National Standard alongside its strategic partners, Housing Investment Partners (www.hiphousing.co.za), has, in 2021, launched the National Standard Social Housing Private Debt Impact Fund (“The Fund”) in response to the need to increase housing delivery for rental for low to middle-income earners in South Africa as the primary impact objective. The fund also aims to develop entrepreneurs in the construction industry through skills transfer and to create jobs as secondary impact objectives.

Research undertaken by the GIIN in 2019 on evaluating impact performance of affordable housing investments among impact investors around the world showed that access to safe, clean, and affordable homes improves standard of living, childhood health and development, mental and physical health, and energy efficiency, among other positive impacts. Most such housing impact investors were reported to be offering supportive services linked to the housing they finance, such as access to public transportation and schools, financial literacy training, and access to healthy food and gyms, among others. These outcomes are incorporated in assessing the quality of housing units in which they invest.

The Fund was established to complement the Capital Grant funding by The Social Housing Regulatory Authority (“SHRA”) by providing private debt funding. The Social Housing Act (“the Act”) and its Regulations and the National Housing Code 2000 as amended, provides the legal framework for Social Housing in South Africa. The SHRA was established in terms of the Act. The Act allows for the undertaking of approved Social Housing Projects with the benefit of public money through Social Housing Investment Programmes for the development of rental housing options for low to medium income households to be provided by Social Housing Institutions in designated Restructuring Zones. The National Housing Code provides for the allocation of institutional subsidy to qualifying Social Housing Institutions (“SHIs”) and to qualifying beneficiaries in the form of social housing grants from the National Treasury through the Department of Human Settlements.

The SHRA provides up to 75% Capital Grant funding into subsidised rental housing developments. Developers need to satisfy certain requirements that involve both technical and financial viability analysis before SHRA can approve the Capital Grants. The developers are then required to seek funding from the property finance market for the balance of between 25% and 35%. This has often been a challenge in the market leading to many projects failing to take off. The National Standard Social Housing Private Dent Impact Fund was established to address that challenge.

National Standard undertook investigations into the structural challenges facing housing developers in securing funding in this sector. The Fund was then established to provide the debt funding into SHRA approved housing projects. Investments are made in the form of loans into portfolio projects underpinned by rental cashflow from the residential properties. Loan interest and capital repayments are passed through to investors. Investments take place mainly through SHRA accredited Special Purpose Vehicles (SPVs) to isolate specific risks. Whilst risk adjusted returns to debt investors are expected to be acceptable as downside risks are actively managed to preserve capital, profit maximisation at the expense of sustainable socio-economic development is not the main objective although the Fund aims to achieve market related financial returns alongside its impact objectives.

The Fund, therefore, has an impact investing mandate that is fundamental to the economic transformation of South Africa through providing investors with risk adjusted inflation beating commercial returns whilst delivering positive environmental, social and developmental impact. There is currently a huge gap in social infrastructure, and the primary objective of social housing developments is to provide affordable rental stock with access to quality education and other amenities. This has the knock-on effects of tangible economic development and job creation.

The Fund was established with the following key impact objectives:

• Accelerate development of new subsidised rental housing stock to provide decent housing to low to middle-income earners
• Create jobs in the construction sector and related industries and improve the quality of lives of individuals and families
• Promote entrepreneurship by supporting existing housing developers whilst developing new entrants into the industry
• Promote environmental, social, and governance (ESG) principles in the running of portfolio companies
• Meet return expectations of investors whilst managing downside risk to protect capital.

The primary target investors are pension funds and life insurance companies in South Africa. The Fund also targets South African and international commercial & investment banks, development finance institutions, family offices, sovereign wealth funds and high net worth individuals.

National Standard collaborated with Santam Limited to develop a Developer Guarantee that is utilised by the Fund in transferring housing delivery and tenant occupancy risks. This credit enhancement avoids the risk of total capital loss. The guarantee requires the appointment of experienced implementing agents that play the following roles for downside risk management:

• Originating and structuring housing development deals
• Assessing the deals for funding and insurance as part of centralised risk management. This forms part of the initial underwriting before final underwriting by Santam and Credit approval by the Fund.
• Ensuring prompt disbursement of funds by SHRA and the Fund.
• Providing end-to-end project risk management.
• Providing all the required expertise to ensure successful completion of projects.
• Signing off on all stages of construction.
• Signing off on all payments.
• Signing off on all other relevant matters relating to the project as may be identified.
• Monitoring management of rental stock during the rental period.

The Fund recognises that different investors have the different risk appetites. Investors with a higher risk appetite who prefer exposure to both upside and downside risk in search of higher expected returns are accommodated in the Fund and do not have to use the Santam guarantee. Lending into portfolio companies are, therefore, structured appropriately to allow for this differential. This means that funds for investors with higher risk appetite may be invested at higher interest rates for the additional risks they take due to potential loss of capital.

In addition, social housing rental stock, debt funding towards equity contribution into affordable housing bonded houses and student accommodation developments may be considered on a selective basis, subject to appropriate subsidies and credit enhancements being available.