By Pauline Larsen 

Banks hinder as well as help as they enter the inner-city and low-income housing markets      
 
Propelled by the financial sector charter, banks are rapidly upping their exposure to cheaper housing.

One way for them to minimise risk is to provide wholesale funding through a financier already established in this market. 

But customers will suffer because hard cash from banks costs more than soft funding from nongovernmental organisations or government institutions. 

Standard Bank, for one, is negotiating a wholesale funding agreement with the Trust for Urban Housing Finance (Tuhf), a development finance organisation that lends money to property buyers in Johannesburg's inner city. 

The bank is offering R25m to Tuhf to begin with. The funding will be available to residential landlords with the focus on small- and medium-sized landlords, says Standard Bank Properties MD Stewart Shaw-Taylor. 

The bank is offering to lend to Tuhf at prime less 1,5 percentage points. "In this instance," says Shaw-Taylor, "we are pricing for development finance and not end-user mortgage finance. It needs to be sustainable."

He adds that Standard Bank's intention is not to bump up margins.

But Tuhf will have to hike its rate to prime plus 2,5 percentage points.  Since its establishment a year ago, Tuhf has been lending at prime plus one to two percentage points.

So if the agreement goes ahead, borrowers will have to cough up more. "We need to achieve a 4% margin to stay viable," says Tuhf head Paul Jackson.  Shaw-Taylor says that as traditional sources of funding run dry and banks enter the market, lending will become more expensive. "It's a market issue," he adds. 

Analysts agree that as the inner-city market recovers, it will become more difficult and pricey to access.

"As the market tightens, so it will start to favour the established investors who already have capital," says Jackson. 

Absa is also in what commercial property finance GM Jack Stroucken calls "preliminary discussions" with Tuhf.

But the two are discussing a budget closer to R100m. 

Absa was one of the first banks to enter the inner-city housing game in a big way when it financed the Brickfields housing estate in Newtown, Johannesburg.

Several months ago, too, it set up a special projects team to target social and "affordable" housing projects. 

Stroucken says social housing is rental stock usually located in the inner city. Affordable housing is newly built and lower than R200 000/house, but can be located anywhere. 

"We're looking at R500m or so of social and affordable housing projects on our book," he says. 

Tuhf serves a relatively small and contained market and is not involved with new development.

"But we feel the development and end-user markets are huge and need service," says Stroucken. 

He adds that an agreement with Tuhf, or a similar financier, offers an enviable foothold in this marketplace and a chance to outsource specialist credit functions that are not currently available. 

Banks, relatively new to the low-income and inner-city residential markets, have a lot to learn from financiers such as Tuhf. With initial funding from the National Housing Finance Corp, Tuhf has signed R54m of deals in the past year. Another R8m-R10m is awarded each month. 

"We have provided finance for 52 entire buildings ," says Jackson. 

To date, 70% of the deals have been with black property buyers. In value terms, though, the figure is closer to half. 

A new landlord programme is also bearing fruit, says Jackson. It's aimed at building supervisors, caretakers and artisans keen to own small, multi-unit buildings in the inner city. 

"We offer loans without requiring collateral, which is a big advantage for this group of buyers," he says.