African Union for Housing Finance Conference: Raising capital for an inner city mortgage company promoting rental housing, 09/11/2013

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2. Business History
TUHF formed in June 2003 as:
A South African NBFI based on:
Shorebank Chicago’s Real Estate Lending Division
Local commercial property finance experience
Inner city rental housing experience
Loan cycle management approach
Set up as:
A National Urban Regeneration Fund,
A Commercial property financier,
Inner city specialist financier
Wholesale finance raised from:
Asset managers, -Futuregrowth Asset Management, the PIC, Cadiz
DFI’s such as NHFC and DBSA
Commercial Banks -- SBSA

3. Commercial Development Objectives
A good business doing good
TUHF restructured in September 2009 as:
A private commercial company :
Commercial objectives of shareholder value, ROE etc
Development objectives through scale in market niche
Shareholding
Controlling shareholder TUHF 21,Other major shareholder:- The NHFC
Shareholders :- PIC 12.5% , Futuregrowth Asset Management 12.50%,
Management & Staff 5.33%
Regeneration and Neighborhood development through:
Commitment regeneration initiatives (currently throughout Gauteng,
Durban and PE)
National Footprint Objective
Low income rental housing:- Economic, spatial, social integration
SME financier- access to finance

4. Development Impact
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Urban regeneration –
Local economic development –
Job Creation
Low to moderate income Housing
17 097 residential units funded by TUHF creating 38 889 jobs
Enterprise Development –Access to finance
landlords in the business of rental housing
Environmental
Sustainability promoted through design, energy saving technology and water
saving
Public policy
TUHF is an invested stakeholder
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5. Business Model
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TUHF provides financing in mortgage, up to the value of R30 million. Ancilliary
products include:
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Bridging finance – market making
Construction loans
Equity finance for BEE objectives
TUHF is not a micro lender nor a home loan financing company.
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Commercial property financier i.e. finance the underlying cash flows of the business
Determine the security value of the asset (primarily)
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As a fixed asset financier, TUHF offers mortgage security, has applicable margins
and is a low volume high value Non Bank Financial Institution (NBFI).
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By specialising in rental housing and inner cities
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deep and stable demand for rental housing
multi sector economies of inner cities and locations close to work and amenities.
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6. Business Model
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Debt capital and risk weighted capital adequacy ratios reflect it’s fixed asset
business.
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Interest hedge
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Debt Capital 88% (below 90%)
CAR > 25%
Exceed SARB and Basel III requirements
Borrow and lend floating
Term mismatches managed through mortgage profile agreements
Underwriting
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Character, building, feasibility and property management
Obvious credit history, referencing etc
Covers the range of market, rights to build and trade, restrictions etc (security)
Detailed feasibility –determines debt levels
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8. Business Model
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Financial Hurdles
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DCR of 1.3 and TUHF value LTV of 80%
Prime plus 3.5%
15years
First mortgage bond
Surety
Business case
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Net interest margin 3.5%
Once off, once ever raising fee of 2%
Current book of R1.7 billion
Outperform commercial averages
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9. Standard Loan Security Structure
Security is of the utmost importance to TUHF. They strive to protect all personal identifiable
information by adhering to industry standards and security practices.
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10. Business Model
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11. South African Inner Cities
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The state of:
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Varying states of decline
Long history of title, Freehold, Section title and Shareblock
Recent difficulties of constitutional principles in property rights largely overcome
Very different markets
Same raison d’etre, much existing building stock at below replacement prices
Multi sector economies:
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Resilient demand
Flexible tenure of rental
Well located
Most services available
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12. WAVERLEY
AFTER

13. ARONBY
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14. CONISTON
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15. 140 BECKER STREET
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16. MASSYN

