Innovations in Backyard Rental: Models for the 2020’s

The need for policies, programmes and tools to promote the development of small-scale rental in South Africa, and in particular backyard rental, has been evident for many years. More recently however, the release of various case studies, position papers and the development of actual initiatives has brought this issue into sharper focus.

In a research paper prepared for the World Bank Group, Brueckner et al[1] (2018, revised 2019) note that by 2016 at least 13.4 percent of urban households resided in backyards, up from 8.9 percent in 2011. The report gives evidence that backyard dwellings have proliferated the most in areas with good access to employment centres.

In a CAHF report of seven case studies of Small-Scale Landlords in Cape Town, Spiropoulas[2] (2019) identifies the need to address a number of contextual challenges in micro-property development, all of which are relevant for backyard rental. Noting that the prime backyard rental market is mainly composed of single people or young couples, limited earnings and affordability for many tenants is a major challenge.

Also in 2019, a study by Scheba and Turok[3] advocates for government to adopt a developmental approach to backyard rental, one which would encourage key stakeholders to invest in and enhance backyard rental structures and practices, rather than an approach which simply acts against informality.

The lack of any form of national policy or guidelines on backyard rental development certainly has not dampened the tendency for this form of rental to proliferate in recent years. And, despite the lack of a specific policy framework or earmarked sources of funds, various entities, including small business enterprises, have been developing interventions to promote the development of backyard rental. The following is a brief summary of a few such initiatives.

isiDuli

Lunga Nodliwa is a young social entrepreneur who has co-founded a micro-social enterprise called isiDuli. The company is looking to support low-income home owners in townships to develop backyard flats to let out as a source of income and has developed a microfinance tool for this purpose.  Initially, IsiDuli will focus on development in Tshwane, Ekurhuleni and Johannesburg.

In 2019 isiDuli was one of eight black-owned micro fintech start-ups to win business support and funding from the Rand Merchant Investment Holdings (RMI) Fintech Incubator AlphaCode. The programme, which will provide capital loans and ongoing technical support to backyard rental developers, has dual aims. IsiDuli’s mission is to alleviate poverty for low-income home owners while promoting expanded availability and an improved standard of living for tenants.

A prime objective is to enable people to move from shack structures to formal structures. The distinction between shacks and flats in the backyard context is a critical one in terms of a tenant’s right to basic habitability, the life of the structures themselves and compliance with municipal standards. This distinction was made clearly in a 2015 report by the Western Cape Provincial Government in the context of developing a demand profile in the City of Cape Town.[1]

Nodliwa concurs with Spiropoula’s (2019) assessment concerning limited earnings and lack of affordability for many tenants. IsiDuli’s own research suggests that while this form of rental is generally targeted at the lower-end market (i.e. income of less than R3500/month), there is great demand among the very poor whose income may be even less than R1000/month. The challenge for the isiDuli model therefore is to balance the critical need for deep-down reach with the need for the owner to have a steady income which makes the enterprise worthwhile.

To guide their investment decisions, IsiDuli is looking to develop township development indices to reflect a district’s profile in terms of employment, clinics, schools and other relevant factors. As part of a rental market component, the company will examine the profile of the local tenant residents, housing quality, vacancy levels and rent levels.

Procurement will involve local home owners in development and property management.  isiDuli will develop a local supplier database of a wide range of skilled artisans from door repairers to plumbers, and will employ local labour for construction work as much as possible. Nodliwa maintains that to be successful the isiDuli programme must understand the sociocultural dynamics of each community in which it works and asserts that “We will be leveraging the social capital that is already there.”

Xtenda Housing Finance

Launched in September 2019, Xtenda Housing Finance is a housing microfinance institution which aims to assist those – both owners and tenants – towards the lower end of the housing market.  Specifically, their model is designed to provide small housing loans for home owners to build additional rooms and units to provide them with an opportunity to earn income.

The company has three main products: 1) assistance to build extra backyard rooms for rental accommodation or businesses (up to R200 000); 2) a microfinance loan product used for smaller incremental needs for housing, e.g. completion of a kitchen, retiling, etc (up to R30 000), and; 3) support for micro-developers to build tenement rental accommodation (up to R800 000).

