File image: IOL.
JOHANNESBURG - The City of Joburg’s proposal to compel developers to provide a minimum of 20% “low” and “low-middle” income housing units in each new residential development is risky because of the possible unintended consequences, a property specialist claims.

Erwin Rode, the chief executive of property services company Rode & Associates, said the most obvious risk was a “strike” by residential developers. He said the sales tempo in new developments would be retarded to the extent that the developments became unviable.

He said the solution from a developer’s perspective was to keep the price gradient between the various price classes within a development shallow.

For example, Rode said, this could involve mixing low-spec units with houses that did not cost more than about R500000.

But he said the downside to such a reaction by the private sector, because the profit margins on low-priced houses were wafer thin, was that “no more houses or residential units of more than R1million would be constructed”.

“Using economic theory and common sense, this would lead to spiraling house prices in these categories,” he said.

Rode stressed that such inclusionary housing policies in the US had contributed little to additional low-spec housing stock.

“Thus, given the risk outlined, a municipality should approach such a programme with the utmost sensitivity and care,” he said.

Rode said the city’s proposal with sectional title schemes, that the body corporate should own, manage and rent out the low-spec units in the scheme, was “a recipe for disaster”.

“Trustees of such schemes are typically volunteers who do work pro bono. Thus to expect them to be saddled with the hassles of conduct issues, not to mention bad debts, is unrealistic.

“In schemes in which the market-related units cost less than R1m, it is very hard to find competent and willing trustees.

“This does not apply to social housing institutions as they are geared to manage tenants in low-spec units,” he said.

Rode suggested that to mitigate the risk, the city could consider applying its inclusionary housing policy to selected, degraded centrally located areas rather than the whole municipal area.

He said land prices in these areas would be low but value could be added through allowing more bulk together with other incentives, such as rebates. Rode said urban development zones came to mind in this regard. This was a reference to the tax incentive launched in 2004 to encourage companies to invest in the development of new commercial or residential buildings or refurbishments in the inner cities of the country’s major cities.

Deter private sector

The SA Property Owners Association (Sapoa) was also critical of the draft inclusionary housing policy, claiming it did not address many of the complex matters associated with affordable and inclusionary housing, including residential market realities.

Sapoa chief executive Neil Gopal said last month that the association did not believe the draft policy was a workable solution and might, in its current form, deter the private sector from developing residential units.

He said Sapoa believed the proposed mandatory 20% inclusionary housing requirement might influence the feasibility of residential developments and was potentially burdensome to private developers experiencing declining returns and profit margins.

Gopal added that in terms of potential social impacts, it might isolate low-income households in high-income, market-related developments, with inadequate access to affordable social facilities.

- BUSINESS REPORT ONLINE