17. THE SANDS
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18. EKUPHUMULENI
BEFORE

19. MARSHALLTOWN LOFTS
AFTER

20. Capital
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Equity capital
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Debt capital
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Capitalization complete
Raised R165 million of investment
NAV at R212 million
BUT what is sufficiently capitalised?
DFI’s. Asset Managers and Commercial Banks
About 1/3 to each group
All SNLC on balance sheet
Reporting and covenants in 15 agreements
TUHF able to:
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Off balance sheet structures
Agency work
Joint financing as lead or co investor
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21. Funding Strategy
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Current Funding Mechanism – Loan book of R 1.7 billion funded by 15 senior debt on
balance sheet facilities. Funders have a specific allocation of loan assets ceded to them
and all funders rank / treated equally.
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Estimated loan book disbursements forecast at R 500 - R 600 million p.a. and growing
and current funding alone cannot support these levels
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Long Term Funding Strategy –
- Continued support from existing funders mainly Futuregrowth Asset Management,
PIC, NHFC, GPF and DBSA.
- Broadening of funder base, particularly on institutional side by accessing capital
markets.
- Propose issue of Domestic Medium Term Note Program (DMTN) following feedback
from fund managers
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22. Existing Lenders
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15 on balance sheet loans
Secured by cessions of security Loan Book Performance
Collections for July 2013 of R 19.56 m
Average arrears for last quarter 2013 0.51%
Group loan loss provision of 2.10% of total book
Total pipeline of R 647 million
Loans in closing of R281.5 million
The loan book is financed by a number of significant institutions. These include:
 NHFC (R345 million)
 SBSA (R230 million)
 DBSA (R350 million)
 Futuregrowth (R350 million)
 Cadiz (R50 million)
 Public Investment Corporation (R300 million)
 Mergence Investment Managers (R15 million)
 Gauteng Partnership fund. (R45 million)
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23. The Challenge of Capital
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Access to debt capital is TUHF’s single largest constraint to growth
By a long margin
Importance of scale
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Low volume, high value, low margin
High levels of security
Able to manage liquidity and cash flow – term of lending shortening
Direct access to the capital markets
Perceptions of lenders
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Inner cities and low income housing
Independent NBFI in mortgage (commercial property finance)?
Distinction between micro finance, home loans and mortgage
Will rating be a more clinical assessment?
 Borrowed covenants
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Particularly a problem when dealing with foreign DFI’s
One size fits all – the five definitions of a business day syndrome
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24. The Challenge of Capital
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Access to debt capital is TUHF’s single largest constraint to growth
Lenders/debt capital
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Capitalisation
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Liquidity hangover from financial crisis
Basel III pricing banks out of property finance
Single party limits
The grand dis-intermediation question
What is appropriate for a fixed asset lender?
Borrowed covenants – micro lender- other?
Will rating remove perceptions
Relationship between DC and RWCAR
Local asset management industry
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Support only as part of SRI
No large scale, main stream support in housing finance
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25. The Challenge of Capital

Access to debt capital is TUHF’s single largest constraint to growth
Lenders/debt capital





Capitalisation





Liquidity hangover from financial crisis
Basel III pricing banks out of property finance
Single party limits
The grand dis-intermediation question
What is appropriate for a fixed asset lender?
Borrowed covenants – micro lender- other?
Will rating remove perceptions
Relationship between DC and RWCAR
Local asset management industry


Support only as part of SRI
No large scale, main stream support in housing finance
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26. The Challenge of Capital

Access to debt capital is TUHF’s single largest constraint to growth
Lenders/debt capital






Capitalisation


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

Liquidity hangover from financial crisis
Basel III pricing banks out of property finance
Look through mentality
Single party limits
The grand dis-intermediation question
What is appropriate for a fixed asset lender?
Borrowed covenants – micro lender- other?
Will rating remove perceptions
Relationship between DC and RWCAR
Local asset management industry
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
Support only as part of SRI
No large scale, main stream support in housing finance
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27. The Challenge of Capital
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Access to debt capital is TUHF’s single largest constraint to growth
Structures
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Security structures
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On or off?
Securitisation
Institutional economics- more parties exponential increase in transaction costs
On BS pooled security
Indemnity mortgage because security divisible
Borrower indemnify’ s trust and offers mortgage in return
Credit enhancement
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Hard or soft
CBA- on price and on liqudiity
Soft- SRI or FSC
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28. Suggestions for future
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Targeted information campaigns
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Create knowledge on track record
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Indicators of performance
Estimations of demand and affordability
Regular reporting
Identify successful initiatives
Emphasize governance
Target institutions
Funding is difficult to raise
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Deal with the perceptions and myths
Find champions
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