Under the micro-developer tenement development programme up to 10 units may be built on a single property and housing microloans are provided for this purpose. Xtenda provides an end-to-end support service for their clients from drawing up plans, to rezoning, through to final construction. The company originates and underwrites the loan, appoints an architect and helps with the process of municipal approval. Xtenda also provides access to a network of registered contractors.

Founder Kevin Chetty asserts that: “Developing backyard units is essential in meeting the housing demand within an urban context, in addressing the needs of mobile people and in offering a safe, tenured right.”

Chetty explains that the model operates in such a way so as to ensure that clients will be in a position to make repayments. It is also market driven and relies on word of mouth. A core aim is to help the owner become market ready and understand the value of investment at the microlevel. For example, the owner will come to understand that if they provide additional features on the property, they will be able to let at a higher rate. In other words, the greater the investment, the greater the return.  The model is also designed in such a way so as to avoid the cycle of debt to which so many South Africans fall victim.

In its first five months of operation, Xtenda finalised around 20 loans for the development of approximately 40 individual additional rooms to rent to around 80 tenants. As of early 2020, the company had made loans only in the City of Johannesburg but plans to gradually extend its reach to other Gauteng Metropoles, the Western Cape and other provinces over the next two years.

uMaStandi at TUHF

As of early 2020, TUHF was coming to the end of a pilot project to facilitate the development of quality and compliant backyard rental housing and transforming the pilot into a fully-fledged programme called uMaStandi. This initiative will operate in numerous townships in the Gauteng and the Western Cape.

TUHF consultant Katherine Cox notes that people have traditionally developed backyard rental on either a piecemeal basis by using the Cash Build Model, or by accessing finance through expensive Mashonisas.[2] There are a few existing products on the market which may be used for developing backyard flats. However, uMaStandi is not looking at making loans based on an individual person’s or household income but is rather funding a fully compliant and quality product, one which will generate sufficient rental income to pay back the loan.  In this sense the programme funds the product itself (i.e. the backyard rental housing) rather than an individual.

Among other factors, uMaStandi assesses how passionate the client is about developing this asset and the level of experience they have in the property field. The initiative has a 3-step training programme to build up the capacity of approved backyard developers and property entrepreneurs and this includes mentoring in the early stages. The client is provided with training on financial management, property management, executing leases, landlord-tenant law and other vitals. While bank account history is also examined, this is mainly to identify if a client requires financial literacy training which uMaStandi also provides.

Ultimately the programme’s intention is to create property entrepreneurs who are also micro-developers. Katherine Cox asserts that there is a great deal of potential in that market but that a programme such as this is not without its challenges.  Some important lessons have been learned along the way and these include the following:

• A significant barrier for many potential backyard rental developers is around title for the property, often inherited from deceased estates. A joint CAHF project which TUHF is currently funding, the Transaction Support Centre, is providing support for regularisation and conveyancing, with the ultimate aim of assisting buyers and sellers to transact formally.
• Gaining Council approval can be an expensive and time-consuming process and some councils seem much more concerned with the strict application of planning regulations. However, a few others including the Khayelitsha Planning Council, are recognising the need for backyard rental development. This underlines both the importance and the possibility of changing mindsets at the planning council level.

National Housing Finance Corporation (NHFC)

It is highly significant that the NHFC – a state-owned Development Finance Institution which looks to utilise models of affordable housing finance – has recognised the importance of backyard rental development.

Jabulani Fakazi, NHFC’s Executive of Incremental Housing Finance, maintains that there is a clear need for quality, affordable rental accommodation in many townships and notes that, “There are many innovators looking to help people develop quality backyard structures for this purpose.” If the NHFC is approached by people who are ready to start such a project, their proposal will be given due consideration. Asserting that “we are running out of space in major cities,” Fakazi underlines the important contribution of backyard housing development towards the goal of urban densification.

