African Union for Housing Finance Conference: Raising capital for an inner city mortgage company...

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Business History

TUHF formed in June 2003 as:A South African NBFI based on:

Shorebank Chicago’s Real Estate Lending DivisionLocal commercial property finance experienceInner city rental housing experienceLoan 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, CadizDFI’s such as NHFC and DBSACommercial Banks -- SBSA

Commercial Development Objectives

A good business doing goodTUHF restructured in September 2009 as:

A private commercial company :Commercial objectives of shareholder value, ROE etcDevelopment objectives through scale in market niche

ShareholdingControlling shareholder TUHF 21,-Other major shareholder:- The NHFCShareholders :- 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 ObjectiveLow income rental housing:- Economic, spatial, social integrationSME financier- access to finance

Development Impact

• 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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TUHF provides financing in mortgage, up to the value of R30 million. Ancilliaryproducts include: Bridging finance – market making

Construction loans

Equity finance for BEE objectives

TUHF is not a micro lender nor a home loan financing company. Commercial property financier i.e. finance the underlying cash flows of the business

Determine the security value of the asset (primarily)

As a fixed asset financier, TUHF offers mortgage security, has applicable margins and is a low volume high value Non Bank Financial Institution (NBFI).

By specialising in rental housing and inner cities deep and stable demand for rental housing

multi sector economies of inner cities and locations close to work and amenities.

Business Model

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Debt capital and risk weighted capital adequacy ratios reflect it’s fixed asset business. Debt Capital 88% (below 90%)

CAR > 25%

Exceed SARB and Basel III requirements

Interest hedge Borrow and lend floating

Term mismatches managed through mortgage profile agreements

Underwriting 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

Business Model

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Financial Hurdles DCR of 1.3 and TUHF value LTV of 80%

Prime plus 3.5%

15years

First mortgage bond

Surety

Business case Net interest margin 3.5%

Once off, once ever raising fee of 2%

Current book of R1.7 billion

Outperform commercial averages

Business Model

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Security is of the utmost importance to TUHF. They strive to protect all personal identifiable information by adhering to industry standards and security practices.

Standard Loan Security Structure

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Business Model

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The state of: 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: Resilient demand

Flexible tenure of rental

Well located

Most services available

South African Inner Cities

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WAVERLEYAFTER

ARONBY

AFTER

CONISTON

AFTER

140 BECKER STREET

AFTER

MASSYN

THE SANDS

BEFORE

EKUPHUMULENIBEFORE

AFTER

MARSHALLTOWN LOFTS

Equity capital Capitalization complete

Raised R165 million of investment

NAV at R212 million

BUT what is sufficiently capitalised?

Debt capital 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: Off balance sheet structures

Agency work

Joint financing as lead or co investor

Capital

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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.

Estimated loan book disbursements forecast at R 500 - R 600 million p.a. and growing and current funding alone cannot support these levels

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

Funding Strategy

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Existing Lenders

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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Access to debt capital is TUHF’s single largest constraint to growth

By a long margin

Importance of scale 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 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 Particularly a problem when dealing with foreign DFI’s

One size fits all – the five definitions of a business day syndrome

The Challenge of Capital

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Lenders/debt capital Liquidity hangover from financial crisis

Basel III pricing banks out of property finance

Single party limits

The grand dis-intermediation question

Capitalisation 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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Single party limits









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Look through mentality

Single party limits









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Structures On or off?

Securitisation

Institutional economics- more parties exponential increase in transaction costs

Security structures On BS pooled security

Indemnity mortgage because security divisible

Borrower indemnify’ s trust and offers mortgage in return

Credit enhancement Hard or soft

CBA- on price and on liqudiity

Soft- SRI or FSC


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Targeted information campaigns Indicators of performance

Estimations of demand and affordability

Regular reporting

Create knowledge on track record Identify successful initiatives

Emphasize governance

Target institutions

Funding is difficult to raise Deal with the perceptions and myths

Find champions

Suggestions for future

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Date post:	09-May-2015
Category:	News & Politics
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African Union for Housing Finance Conference: Raising capital for an inner city mortgage company...

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