 sense. What are some of those key drivers that fundamentally drive the real estate sector? Yeah, yeah, that's that's a very good question. Thank you for that. There's quite a number of them, but then I'll just like pick out just a few main ones. You want to make sure. San Vanani Dumilan, good evening and welcome to Episode 449 of the Private Property Podcast. I'm your host Uzaman Dunwa Kumalo. It's the Friday edition of the Private Property Podcast. If you're doing this for the first time, welcome to the family. You tuned into the leading podcast and all things property right here in South Africa. And to all our regular viewers, our top fan gang members and of course, many of you who share our live and certainly tag your friends and families. Welcome to it. You know how we do every single weekday. You and I have an appointment where every single evening I am in conversation with the property expert who helps us navigate and make better property decisions. That's exactly what we're going to be doing this evening. And of course, as we look at investment on the lower end of the housing market and to help us get a sense of what investing in that sector is like, how it works, some of the drivers, what we need to look forward to. I'm joined by Lutha Lujabem, who is a research manager at the Center for Affordable Housing Finance in Africa. Lutha, good evening and thank you so much for joining us on the show. Good evening, Zama. And thank you for having me. This is great. I'm looking forward to having this chat. It's so great to have you on the show. I know it's the first time we're speaking to you, speaking to some of your great colleagues on the show. And it's always so great, you know, speaking to them because I always say whenever we speak to somebody from CAF that this is one of those subjects that I particularly like because we don't explore it sufficiently. And also, the nerd in me enjoys this. I mean, I'm doing a master's in property development and management. So it's always great speaking to people who research this and of course, produce the data. I hate having to get the data and get it in its raw form and clean it up. I hate that part. So I like the work that CAF does, because then we get all the nice stuff. We get the good reports. We've done all the grunt work and of course, packaged it for us in a really great way. And I think there probably leads us straight into our conversation. I mean, when you talk about the lower end market firstly, which what's the price points that we're talking about? Just so viewers are aware, because I know that the way CAF defines the different price points or the different classifications, if you call it that, isn't quite the way we define it. I'll say in mainstream media. So in mainstream media, your lower end property is your entry level, they'll say it's something like 700,000. And you and I both know that that's actually not the lower end of the spectrum. Right. Yeah, yeah, that's very right. We're constantly having these negotiations of developers on what, on how to define what the lower end of the market is. But at CAF, we've actually broken down the market into five different markets. Segments. The first one being the lowest one, which is the entry market segment. And these are houses or units that are worth between zero to 300,000 rent. And then there's the affordable market segment, which is units between 300 and 600,000 rent. We also have the conventional markets. Those are units between 600,000 to 900,000 rent. And we have the high end market between 900 and 1.2 million. And lastly, we have the luxury market, which we have designated as anything over 1.2 million rent. So that's how we've kind of defined what affordable housing is. So anything less than 600,000 rent falls within the affordable housing market segment at CAF. But this is, it's quite subjective. We get a lot of developers that disagree with that. But I think with the work that we do on the ground, we can firmly say that, yeah, anything above 600,000 is for the most part, not affordable to a great many people within the country. Yeah. And I think, you know, the big thing is we do, I see why developers would want to contest your definitions. And we won't go into it. But I know why. Because I think a number of developers would argue that some of their developments, for instance, cater for the lower end, and yet it's not priced if we're being completely honest for that market. Because when we look at the income data from SARS and the number of people at sort of different price points and the ability to even afford or qualify rather for property assets and price points, we know that it's not possible. Because if you're talking lower end, it should at the very least be catering for the vast majority of, you know, working South Africans within a particular text bracket. But unfortunately, that's not, you know, possible. So we won't speak about the developers. You know, they have their own agenda and why they would stick to their guns. But I think let's look at then what the key factors that drive the real estate market is. I mean, this is one of those topics I love, because you look at the different factors. I mean, I do real estate market analysis where you actually then look at the data and you justify that these are in fact the key drivers. You're not even talking about it from a hypothetical sense. What are some of those key drivers that fundamentally drive the real estate sector? Yeah, yeah. That's a very good question. Thank you for that. There's quite a number of them. But then I'll just like pick out just a few main ones, which I think are really, really critical in driving the real estate market. So the first one would probably be your demand. Or as some other people would put it, the demographics, because when you're producing units, when you're building houses and building apartments, you're actually doing that for a particular group of people, right? So what you'd want to do firstly is to look at the general demographics of the area. What kind of people are they? What is their affordability? And is there actually a demand for the units that you want to produce? So that's the first thing that you look at when you're looking at the real estate market. And then secondly, there's the economy, right? So you obviously want to know what the economic climate is. And this varies from different geographical contexts, different countries, different cities, and different provinces as well. So you'd want to know what the economic climate is, and that can speak to the employment that's happening there. The economic activities are people actually managing to generate an income, which informs their affordability to actually purchase these units, or if it's rental, or that they're able to afford the rentals in the rental market there. And also within the economy, this kind of just is a good segue to get into the third driver of the real estate market with interest rates. And interest rates are more particularly important because there's also lending and borrowing that is happening to create some flow within the real estate market. So take for instance, if you are a developer and you want to purchase some units, for the most part, you might get your finance through borrowing from maybe development finance institutions or other financial institutions, and then you use those finances to build. And if you're looking to buy a unit, a house, or an apartment, you might go through the way of mortgage financing and you might want to borrow. And interest rates then play a critical role there in the pricing of these loans that people obtain to either build or to either buy housing units. And lastly, there's also government policy, which basically informs the enabling environment. So this basically speaks to whether the enabling environment is good enough to allow for these transactions to happen within the real estate market. So policy can either be in the form of subsidies, can also be in the form of taxation, it can influence state intervention when it comes to the real estate market, and it can also influence just what the general market is. So if state policy is more liberal or takes on