Although there are many low-cost housing developments that have been undertaken over the past years and will continue to be undertaken into the future in many parts of South Africa, the demand for housing continues to increase. Some of these low-cost housing developments are undertaken by small housing developers with limited experience who are awarded contracts with a view of promoting transformation. Most commonly, these developers do not have the experience and balance sheet to secure funding, excluding them from the funding market. They also lack capacity due to many other factors. This calls for a structured solution.

There are two key risks are delivery risks, which should be covered by construction guarantees, and market risks, which are limited to possible delayed payment by off-takers like the Government as they only pay for work done in terms of the service level agreement signed with the housing developer. In the case of rental developments, the risk is of lower occupancy leading to cashflow deficits to service debt backing the project.

NSFA has designed a structured risk-managed solution where insurance guarantees that are not dependent on the strength of the balance sheet or experience of the developer are provided to allow these smaller and relatively inexperienced property developers to secure funding for their projects. This requires strong risk management to reduce both the frequency of claims and the severity of claims under the guarantee. NSFA’s risk-managed guarantee-backed funding model, therefore, involves working with large experienced implementing agencies and developers and professionals to provide monitoring and implementing services to the smaller developers and manage all the associated risks to ensure successful delivery of projects. This minimizes the delivery risk and is expected to provide an acceptable insurable risk to the insurer to provide the required guarantees, which in turn allows funding to be secured. The Social Housing Private Debt Impact Fund designed by NSFA that seeks to secure funding from institutional investors like pension funds and insurance companies is based on this model.