Township market opportunities

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71point4 > Blog archive > 2018 > May > 28 > Township market opportunities

Township market opportunities

Posted by: Illana Melzer
Category: Housing
Woman walking in township

With established asset classes under pressure to perform, the likes of impact and angel investors, crowdfunders and even traditional investors are looking to new places, people and products in which to invest. While interest in the world’s emerging markets is growing, the informal economies in these nations often remain veiled in mystery. But do they hold opportunities?

In the most recent budget, Malusi Gigaba, the Minister of Finance, highlighted the importance of urban renewal and spatial transformation. He noted that cities are “at the heart of the national economy and hold the potential to drive our urban renewal” and that the importance of cities is likely to increase. But a quarter of a century after apartheid, South African cities still face significant challenges of economic and social integration, despite enormous state investment.

Researchers point to deep flaws within the post-apartheid housing delivery programme, which located poor households on the urban periphery away from jobs. They also note the unwillingness of the private sector to invest in poorer areas. To quote from a recent SERI publication: “Municipal efforts to induce the private sector to invest in poor areas have generally been successfully resisted by developers in what is a concentrated and powerful industry, while property owners have organised into strong lobbies to protect their interests”. It would seem from this literature that the private sector, in its wilful stubbornness to relinquish its apartheid capitalist mindset is, together with the state (in its misguided enthusiasm for housing form over location) have conspired to leave us no better off than we were in 1994.

While there are no doubt elements of truth in this perspective, it needs to be tempered with evidence that suggests that other very real, but controllable, factors may deter private investors from participating in township economies.

In the first instance, there is the lack of a coherent vision for how a township economy should function. Is its primary purpose to provide sustainable livelihoods for business owners or should it exist to serve the needs of customers? The current Competition Commission investigation into the retailing sector is a case in point. Its terms of reference (TOR) includes an investigation into the impact of the expansion of large grocery retailers in South Africa’s townships on small and informal retailing businesses. The TOR quotes an unsurprising result from a BER study that the opening of a large, formal retailer in a township impacted negatively on the revenues of local stores, with a more noticeable impact on traders in closer proximity to the new store. While there is no need to defend the very many uncompetitive practises that large retailers no doubt adopt to secure long term advantage – doesn’t Porter’s Five Forces recommend precisely the strategies repugnant to the Competition Commission? – I have some sympathy for their predicament; if they do not invest in townships they are anti- transformation, and if they do, they are predatory.

Curiously absent from the critique of large retailers is any enquiry into why it is that township consumers prefer to shop at large retailers, not to mention the impact of retail presence on property prices.

The intolerably high level of crime is another critical factor. Perhaps the best indicator would be the homicide rate. Of all crime statistics, this one is arguably the most reliable. The data indicates that South Africa’s very high homicide rate of 33 per 100 000 is unevenly distributed, with a substantially higher rate in many townships. By way of example, the homicide rate is around 400 per 100 000 in the well-known townships of Gugulethu and Nyanga in Cape Town dropping to an enviable 100 or so in Khayelitsha and Delft.

Anecdotally, many informal business owners I meet in the townships around Cape Town have been victims of destabilising crime that threatens their lives and livelihoods. Put simply, crime is not an insurable inconvenience, it is a negative force that prevents progress, saps the creative force out of society and terrorises everyone.

Crime itself is perhaps a subset of a bigger phenomenon which deters investment, namely the complete absence of effective governance.

To put it in Weberian terms (not that I know anything about Max Weber), the state has no monopoly on violence. In its absence there is entropy presided over by a myriad of alternative governing mechanisms, including various industry associations, civic organisations and development forums. While these organisations are there ostensibly to protect the community, they can appear to be rationing economic opportunities and protecting the economic interests of leaders.

In addition, the lack of governance means no effective enforcement of by-laws. While some of these laws are inappropriate vestiges of South Africa’s colonial past and should be scrapped, others can be quite helpful in ensuring harmonious living in dense, urban settings. Irrespective, the lack of governance creates significant risks for investors. By way of example, a mortgage lender would be reckless to grant a mortgage on a property built with no planning approvals and numerous departures when the city would be within its rights to order a demolition.

There are no doubt other factors that in effect make doing township business almost impossible.

Almost, but not quite. There are some slivers of a silver lining that may be starting to emerge, grounded in the self-same housing programme derided by academics. According to available data, the State has delivered over three million housing opportunities to predominantly poor households. Around two million of these properties have made their way onto the deeds registry. This is not insignificant relative to the six million formally titled (and potentially mortgageable) residential properties in the country. Leaving aside the obvious question (what happened to the other million or so houses delivered by the State?), these properties embody significant potential wealth, if not yet actually realised because of the self-same factors noted above. The fact that these assets have been distributed widely to beneficiaries who are largely poor is itself an overlooked achievement and represents a massive transfer of wealth from the State to the urban poor.

At the same time, the transfer of housing has created a middle class. To quote Paul Collier, a leading development economist “Commentary on the emergence of an African middle class has become common, but it is being defined in terms of discretionary spending and potential for consumer markets. A politically more salient definition of a middle class would be in terms of home ownership and the consequent stake in economic stability.” It is this stake in economic stability, not only nationally, but locally, that provides the basis for tempered optimism about township markets.

The green shoots are visible not only in property prices which have started to increase noticeably in some townships, but also in the emergence of a class of small scale landlords. These landlords might build rental accommodation on their own backyards informally at first. But the development of formal backyard accommodation is perhaps the most overlooked feature of South Africa’s housing market. According to Stats SA, the number of households living in backyard formal dwellings increased from around 425 000 in 2011 to over 1.2 million in 2016. At the same time, the number of informal dwellings in backyards continues to increase. The same data indicates that around 40% (if not more) are rented.

This class of property owners whose wealth and income are directly tied to housing have a material interest in actively encouraging cities to govern. And when they do, more investment will follow.

A version of this article was first published in the ABSA Gradient Magazine (May 2018)
Author: Illana Melzer
Author: Illana Melzer

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