Chuck Laven and Esther Sandrof

MEMORANDUM

To: Premier Helen Zille, Western Cape Government, South Africa

From: Charles S. Laven, President, Forsyth Street

Esther Sandrof, Partner, Forsyth Street

Date: June 8, 2016

Re: Tafelberg Review: The Case for Active Government Intervention in Affordable Housing

We are pleased to submit for your consideration the following comments and thoughts in support of Cape Town’s Reclaim The City Campaign, and specifically the calls for well-located publicly owned land – including the 1.7ha Tafelberg site in Sea Point – to be used for government subsidized affordable housing. We hope that this submission can inform your review of whether the land should be sold to a private buyer, or be used for another social purpose.

We are both experts in the field of affordable housing. Mr. Laven has been on the faculty of Columbia University Graduate School of Architecture, Planning and Preservation since 1981 and has taught a variety of courses on housing finance, housing policy and real estate finance. He has more than 40 years career experience in designing and developing affordable housing policies, programs and buildings across the United States and internationally. Ms. Sandrof has been a consultant in the field of affordable housing since 1988 and has worked throughout the United States and internationally as well.

Together, in 2003, we formed Forsyth Street: Forsyth Street is a prominent financial advisory and consulting firm specializing in real estate, affordable housing, public-private development and impact investing.

The purpose of this submission is to outline some of the challenges in developing affordable housing in cities across the globe. We will articulate the case for active government intervention in creating affordable housing, including the provision of public lands at low or no cost, as well as the benefits of mixed-income housing and neighborhoods. We will also highlight some key examples from around the world where a mix of government interventions have worked well and have been embraced by the market and the surrounding owners and residents.

Attached are detailed biographies of each of us and a copy of a recently published op-ed article that Mr. Laven co-authored about the global affordable housing crisis: New Frontiers in Affordable Housing.

The Global Challenge of Affordable Housing

An estimated 330 million low- and moderate-income urban households around the globe either live in substandard housing or face severe financial burdens from housing payments that force them to forgo spending on essential needs such as health care and education. By 2025, that figure could reach 440 million households, or one-third of the world’s urban population [1] .

Access to decent affordable housing is a global problem, affecting the most affluent cities in high-income countries to urban areas in the developing world and everywhere in between. The context and specifics vary widely, but similar challenges are present in all countries and major urban areas across the world. These challenges include:

• The cost and availability of land and sites that are accessible to transportation, urban services, and employment opportunities;

• The high costs of construction and lengthy development processes in dense urban areas;

• The lack of an active government role to establish the rules and define the ‘playing field,’ to provide the physical infrastructure needed for affordable housing to be sustainable, and to provide the subsidies and other incentives to support financial feasibility and attract private investment.

• Land-use policies that restrict mixed-use development or that establish minimum dwelling unit size requirements, which in turn limit the development of compact and lively, high-density, mixed-use, mixed-income urban districts.

• The lack of the access to banking services and credit which prevents low-income households from accumulating savings for down payments or borrowing at a reasonable cost.

The nature and scale of the problem defies universal solutions: there is no quick fix or one-size-fits-all solution to the challenge of producing housing units of reasonable quality in sufficient volume at price levels that are affordable for a wide range of income groups. For government, the problem is best addressed through the creation of a menu of flexible financial resources and incentives that can be mixed and matched to address unique local conditions.

Defining Affordable Housing

The term “affordable housing” encompasses a wide range of social needs, income bands, forms of tenure, and physical housing types. Affordable housing is often erroneously portrayed as publically-owned and -operated, poorly-maintained, architecturally uniform high-rise apartment blocks occupied solely by very low-income households. This is not the complete picture. There are a myriad of international examples in all types of countries of attractive and contextual properties that counter the image of low-quality segregated housing. In general, affordable housing serves a vital public purpose and is a part of good urban design for inclusive mixed-income neighborhoods.

