680 would be affordable to households earning in excess of R10 500 per month, way higher than the current maximum threshold allowed by the policy.

Policymakers have therefore proposed increasing the institutional subsidy by around R30 000 per unit, and increasing the maximum income threshold to include households who earn up to R15 000 per month. This would certainly allow for greater responsiveness as rentals could theoretically increase to R3 750 per unit per month.

The increase in the income threshold of the target market would seem to undermine the objective of catering to the needs of the poor. However, in reality the social housing policy was designed to meet the needs of households with stable, albeit relatively low incomes. Typically, income earners would be employed in the formal sector, where minimum wages are currently significantly higher than the R3 500 per month stipulated by the policy. That is not to say that social housing institutions cannot accommodate domestic workers or others with lower incomes; there are cases where they do. But typically this would require an act of generosity on the part of employers who might supplement rentals paid by beneficiary households at the lower end of the income scale.

While increasing subsidies or changing the income threshold associated with the social housing target market to enable institutions to charge higher rentals can help, this still does not deal with the issue of land cost. Where the land is not free – as is the case in all well-located areas, but especially on the Atlantic Seaboard, the equation remains out of kilter.

To bring this back to something feasible, other key variables need to be adjusted. In the first instance, the three to four story walk-up model which is currently the most common built form in social housing developments is clearly not the most efficient use of land. Unit size is another variable. In Hong Kong for instance, luxury apartments of under 17 square metres are on the market; in Nairobi, a reputable developer has put 15 square metre units into the market to accommodate affordability constraints and has found demand to be substantial. In South Africa, companies like Afhco have delivered 12 square metre rental units in the Johannesburg CBD. While this is by no means an ideal, these small units offer choice to those who otherwise could not afford to live in well-located areas – a choice that low vacancy rates suggest is highly valued.

A further critical variable is cross-subsidy within a development. In some cases this could leverage commercial development, or other, higher value residential development on the same site. While cross-subsidy does lower the overall return to an investor, the mechanism is commonly used in so-called integrated developments where land sale agreements stipulate a minimum requirement in terms of affordable delivery.

This brings us back to the Tafelberg site. Throughout, the debate has been framed as a stark choice; use the site either social housing or sell it to the highest bidder. This is far too narrow a lens, particularly on the Tafelberg site, and arguably on other well-located pieces of land too. This specific site clearly lends itself well to a creative solution incorporating a mixed use, truly integrated development. The old school building which dominates the site is a heritage structure which must be preserved. It is ideal for use as a school – the primary stated need of the consortium that won the bid. In addition, the site’s position on the main road in Sea Point provides valuable commercial rights. Finally, the site also encompasses a now derelict, but historically affordable state-owned and managed residential block of flats.

That particular component of the site may well have fueled some of the NIMBY (“Not In My Back Yard”) concerns with regard to social housing in the area. However, the trajectory of decline on that block of flats is more a reflection of the very limited property management capabilities of the State. Better run social housing companies and private developers who build and manage affordable rental stock screen tenants carefully, ensure tenants pay their rent and comply with tenant rules. There is no reason to believe that well managed properties that happen to house lower income tenants will impact negatively on value of surrounding properties. Indeed, the great NIMBY irony is that many blocks of flats in Sea Point already house lower income tenants – often in poorly maintained back rooms. It is not clear why offering vastly improved accommodation for the same profile of tenants in the area would necessarily result in a slump in property prices.

Beyond more creative use of the land itself, the site offers an opportunity to test alternative mechanisms to create affordability. As noted, existing subsidy instruments support accredited social housing institutions with capital subsidies, which in turn come with strings attached in terms of tenant selection and unit spec. In practice, the true cost of these supply side mechanisms is often poorly accounted for; land is typically made available on a preferential basis and not costed at market value. Likewise municipalities may subsidise bulk contributions. All together the value of the total investment is often understated significantly.

An alternative model would support affordability of renter households directly with demand-side subsidies. Aside from improved cost transparency, this mechanism can be more flexible, with subsidies decreasing in line with growing incomes that might characterize more upwardly mobile tenants. It would also enable integration, with subsidy beneficiaries living in the same development as households who earn above subsidy thresholds. Critically, it would enable participation by the private sector, which has capacity to deliver at scale. Demand side support has already been implemented in South Africa’s student housing sector which may well offer a number of critical learnings. Given the significant challenges with regard to existing social housing funding models it could be useful to pilot alternative demand side mechanisms on the Tafelberg site, potentially with the active participation of employers in the area.

Going forward, the Province, and the State more broadly, should be more deliberate in establishing and communicating the basis on which decisions regarding the sale of state land are made. Uncertainty in this regard leaves future land sales open to dispute, reducing the willingness of potential buyers to participate in the process and decreasing the potential yield to the State on these assets. But beyond this it is critical to approach other well-located parcels of land with a creative, multi-dimensional approach that optimizes social and economic returns. Clearly, in the face of an enormous housing backlog, and many households too poor for social housing, the State cannot justifiably invest in the sector at scale. It is therefore critical to create opportunities for a wider base of participation in the sector by a range of institutions including social housing companies, private developers, funders, communities and of course employers. While it may seem unlikely to some, it just may be the case that entities other than the State might be willing to invest in creating truly integrated communities, in their own backyards.

Written by Illana Melzer, co-founder and Director at Eighty20