Empowering Communities: Financing Quality Affordable Housing in South Africa

Join us for an insightful interview with Tibor Asboth, Head of Equity for Africa and the Middle East, Proparco, as we delve into the vital topic of financing quality affordable housing in South Africa. Against the backdrop of AVCA’s 20th Annual Conference and VC Summit in Johannesburg, Tibor will share Proparco’s strategic approach to addressing the housing challenges facing South Africa, with a focus on empowering communities and fostering sustainable development.

Please introduce yourself and your role at Proparco in a few sentences.

Tibor Asboth, head of a team of 16 investment professionals dedicated to Africa and Middle East through direct and investment funds. We focus on key sectors that promote growth, job creation, climate change mitigation and the provision of essential goods and services.

Could you outline the importance of financing quality affordable housing in South Africa, particularly in underserved areas, and how this aligns with the development goals of the region?

Proparco and its mother company, the French Development Agency (AFD), France’s bilateral development bank, have a longstanding experience of financing quality affordable housing in South Africa, throughout the whole value chain from the financing of public policies to improve basic urban services to the backing of financial institutions, private developers and long-term investors. Our objective is to contribute to providing equal access to and improving the quality of sustainable housing, notably with a focus on climate change and a low-carbon transition.

In the South African context, the prevailing spatial segregation and 2.3 million-housing backlog largely contribute to social, gender, economic inequalities. The housing gap has been exacerbated by the acceleration of the urbanization in the early 21st century and more recently, in a context of high interest rates, which decreases the ability of households to access traditional mortgage finance and increases the need for rental accommodation to supply the housing market. Moreover, the housing sector is a large contributor of greenhouse gas emissions.

As such, supporting access to adequate and green housing close to employment areas and essential services provides with an opportunity to drive reductions of inequalities, to favor economic inclusion and to support climate change mitigation and adaptation. Hence, the sector plays a major role that goes beyond the subject of access to housing but also contributes to the achievement of a wider range of sustainable development goals.

We have read about Proparco and 27four’s R550mn investment in Divercity Urban Property Group. How do you assess the potential impact of improving access to quality affordable housing in South Africa from this investment, particularly in urban centers like Johannesburg?

Divercity focuses on high-density housing schemes, in well-located areas close to transportations hubs and job opportunities. Moreover, their projects are held within precincts providing direct access to essential amenities and services. As such, they achieve significant impact through the improvement of their tenants’ quality of life, granting them access to a safe and well-managed accommodation and contributing to the reduction of daily commuting and the associated cost or exposure to gender-based violence during transportation. Moreover, Divercity’s assets contribute to climate change mitigation through the various energy savings performed at building level — each property being EDGE certified — or induced by the location of Divercity’s scheme in the urban core versus urban periphery, leading to the reduction of travel distances and carbon emissions.

Given Divercity’s focus on urban regeneration and affordable rentals in city centers, what strategies does your equity team employ to ensure the sustainability and scalability of such investments, especially in the context of fluctuating market conditions and urban dynamics?

Our strategy is to identify and invest in robust and experienced players such as Divercity, which can leverage on a proven track record in delivering affordable housing in attractive and central locations, an experienced team and a strong network of partners. These three items are critical, in our opinion, to provide us with sufficient comfort on their ability to replicate their model on new projects.

While Divercity doesn’t operate within townships, how does Proparco view the potential ripple effects of its investment in terms of indirectly impacting neighboring communities and fostering broader socio-economic development in South Africa?

Our investment in Divercity is likely to positively impact socio-economic development through the enhancement of urban densification and reduction of urban sprawl, in line with the main axis of the government’s urban policy. Urban densification is likely to reduce by 70–80% the required additional infrastructures on virgin land. Through portfolio growth and diversification, Divercity will support housing development and create opportunities to get closer to key economic opportunities as well as to health and education infrastructures.

In parallel and in order to complement our footprint within the housing landscape, the AFD Group and Proparco look at other investment / financing opportunities in South Africa which are more focused on suburban or peripheral areas. As an example, in 2023, Proparco provided TUHF Limited with a line of credit in order to finance loans dedicated to the rehabilitation and / or construction of affordable housing in South African. Half of the financing will be specifically steered towards TUHF’s activities in townships areas, hence complementing Proparco’s investment focus in city center areas.

What are some of the key challenges and opportunities you’ve encountered in financing affordable housing projects in South Africa, and how does Proparco work alongside local stakeholders to address these challenges and maximise impact?

One of the biggest challenges in financing affordable housing projects is to find a partner with a proven track record in operating residential assets. The latter is critical to ensure maintenance, tenant retention, sound cost control and as a result, to drive value creation throughout the investment holding period. Operating affordable housing properties, especially within challenging areas, requires expertise, rigor as well as an excellent knowledge of the local environment. We found in Divercity a game changer, which, on top of being a long term investor, has a longstanding experience in managing an extensive portfolio. In our opinion, this plays as an incommensurable strength and will contribute to enabling them to build a quality portfolio and demonstrate the resilience of the asset class.

Another challenge is related to our foreign investor position. It is critical for investors like us to work alongside experienced and local players to properly assess opportunities. This is even more the case when it comes to real estate where location and microenvironment are key value drivers. On Divercity, we had the chance to invest alongside 27Four with whom we managed to implement a balanced set up and benefit from their great inputs on the local context.