Affordable housing can address a wide spectrum of housing needs. One way to categorize affordable housing is by the beneficiary to whom it is targeted:

Screen Shot 2016-06-17 at 11.12.24 AM

Different Types of Housing Tenure

Another way of classifying affordable housing is by tenure. Private homeownership is often viewed as the gold standard for housing. Homeownership has been found to correlate positively with a numerous measures of social capital and civic engagement and often public policies in developed nations provide explicit incentives for private ownership. For example, in the United States, homeowners receive a direct tax deduction for the amount of interest paid on a loan which is secured by their principal residence.

While homeownership is desirable, it is not right for everybody. The costs can be beyond the reach of low-income households because they lack the upfront cash required for a down payment, can’t qualify for a home loan, or lack the financial means to make maintain the home in livable condition. Furthermore, even for those who can afford it, homeownership is not always the best choice. Often young adults or growing families prefer the flexibility that comes from renting or may prefer to live as renters while they save up for a down payment on a house or condo. Seniors often sell their homes and move into rentals to downsize, to relinquish responsibility for maintenance and upkeep, or take advantages of specialized supportive services and amenities available to senior renters.

In addition to traditional homeownership or rental models, many nations have experimented with hybrid shared equity models that provide the benefits of homeownership at a lower price point. Shared equity housing creates long-term, affordable homeownership opportunities by imposing restrictions on the resale of subsidized housing units. Typically, an NGO or government entity provides a subsidy to lower the purchase price of a housing unit, making it affordable to a low-income buyer. In return for the subsidy, the buyer agrees to share any home price appreciation at the time of resale with the entity providing the subsidy, which helps preserve affordability for subsequent homebuyers.

For example, roughly 80% of the population of Singapore lives in limited-equity cooperative-style housing that is sponsored and managed by government entities. Most residents own their units subject to a 99-year lease agreement with the government. Housing in Singapore is targeted broadly to low- moderate- and middle income households and subject to an ethnic quota system to avoid racial and ethnic segregation.

Who Develops and Owns Affordable Housing?

There are different models for developing and owning affordable housing. The traditional public housing approach of providing housing for the lowest-income households is for government entities to finance, develop and own the housing. Globally, public housing has met with mixed success. The failure of public housing efforts can usually be attributed to poor design, poor construction quality, inadequate capital funding for maintenance, isolation from jobs and transportation, and high degrees of economic segregation.

Where these challenges are addressed, public housing has been incredibly effective. For example, in Japan, ”Kōei jūtaku” public housing projects are distributed throughout the nation even in the priciest neighborhoods. Local governments receive subsidies from the central government to build public housing. Rent is determined by household income. Tenure is meant to be temporary. The housing is designed to give low-income families the chance to save money, so that they will be able to afford private housing as their incomes increase over time.

Another approach is for non-governmental organizations to serve as developer owners of housing with government subsidies and incentives. The benefit of NGO participation is the ability to provide specialized services to tenants and the ability to make sure that the housing is leased to qualified tenants and meets government requirements. In South Africa, a variant of this system is a primary means of providing government-subsidized rental stock through independent Social Housing Institutions (SHIs).

A third approach is to provide the subsidies and incentives for private developers to build affordable or mixed-income housing that is then subject to an ongoing regulatory regime to require continued affordability. This has been very successful in New York City, where land costs are high, land is scarce and developers are willing to include affordable units to gain access to sites. The economic equation for a private developer is the ability to earn a developer fee upfront, moderate returns on investment during the regulatory period, and the potential to earn substantial returns at the end of the regulatory period by renting units to market-rate tenants.

Why Should the Government Intervene in Land and Housing Markets?

Many developed and developing nations have found that there are high social and economic costs for not addressing housing affordability. Concentrations of poverty and poor housing quality have been found to reinforce economic, racial and ethnic segregation; they also lead to decreased worker productivity, increased incidence of crime, poorer health and educational outcomes, higher incarceration rates, deeper social divisions, and substantial barriers to opportunity.

