Opening a Door to Home Ownership in South Africa: NURCHA
Site: South Africa
Challenge: Large numbers of homeless in South Africa needed housing but even with government subsidies in place, local builders were often unable to obtain bank loans for construction projects.
Solution: OPIC, together with the Soros Foundation, provided a loan guaranty to a major South African bank to support lending to homebuilders through the country’s National Urban Reconstruction and Housing Agency, or NURCHA.
Impact: The deal has led to the construction of almost 40,000 modest houses per year, providing homes for more than 500 people every day, while also employing large numbers of local contractors, helping many black- and minority-owned businesses establish themselves, and creating local jobs.
Banks found low-income lending too risky
South Africa has a large homeless population and for years has been working to provide housing to more of its poorest residents and build more stable communities, both by establishing low-income housing subsidies and enlisting small contractors to take on some of the work. But even when there was strong demand and support for such construction projects, local builders had difficulty obtaining financing. Low-income housing was seen as a high-risk venture and banks often charged them exorbitant interest rates, which made their projects untenable.
In 2002 South Africa’s housing minister visited OPIC seeking a way to bridge the gap between lenders and builders. Over the next year, OPIC together with the Open Society Institute (OSI), a U.S. nonprofit founded by the Soros Foundation, developed a solution. OPIC arranged a $15 million loan guarantee to a major South African lender, Rand Merchant Bank, so that it could “on-lend” funds to homebuilders at more reasonable interest rates. The funds were provided to local contractors through NURCHA, South Africa’s National Urban Reconstruction and Housing Agency. NURCHA reviews the viability of each proposed project, organizes the loans and provides support to see the construction through to completion.
To date, OPIC’s loan guarantee has supported 884 loans to builders throughout South Africa for the construction of 300,000 modest homes; more than 100 per day. With an average of five people living in each of those homes, the project has housed more than 500 people per day. Houses are typically small two-bedroom units with a living room, kitchenette and inside bathroom, providing a basic but crucial source of shelter, security and stability for thousands of people who had been squatting in makeshift shacks.
From squatter to home owner
OPIC Vice President Robert Drumheller described the project as “taking people who were in large part squatters and making them legitimate homeowners with a stakeholder’s interest.”
Low-income residents who qualify for such free housing are given full ownership status. However, because these new stakeholders may not fully understand the concept of homeownership or the value of property, the NURCHA program imposes some restrictions designed to protect them. New homeowners are barred from selling their homes for a number of years so they do not accept a grossly undervalued bid and lose their home for good.
Project supports small construction companies
As important as this large scale construction of housing has been in providing shelter to people who previously had none, the project has also supported South Africa’s nascent black homebuilding industry. The majority of loans provided under the program have gone to small, black-owned construction companies, many which had little lending experience and had previously been withdrawing from projects because of the high cost of financing. As a result, the program has created jobs for thousands of emerging contractors. Cedric de Beer, a former NURCHA managing director, credited the OPIC loan guarantee for “squeezing all the risk out of the lending business.”
By supporting many small and inexperienced contractors in obtaining equipment and managing expenses, NURCHA helps them improve their credit ratings and overall marketability, and helps ensure that these businesses can survive and grow, and create more jobs.
“Overall, what OPIC is doing in South Africa – a country with substantial resources and a sophisticated financial sector – is use its financing to build a bridge that has enabled a South African bank to enter into a financial opportunity that it wouldn’t otherwise,” de Beer explained. “In effect, by repricing risk and demonstrating what works and what doesn’t, OPIC has opened a door.”
This project was profiled in 2011