Cosmo City, the integrated, mixed-use housing township in northern Johannesburg has become a flagship project in more than one way.
The development, which on final completion will provide 12 500 homes, has offered government a model for public-private partnerships in housing mixed income groups, including SA's burgeoning squatter population. Other SA cities are flocking to Cosmo City to study and replicate it.
But the project has also catapulted Absa into a lead role in SA's drive to fund efforts to make inroads into the vast shortage in low-cost and affordable housing.
"Cosmo City was SA's first major integrated development and because of that it was considered riskier than conventional developments. It took the developers and various government departments years to conceptualise it and Absa required as much time and resources to devise products to fund it," says Lukesh Govindasamy, the head of Absa CPF's affordable housing unit. "We had to think completely out of the box."
Absa provided R457m in funding to the project developer - the M5 consortium - which was delivered in three loan facilities: two bridging funding loans and one development loan.
Cosmo City started as an attempt to provide formal housing to the informal settlers of Zevenfontein and Riverbend. Though negotiations started in the late 1990s, the approvals for Cosmo City were signed only in 2005 - after resistance from neighbouring landowners.
When completed, the development will be valued at R3,5bn. All the houses are set for completion by 2009 and there are possibilities to increase the size of the development by integrating other informal settlements on its periphery.
Absa, through its DevCo subsidiary, which is separate from Absa CPF, has been involved in other similar developments since. These include Olievenhoutbosch in Pretoria south, and the recently launched Albert Luthuli development in southern Johannesburg.
Absa CPF was also the prime funder in another landmark development - the Johannesburg Housing Company's R120m Brickfields project in Newtown, which has 650 flats for a range of income groups.
The project was a public-private partnership, which apart from R50m in loan funding - half from Absa and half from the National Housing Finance Corp - also included financing from the Gauteng government and Anglo American.
Govindasamy says Absa took a R10m equity stake in Brickfields "to illustrate our commitment and confidence in the development".
The project won international acclaim for the legal framework in which it was established - 23 legal agreements were necessary - and all the flats have been let or sold since its completion in 2005.
Absa's next big push is into the Johannesburg CBD and the conversion of former office blocks into rental accommodation. Though this includes flats for sales to high-income earners, Govindasamy's focus is on the rental stock made available to low-income earners.
"Our current and future pipeline of inner city projects is between R300m and R400m," he says.
Govindasamy says a number of factors are driving the growth of rental accommodation in Jo'burg's CBD. "Businesses are moving back into town, which will boost demand for flats by their staff.
"But government has played its role both through the tax incentives provided under the urban development zone scheme and by upliftment initiatives from quasi-government bodies such as Blue IQ," Govindasamy says.
The strong drive to fund affordable housing projects in their various disguises underlines what Govindasamy terms "Absa's prominent role in SA's low-cost housing programme".
Of the R42bn the commercial banks have committed under the financial sector charter to affordable housing until 2011, Absa is responsible for 32%. "We were committed to low cost and affordable housing well before the charter came into effect. SA's economic progress simply won't be sustainable unless we can house its people."
Department of housing figures show that there is a shortage of more than 2m so-called RDP homes - those for households earning less than R2 000/month - and a 625 000 affordable home shortage for those earning R2 000-R8 600/month.
"SA needs to build at least 130 000 low-cost homes a year and we are not even doing 17 000 at the moment, of which Absa funds about half," he says.
He says that projects such as Cosmo City and Brickfields can make meaningful inroads into those numbers. "Integrated developments not only boost the supply of low-cost and affordable housing, but also boost the housing rental stock."
He says that by integrating homes with social amenities, such as schools, retail facilities and light industrial projects, they address many of the other demographic challenges government is facing.
Absa Commercial Property Finance was active in the affordable housing market for many years through their Residential Division. This was before officially forming the Affordable Housing Development Division in 2004, and it has subsequently built up a unique skills set and resource base through exposure to landmark projects.
At the same time, though, the bank is aware that if it is reckless and aggressive in its approach to fund affordable housing, it could do enormous damage. "Not only could we lose a lot of money but it could have far wider implications for the affordable housing market - our failure would lead other banks to walk away and the building of new housing stock could slow significantly," he says.
Govindasamy lists a number of steps Absa CPF takes to reduce the risk:
- "We work closely with government and quasi-government bodies to reduce the cost of funding and thus the risk of debt defaults. Cheaper and soft funding is definitely needed to facilitate big deals," he says, but adds though that Absa will always take the senior debt in any transaction. It seems to be working as the division has had no bad-debt experiences to date.
- Absa is willing to cofund projects with other banks, "as long as we remain the lead banker".
- Making use of the extensive resources available throughout the Absa and Barclays banking network.
- Careful assessment of each project is a must, as are tight controls once building starts.
In recent years more financial institutions have followed Absa into the social housing market, but Govindasamy says the number of developers is still limited. "We need more credible developers to move into the market as there is a definite shortage of capacity," he says.
Another risk to growth is the sharply escalating building and land costs that are threatening to make low-income homes unaffordable to the people they are targeted at.
Govindasamy also says that government's role in the process can be strengthened further. "There is a shortage of well-priced land, which local governments could help to identify.
"And they could further ease the red-tape burden by speeding up the approval processes. The longer it takes for land to be transferred, the higher the cost of holding the land," he says.
Government, at both national and local level, is aware of these constraints and is devising policies to overcome the legal and bureaucratic obstacles that remain, says Govindasamy.