There is an important connection between the location of affordable housing and access to transportation. Placing affordable housing on inexpensive land located far away from the city center, job opportunities, and access to transit may reduce the costs to produce the housing in the short run, at the expense of creating housing that is truly affordable to tenants after factoring in the combined housing and transportation cost. Locating affordable housing in remote locations also increases social isolation and exacerbates racial and economic segregation with long term negative effects. The Center of Neighborhood Technology has created a Housing and Transportation Affordability Index for all neighborhoods in the United States to illustrate the economic benefits of creating compact, mixed-use communities with convenient access to jobs, services and amenities. [2]

Affordable housing development has also been found to raise economic productivity. According to a recent report sponsored by the McKinsey Global Institute, “Affordable housing in the right locations boosts the city’s productivity by integrating lower-income populations into the economy and reducing costs to provide shelter and services. It enables labor mobility, opening a path to rising incomes, giving households more to spend on goods and services in their neighborhoods and, over time, enabling them to move up the income pyramid and help drive city.” [3]

Government intervention can also act as a counter against displacement in highly competitive markets. In global cities such as Paris, London and New York City, surging demand for investment properties from wealthy foreign investors has contributed to inflationary pressures within local housing markets. Likewise, concerns are being raised in a number of cities, including Cape Town, that the diversion of housing units for short-term rentals through programs such as Airbnb is effectively removing thousands of formerly affordable housing units from a city’s limited inventory. [4]

Different Approaches to Government Intervention

Government can play many different roles in supporting and encouraging the development of affordable housing. These include:

Provision of Land

The cost to acquire private land is often a major economic obstacle to the development of affordable housing. In some urban locations, land costs can range from 40 to as much as 80 percent of the total development cost. Governments often own significant shares of vacant or undeveloped land in cities. In areas where land costs are high, government contribution of free or low-cost land can serve as an implicit and generous subsidy.

Land Use Incentives

Land use controls, regulations, entitlements and/or zoning incentives are often used to reduce the effective cost of producing affordable housing. For example, inclusionary zoning is a method that allows developers to build at higher density in exchange for the inclusion of affordable units.

Capital Subsidies

Government can provide direct capital subsidies either in the form of grants or below market subordinated debt. In either case, the inclusion of free or low-cost capital reduces the amount of market-rate debt and/or equity required to finance a project, resulting in lower carrying costs over time, so that lower rents can be supported.

Operating Subsidies

Governments can also provide subsidies to cover a portion of operating costs on an ongoing basis to reduce the rent burden on tenants. For example, in the United States, operating subsidies are used to cover the difference between the rent that a tenant can afford to pay and the amount of rent required to operate and maintain a property.

Foregone Government Revenue

Rather than providing direct cash subsidies, governments can also support affordable housing by foregoing tax revenue. Government entities often provide property tax exemptions or abatements to reduce carrying costs on affordable units. In the U.S., private companies are eligible for reduced corporate taxes if they provide direct capital investments in affordable housing projects.

Financial Market Incentives

Government can also use its regulatory authority to provide incentives to the financial sector to increase the supply of well-priced, appropriately-structured capital for the affordable housing sector. For example, in the United States, the Community Reinvestment Act has been a highly effective government tool in encouraging the banking sector to meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods. Failure of banks to address credit needs of the low-income neighborhoods in their service areas can lead to a slowdown or withholding of regulatory approvals for mergers and acquisitions.

In practice, the above types of incentives are often used in combination to arrive at projects that are economically feasible.

New York City as an Example

New York City has long been a leader in US housing policy. An extremely competitive housing market has led to challenges including displacement, homelessness, concentrations of poverty, and racial segregation. The city has developed multiple tools to create more equity, such as the provision of free or cheap land, capital subsidies, tax and zoning incentives, inclusionary zoning, rent controls, and use of internal subsidies.

