The success of inner-city regeneration in major cities such as Johannesburg is reaping healthy dividends for investors, particularly in the conversion and refurbishing of residential buildings, which are breathing new life into former decaying urban areas.

Says Sarah Webb, operations manager of the Trust for Urban Housing Finance (TUHF): “Inner city development is a dynamic process and we are prepared to play a role, together with our partners, in enabling responsible residential investors to provide good quality accommodation so that people can live in a dignified manner. Some of the buildings we have seen in the inner city are in an appalling condition.”

The TUHF is a Section 21 niche inner-city finance company which provides bridging and medium-term loans to property entrepreneurs looking to purchase or improve mainly residential rental buildings within SA’s inner cities. It is also an administrator of European Union funds to facilitate the delivery of social housing developments in SA.

“We try to operate on a precinct basis,” says Webb, “so that when conversions and refurbishments result in good, quality buildings in a block, other owners are put under pressure to play catchup, and we get a further spillover into the next block. In so doing we try to convert slumlords into responsible residential housing providers.”

Webb says that up to a year or so ago, residential conversions were considered the highest value and best use of a property.

“Now the commercial market is playing catchup, and vacancies in the inner city are dropping, partly because some of these conversions are beginning to have an impact on the amount of available commercial space.

“With Gautrain due to come on stream and possibly less pressure on the need for parking — which is what choked commercial development and office usage in the first place — we are likely to see more people coming to work by train and on foot, as office use is revived in the inner city,” she says.

“Flourishing commercial and residential opportunities make for a more balanced city, which in turn makes for better-balanced lifestyle opportunities.”

The introduction of City Improvement Districts (CIDs) in inner cities has had a major influence on urban renewal, Webb says. One of the first of these CIDs was established in Cape Town, which helped to reverse the tide of decline in the inner city.

“You can now see the impact in Johannesburg. In Braamfontein, where we have our offices, we have clean streets, trees, and good pavements. Yeoville is in the process of being improved as well, where there is also ample retail space to be taken up.”

Webb believes that the conversion and refurbishment market represents a sound investment proposition, although it is not as opportunistic as a couple of years ago, due to factors such as the significant increase in inner-city property prices, interest rate hikes, and building cost increases.

This in turn has led to a surge in sectional-title sales, as some owners sell off units to reduce gearing levels, taking a capital profit to reduce money owing on the property, or to invest in new ventures. A positive spin-off from this trend, Webb says, is that the increase in sectional-title sales is bringing a level of liquidity back into the inner-city property market, which was not evident three to five years ago.

Ilona Roodt, TUHF’s financial manager, says the next chapter will be a venture to securitise the company’s loan book, under the umbrella of a new propriety company. This is to ensure that TUHF can offer more competitive lending rates and achieve increased efficiency and commercial independence. The social housing component will remain under the banner of the Section 21 company and will continue to be an integral part of TUHF’s business objectives.

The trust makes funding available to small entrepreneurs as well as to medium-sized players, which is its bread-and-butter business. It has a tranche of funding in a company called Intuthuko to assist caretakers and would-be inner city landlords to own residential rental property.

Entrepreneurs would typically put in a small amount of money — say R5000 to R10000 — which would be combined with the Intuthuko funding as the mezzanine debt, underpinned by loan mortgage finance from TUHF.

For medium-sized investors, loans can range from R500000 up to R15m, usually on the basis that the trust will fund up to 80% of the purchase price. In certain circumstances, it can fund up to 100% of the conversion or refurbishment cost.

Gavin Meskin, MD of Aengus Property Management, says that all efforts at inner-city rejuvenation will fall short if attention is not focused on long-term, sustainable property management that has value growth as its core premise. Inner-city property managers have a responsibility to property owners and tenants, as well as to the wider urban community, he says.

“By the same token, inner city property owners need to take a hard look at their own buildings, clean up and upgrade if possible and implement effective building management systems. Degradation of an area is a far quicker process than upgrading, and it will take collective responsibility and commitment to ensure sustainable renewal.”

“There’s a hugely encouraging focus on inner city rejuvenation. However, investors need to look 10 years ahead and ensure that their properties will be managed optimally to deliver value over the long-term,” he says.

Business Day