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Summary of Proposed Investment
This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.
Mortgage Services and Other
Reg Ind, Financial Markets, CAF/CLA
Date SPI disclosed
May 7, 2007
Projected board date
June 7, 2007
Approved: October 4, 2007
The proposed project involves:
- an IFC investment of up to ZAR125 million ($16 million equivalent) through a collateralized mortgage finance warehousing line to TUHF (Pty) Limited (TUHF Pty or the company); and
- an equity investment of up 10 percent in the company.
The company will be newly incorporated as a private sector firm, assuming the key business operations that are currently performed by Trust for Urban Housing Finance, a section 21 company duly registered under the Companies Act in South Africa (TUHF Section 21). Section 21 companies in South Africa are incorporated as “not-for-profit” firms.
TUHF Section 21 is a financing organization that provides:
- funding to entrepreneurs for the purposes of purchasing and rehabilitating dilapidated multi-family rental buildings in the inner city of Johannesburg; and
- extending long-term mortgage loans to these property owners once the acquisition and rehabilitation process has been completed.
These property owners (landlords) rely on revenues generated from their rent-rolls to make mortgage payments on the property. Over the years, TUHF Section 21 has built a working business model focused on inner city mortgage loan origination, and the outstanding portfolio currently stands at ZAR250 million ($33 million equivalent), with another ZAR400 million ($53 million equivalent) in commitments to be funded.
The management of TUHF Section 21 embarked on a program to rationalize its funding structure due to growth in its operations. This growth has prompted the need for a restructuring of TUHF Section 21 operations, and led to a proposal for the establishment of TUHF Pty. This conversion will ensure that the business model can be placed on a firmer financing footing by restructuring its sources of funding, thereby lowering the cost of funding and enabling operations to be further scaled up using a corporate structure that is driven by a profit motive. At the same time, the business model will retain its developmental mandate of inner city rejuvenation.
The management is currently in the process of putting together a ZAR1.075 billion ($143 million equivalent) comprehensive funding program (Total Funding Program) for TUHF Pty. This Funding Program will comprise:
- ZAR250 million ($33 million equivalent) warehousing line (of which IFC will participate up to 50 percent and Standard Bank of South Africa will provide the balance);
- ZAR825 million ($110 million equivalent) mortgage-backed securities (MBS) issue, broken down into three pieces as follows:
- ZAR450 million ($60 million equivalent) Class A notes;
- ZAR300 million ($40 million equivalent) Class B notes; and
- ZAR75 million ($10 million equivalent) Class C notes, which can be substituted with an equity investment in TUHF Pty.
The MBS issue will be a securitization of the current and future mortgage loan book. A group of Investors interested in the three classes of notes have expressed their interests in the debt offering to the Company. They include Future Growth Asset Managers, Standard Bank of South Africa, Development Bank of South Africa and National Housing Finance Corporation. All these entities, except Future Growth, are already lenders to TUHF Section 21 and will essentially swap their outstanding loans for the proposed notes.
Project sponsor and major shareholders of project company
The original formation of TUHF Section 21 came about through a pooling of resources of a number of stakeholders involved in inner city urban regeneration: The National Housing Finance Corporation (NHFC), the National Urban and Reconstruction Agency (NURCHA) and the Inner City Housing Upgrading Trust (ICHUT) formed a joint venture to establish TUHF in June 2003. As one of the founders, ICHUT itself was formed as an NGO ten years ago, and coupling with its two new partners, transferred its loan book and retained earnings to the newly formed entity. At inception, TUHF Section 21 was the beneficiary of a capital base of approximately ZAR11 million ($1.6 million). TUHF section 21’s Board of Directors is drawn from its founding institutions as well as community associations such as the Banking Association of South Africa and the Johannesburg Housing Company.
Although it has a national mandate, so far TUHF Section 21’s initial focus has been on redlined areas of the Johannesburg city centre. TUHF Section 21 chose this starting point for two reasons. Firstly, as the successor to ICHUT, TUHF Section 21 could build on ICHUT’s ten years of experience in lending to tenant-based and small private landlords in the Johannesburg inner city. Secondly, the experience of TUHF Section 21’s staff and its Board of Directors was centered on Johannesburg.
Total project cost and amount and nature of IFC's investment
The total project cost is estimated at ZAR1.075 billion ($143 million equivalent). The proposed IFC investments will be in form of:
- an IFC investment of up to ZAR125 million ($16 million equivalent) through a collateralized mortgage finance warehousing line to TUHF (Pty) Limited (TUHF Pty or the company);and
- an equity investment of up 10 percent in the company.
The investment will be made in South African Rands (ZAR).
IFC investment as approved by Board
19.76 million (USD)
IFC Investment (million USD)
* These investment figures are indicative
Location of project and description of site
TUHF Section 21 is located in Johannesburg, South Africa and currently all its commercially funded projects are located in Johannesburg.