These policy measures have resulted in greater economic and racial integration, as well as improved conditions in low-income neighborhoods. There is also ample evidence to suggest that mixed-income housing does not have adverse impacts on surrounding property values nor does it pose marketing challenges or contribute to increased criminal activity. Quite the contrary, these type of compact and lively projects have proven to contribute to increased economic activity, reduced crime and enhanced community vitality. [5]

Other competitive housing markets in the US such as San Francisco have also met with success in creating mixed-income housing, often using public subsidies and incentives and leveraging the inherent strength of the private market to create successful mixed-income developments. [6]

While urban contexts in United States and South Africa differ significantly, many cities across the world have actively embraced regulation to prevent market distortions and stimulate affordable housing provision through both demand- and supply-side interventions.

South Africa, Cape Town and the Tafelberg Site

Apartheid- and colonial-era planning and housing policy has left South Africa with some of the world’s most spatially divided cities. The general model of development since 1994 has been to build affordable housing stock—not within well-located areas of economic and social opportunity, but on the urban periphery. This is an unsustainable model that must be addressed sooner rather than later.

The facts suggest that Sea Point is uniquely in need of affordable housing. It is a lively, high-density, mixed-use suburb a few kilometers away from the central business district. It has access to excellent public transportation, including Cape Town’s new Integrated Rapid Transit (IRT) bus system. It has a robust service economy, which is dependent on thousands of modest-wage workers who must travel very long distances to get to work. Anecdotal data suggests that some workers travel for three hours per day to get to and from work. This alone provides impetus for intervention, but Sea Point has also seen soaring rental rates in recent years. These pressures are pushing the lucky few workers who could afford only meagre accommodation within the neighborhood out to the urban periphery.

The Tafelberg site is the last sizable piece of publicly owned land in the area, zoned for residential and mixed-use development. This provides a unique opportunity for the Provincial Government to generate a mixed-income rental demonstration project. We would strongly advise against disposal of the Tafelberg Site and other well-situated public land holdings without conditions for affordable housing attached, or before there is a comprehensive public plan describing how all parcels will be used collectively to advance an inclusive housing agenda.

Tafelberg could be the first time that any post-apartheid government an Cape Town has built affordable housing in a well-located central city neighborhood. This site provides an ideal opportunity to both demonstrate the benefits of compact, mixed-income, mixed-use housing and dispel some of the prevailing myths about this type of housing so that such projects can be replicated elsewhere in Cape Town and in other cities in South Africa.

In our experience, some of the most successful affordable housing in the U.S. and globally has been built as part of mixed-use housing developments. Increasingly, mixed-income housing is becoming the preferred means by which to leverage market forces to increase affordable housing options in the context of a secure, high-quality, inclusive living environment. It is a proven tool for revitalizing urban neighborhoods, decreasing the concentration of poverty, and providing an engine to activate smart growth principles by reducing travel times and congestion.

In conclusion, we believe that the Tafelberg property in Sea Point would be an ideal demonstration project to illustrate how the provision of low cost or free land by government agencies combined with a other targeted government incentives can be a highly effective approach to creating attractive and contextual mixed income housing developments in central locations near services, economic opportunity, and public transportation. The project could serve as a replicable model for projects elsewhere in Cape Town. With sufficient political will, Cape Town could become a leading global example of how government driven mixed-income development can create a more inclusive, economically vibrant, and just city.

Please feel free to contact us should you require any further information or assistance.

Chuck Laven

Esther Sandrof

PDF here.

[1]  These figures do not cover some of the world’s poorest people, who often live outside of cities, on urban streets, or as squatters, leaving them unaccounted for in census estimates.

[2] H+T Index (htaindex.cnt.org)

[3]  Woetzel, Jonathan, et. al, “A blueprint for addressing the global affordable housing challenge ”, McKinsey Global Institute: October 2014, p. 4.

[4]  Monroe, Rachel, “More Guests, Empty Houses ,” Slate.com, February 13, 2014

[5] Myerson, Deborah L. Mixed-Income Housing: Myth and Fact. Washington, D.C.: ULI–the Urban Land Institute, 2003, p. 18.

[6]  For other international examples, we recommend that you see the McKinsey Global Institute report. (Woetzel, Jonathan, et. al, A blueprint for addressing the global affordable housing challenge , McKinsey Global Institute, 2014.)

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