a market-free approach, then you kind of have an organic real estate market that just takes place on its own. But then sometimes you might have policy and legislation that just restricts organic market flow and has a lot of state intervention within it. So also, yeah, how this is viewed is basically, it could be different. Some people would probably want that more state intervention, and other people may not really like that, and they'll just want the market to grow organically and things to happen on their own. But yeah, those four that I just mentioned are probably the more essential ones. And there could be others as well that people would see as very important. But these are also a bit subjective matters. But yeah, those four I think are very critical when you're looking at the real estate market in any geographical context. This evening I'm in conversation with Lutha Lujabu, who's a research manager at the Center for Affordable Housing Finance in Africa, looking at investment on the lower end of the housing market where the drivers are. And of course, some of the key factors that you need to be looking out for in the event where you want to invest in that particular sector. Lutha, one of the things that you're mentioning was, of course, we look at interest rates are quite a big driver. We saw yesterday the Reserve Bank Governor, we've seen another interest rate hike by 25 basis points. And a lot of the experts have noted that we're going to see hikes pretty much for every meeting they're going to have this year with, I think, two members of the MPC actually wanted a 50 basis points hike. So in many ways we're somewhat spared by having it by 25 basis points. So we know that the interest rate is not sitting at 7.5%. We know that that is quite a big driver. And when we saw the historically low interest rates, we did see quite a number of new players entering that first time home by market because they simply couldn't afford it when interest rates were slightly higher. So it's a big factor for people. We're always cautioned. And I certainly always cautioned people that look, you don't want to, especially when an investment buy, it's slightly different when you're buying a home to live in. As an investment buy, you don't want to buy primarily because of low interest rates. That's a terrible reason to buy that needs to be part of a bigger strategy that you have in place. Because as we're seeing, interest rates are going up. And if you hadn't adequately budgeted for that, then you're going to feel the pinch quite significantly. And so when we look at the private sector and government, what would you say is the role that the state in particular government plays in the private sector when it comes to making a affordable housing market or playing a role in the affordable housing market? Okay. Yeah. So the affordable housing market is quite a precarious one. So the issue there is that a lot of private sector players don't really want to invest in it. They don't want to participate in it because firstly, it's seen as not very profitable. And secondly, the margins are quite narrow in the affordable housing sector. So with narrow margins, if anything goes wrong along the value chain, then you're likely to incur loss. So in order to stimulate some activity within the affordable housing sector, you then need both the private sector and government to play a role in it. And then that's how you can make it work. And in the developing world, a lot of countries seem to look to the state to try and make the affordable housing markets work. But to be quite fair, it's almost impossible for the states to take on that role on their own. So now that's why you kind of have the two, the state and private sector having a big role to play to make affordable markets work. So now the role that the state can play could either be one of multiple ways. The first one being subsidies, which is probably the most obvious one. So in South Africa, we have the RDP, the BNG and the finance linked individual subsidy program, which is FLISP, which tries to provide subsidies for full houses and units that are still under construction so that they can be more affordable to the end user who, when we're now at the stage of getting people inside homes. So that's the one role they could play. Another role that the state could also play is actually working in partnership with private sector, with private developers. And this could either be in the form of, this is actually a good example, in the form of the state providing land. We all know that in local government, there's large pockets of land that are owned by local government. And so another role the state could play is just releasing some of that land. So they provide the land and then developers, private sector developers come in and erect the top structures. And so those are how these public private partnerships could possibly work. And so with the land being released by the state at subsidized prices, or sometimes really subsidized, like the land is released for free, that takes away some of the costs, particularly the cost of the land from the developer, which and that price reduction in the land is then become, it becomes a benefit to the end user in the form of a price reduction because the total cost for the developer is less because they didn't pay for the land. Another way could also be just infrastructure delivery. So that's the state's local government providing infrastructure on land. So that's basically servicing the land, which takes away that costs from the developer and then the developer then reduces their prices so that the end user gets a reduced price as well for that unit once it's fully built. So this is private public partnerships. And then also now when you look at how private sector on their own could play a significant role in affordable housing, you could possibly look at things like them being cognizant of that people who are low income earners, some of them earn it leaving informally. So what you get with conventional land is that if somebody is in the informal economic sector, informal job market, they are not necessarily, they're not really considered for finance and they wouldn't be provided any loans to try and acquire homes. So just a more liberal understanding of that. Some people do earn it leaving, but it's probably in the informal sector and considering those people as well. So the housing microfinance is a way that the private sector is not doing it. So other financial institutions or land banks are providing microfinance to people who are earning informally so that they could either purchase units or use self-build methods to incrementally build their own homes. So that's a big way in which the private sector could also play a role and these are usually non-bank financial institutions that are doing that. So yeah, there's quite a number of ways that both the state and private sector could play a role in making affordable housing finance work. And I think if anything Luda, that's a great point to leave it at that there's a lot of work to be done and both the private and the public sector need to come on board because this is one of those things that we cannot not service and adequately service at that in when we of course address it because it's so important that that market is serviced and serviced well because the reality of the majority of South Africans are going to be the one that access property at those price points and so we need to make sure that we're catering to them as best as possible. Well Luda, we're going to leave it there this evening. Thank you so much for joining us. All right, thank you very much Summer and thank you for helping me. And that is Luda Luchabe who's a research manager at the Center for Affordable Housing Finance in Africa closing up the Friday edition of the Private Property Podcast. It certainly has been a pleasure to be with you on this short long week. I do hope that you'll enjoy your weekend and of course be tuned in to the other great shows that we have on our Facebook page. I'll be back on your screens on Monday evening at 7 p.m. as usual until then hoping you're staying home and staying safe.