The NHFC would look at funding suitable entities to develop a microfinance product and then to lend to individual households. However, such entities should not only provide microfinance and loans. There also needs to be technical assistance offered to borrowers to ensure that their small-scale rental developments are successful. This includes, for instance, the provision of consumer education addressing such issues as property registration, rent collection, understanding responsibilities as small-scale landlords, being cognisant of the possibility of repossession, and understanding the basics of managing rental as a business.

While it has no specific programme for backyard rental, the NHFC is able to fund such initiatives from its existing portfolio. It has, for example, funded IBuild Home Loans based in Cape Town, an initiative that assists home owners build additional rooms and backyard structures for rental. Fakazi notes that such innovations, however small-scale, can become a long-term income stream for low-income households. He points out that the possibility of promoting backyard rental development in subsidised housing was recognised as early as 2004 with the launch of Breaking New Ground (BNG). But he also notes (as others have) that there is no country-wide framework to guide such development and asserts that “we cannot wait for a national policy” before taking action.

Wits University and further research

As of early 2020, the NRF Chair in Spatial Analysis and City Planning, in the School of Architecture and Planning at Wits University was undertaking an application process for funding to undertake research on backyard rental development and, in particular, its link with commonly utilised financial schemes such as stokvels and funeral associations. An objective of the research would be to better understand such linkages, the use of, and potential use of non-housing related financial products for backyard rental.

Research Chair Professor Margot Ruben asserts that many home owners who are looking to develop this form of small-scale rental do so if they can access finance for building materials. Some of the larger suppliers, such as Builder’s Warehouse, offer “credit” for purchasing materials. As distinct from loans from financial institutions, finance provided by suppliers of building material pose relatively few barriers to uptake by low income households.  In this context, a small line of credit may be sufficient  to purchase a substantial portion of the necessary materials, and may obviate the need for a much  larger loan from a third party.  As Prof. Ruben noted: “Households tend to only borrow as much as they need at a specific time – so we think they use credit and then pay back and use again as and when needed, and when able to pay.”

In terms of developing loan products for the building of backyard rental, Ruben urges caution and maintains that low income earners tend to be risk-adverse in terms of capital loans. She adds that the addition of rooms in houses and the building of backyards structures are often undertaken in an incremental fashion (as TUHF has also observed) and is uncertain whether there is a substantial section of the market for which such loans would be appealing. Rubin also maintains that a major advantage of backyard rental is that the owner begins to earn income from the investment almost immediately and expresses concern that the imperative of paying off a capital loan would reduce that benefit.

According to Brueckner et al[3] (revised 2019), backyarding remains poorly understood despite its emergence as the fastest growing housing type in South Africa. Backyard rental is also not fully recognised in the economics literature on housing in the context of developing countries.  If the funds are awarded, the Wits research could better inform future efforts to support the development of backyard rental and could tell us a great deal about the topic in terms the microeconomic context and the broader use of investments by backyard rental owners / potential owners. Such information may help inform future initiatives and assist to leverage capital funds.

Conclusion

The multi-faceted challenges and complexities which define the environment for backyard rental development have been well documented by Brueckner et al and others. These include income limitations for tenants whose need is the greatest, regulatory issues within the micro-development supply chain, limited local building capacity, professional challenges and the near total absence of support from mainstream financial institutions. Yet, the people and entities documented here are continuing to come up with an extraordinary range of innovations to meet and overcome the challenges of this rapidly growing segment of the rental housing market.  Government must develop formal policies and structures to encourage this sub-sector’s development, to support its contribution to national policy objectives such as poverty reduction, densification, urban restructuring, the promotion of microenterprises and the development of affordable, quality rental housing for low-income households.

[1] Brueckner. J, Rabe. C, Selod H. (revised in 2019 – originally published in 2018).  Backyarding: Theory and Evidence for South Africa. Prepared for the World Bank Group (Washington DC).

[2] Spiropoulos. J (2019). Financing Micro-Developments of Residential Rental Stock: Case Studies of Seven Small-Scale Landlords in Cape Town. CAHF Case Study Series 14.

[3] Scheba. A and Turok. I (2019). Informal rental housing in the South: dynamic but neglected. Forthcoming in Environment and Urbanization.