Anticipated development impact of the project
Enhance access to housing by increasing supply and making property more affordable to low and middle income households in South Africa, especially through the rental and rent-to-buy schemes;
Provide value added products and services to underserved markets. Improve living standards generally and environmental sustainability by investing in residential refurbished, renewed and enhanced residential properties. Such investment provides social and financial upliftment in inner-city of Johannesburg by reversing the cycles of disinvestment and abandonment -- the positive aspect of contagion effects.
- Financial Sector (Banks, Investors):
Support the development of financial markets by improving the quality and quantity of the housing stock, which will help create important downstream effects on the mortgage/housing finance markets; bolster housing finance markets by providing a demonstration effect to other players as it showcases the commercial viability of this business.
- Related Businesses:
During construction, provide contracts to construction businesses as well as sub-contractors and service providers, especially SMEs. As consumers purchase and/or occupy their homes, generate increased demand for goods and services supplied by local businesses, and provide opportunities for Black Economic Empowerment (BEE) policy by supporting emerging entrepreneurs.
- Local Employment:
Create jobs in housing-related industries – contracting and sub-contracting, surveying, construction, interior design, and other complementary industries and service providers.
Contribute to the creation of viable and sustainable residential (housing) property markets, which have a powerful influence on a broad range of socio-economic conditions (High income countries use housing statistics as an economic barometer).
IFC's expected development contribution
- Market Funding:
In providing warehouse funding, IFC will support the company in the regeneration of inner-city multi-family buildings. The company’s inner-city regeneration in Johannesburg is only beginning to gain traction and funding is not readily available by the mainstream banking system and mainstream banks are reluctant to take this kind of risk because the company’s clients and the underlying security properties are unproven unless the risk is syndicated among various funders. Through this investment, IFC will promote confidence in the company and help it mobilize additional term funding from other financial institutions.
- Enhance the Profile of TUHF Pty:
The proposed investment will help enhance the profile of the company and help improve the risk perception of the institution, thus possibly allowing the company to fund itself at more competitive rates; and reduce the company’s dependency on South African institutions for new capital.
- Risk Uncertainty of the Company’s Clients:
The company’s client base is exclusively small business people and entrepreneurs. While these clients are presumably underwritten based on normal mortgage lending standards, they are also SME's whose investments are focused in the inner-city landlord business. Some clients are repeat customers while others are engaging in their first venture. As a result, most lenders within the banking community are reluctant to take on this, as yet unproven, risk.
- Technical Assistance:
IFC has discussed with the company a potential technical assistance program that would bolster the company's ability to grow, improve operations and achieve scale. While a more detailed program would be developed following the due diligence phase, the company clearly values this unique aspect of doing business with IFC.
- Demonstration Effect and IFC Imprimatur:
By participating in the Funding Program, especially by providing a warehousing line, IFC would be sending a signal to the property markets and the financial sector that this type of venture is viable and bankable. This may spur competition to thrive in the local economy by encouraging local and foreign investors to undertake inner city regeneration type of projects and also attract funding from local and international financiers.
- Environmental and Social Risk Management:
IFC’s investment will offer the opportunity to introduce TUHF Pty to environmental and social risk management. At present, TUHF Section 21 does not have environmental assessment capabilities. The company has committed to working with IFC to develop basic environmental management capabilities.
Environmental and social issues - Category FI
This project has provisionally been classified as a Category FI project according to IFC’s Environmental and Social Review Procedure. During appraisal, IFC will analyze the FI portfolio, for types of transactions, size, tenor and industry sectors and determine the Applicable Performance Requirements, if any, that may include a combination of:
- The IFC FI Exclusion List; and/or
- The applicable National Social and Environmental Laws and regulations.
IFC will also review, if required, the capacity of the FI to manage social and environmental risks and to establish and maintain a Social & Environmental Management System (SEMS). If required, IFC will suggest Supplemental Actions to address any gaps in the SEMS. Based on the review, the project may be required to:
- Develop an, or upgrade, if necessary, any existing SEMS, prior to disbursement to the satisfaction of IFC;
- Identify responsible, qualified persons to manage and implement the SEMS;
- Commit to implement the SEMS, to ensure that its investments/activities are in compliance with the Applicable Performance Requirements.
Submit a periodic report to IFC as per a format to be provided by IFC.
For inquiries about the project, contact:
Paul Jackson, Chief Executive Officer
Trust for Urban Housing Finance (TUHF)
Telephone: +27 11 276 1443
Fax: + 27 11 339 1784
For inquiries and comments about IFC, contact:
General IFC Inquiries
IFC Corporate Relations
2121 Pennsylvania Avenue, NW
Washington DC 20433
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