In this episode of the South Africa Growth Through Inclusion series, Alexia Lochmann, Research Fellow at the Growth Lab, speaks with Carel Kleynhans, CEO of Divercity Property Group. Divercity is South Africa's leading investor in well located affordable housing precincts. Carel worked closely with the Growth Lab during its two year research engagement in South Africa and has been instrumental to the teams understanding of post apartheid urban planning, housing policy and patterns of spatial exclusion.
Welcome to the Growth Lab podcast.
The Growth Lab at Harvard Kennedy School is a research program that pushes the frontiers of economic growth and development policy research by collaborating with policymakers to design actions and sharing insights through teaching tools and publications.
Today's episode is part of our South Africa Growth Through Inclusion series which takes a deeper dive into our two-year research engagement in South Africa.
If you'd like to learn more about this work or download the full report, visit our website at growthlab.hks.harvard.edu.
In 1994 South Africa ended apartheid and created a democracy. At the time, the country supported the 47th most complex economy in the world. Far ahead of any other African nation.
There were good reasons to believe that the economy would grow rapidly and opportunities would expand to South Africans previously excluded by apartheid.
Fast forward to 2023 and South Africa has become less complex when compared to the rest of the world. Jobs are scarce, economic growth is low and highly vulnerable and inequality is the highest globally.
Though government policies have dismantled many apartheid institutions, these efforts have not created an inclusive economy for the majority.
In 2021 the growth lab at Harvard University started a two year research project in South Africa in collaboration with the National Treasury of South Africa and the Center for Development and Enterprise.
This project was focused on understanding the root causes of the country's economic hurdles and potential pathways towards inclusive growth.
My name is Alexia Lochmann. I'm a research fellow at the Growth Lab.
On August 31st of this year. A tragic fire claimed the lives of at least 77 people in an abandoned building in Johannesburg, South Africa. This grim incident underscores the pressing housing crisis in South Africa.
Many are faced with a difficult decision opt for a spacious and safe for housing far from economic centers and jobs or contend with hazardous living conditions in city centers.
In our report, we discuss how post apartheid urban planning and housing policy have inadvertently perpetrated spatial exclusion by disallowing urban densification.
These policies and regulations have entrenched the distortion of the primary role that cities play a place where people and economic opportunities meet in most cities across the world city cores have high built up density and then this density gradually declines towards the outskirts of the city.
This is not the case in South Africa where zoning and housing regulations have blocked urban development.
The lack of mixed use built up density in city centers leads to high real estate prices in these well connected desirable locations that are not affordable for the majority of the population.
In fact, the overwhelming majority of South Africa's affordable housing is located at the urban periphery leaving a shocking number of people spatially marginalized.
In addition, not only are city centers less dense than elsewhere in the world, but the peripheral residential areas are also extraordinarily sprawling.
This makes public transport choices like bus rapid transit systems also way less effective than in cities of comparative size in other countries.
Like for example, Bogota, Colombia, this sprawl is the result of well intentioned supply side housing policy that built miles and miles of cookie cutter, single family homes in the outskirts of cities and gave them to low income earning households.
In the context of the RDP B and G housing policy framework. We observe in many cities across South Africa that if given the choice, people prefer to live in smaller spaces that are better located and allow them to commute to work more easily.
The spatial misallocation of where people live and where economic opportunities are harms the South African labor market to the extent of leaving many people without opportunities and many economic opportunities and tapped to achieve a better spatial equilibrium.
We need an understanding of what is required to build inclusive cities. In our report, we discussed the binding constraints in the case of South Africa.
These constraints include on the one hand, regulatory barriers like zoning regulations, building regulations that make it difficult for developers to build affordable multistorey, residential and mixed use housing in economic centers.
On the other hand, supply side housing policy allocates houses to people in predetermined locations, limiting the choice of where people want to live.
A review of these regulations as well as a redirection of spending towards demand side policies such as rental or mortgage or interest payment subsidies that allow people to overcome financial constraints of home ownership and rental while allowing them to choose where they would like to live.
These are fundamental levers to unlock a better special spatial equilibrium in cities.
During our two years in South Africa, we met numerous people who have been instrumental to our understanding of these patterns of spatial exclusion and who helped us paint paths forward to a better future.
Today, I have the pleasure and the honor to welcome one of these extraordinary change makers: Carel Kleynhans, CEO of Divercity Property Group. Divercity Property Group is South Africa's leading investor in well located affordable housing precincts.
Divercity invests in affordable rental housing in well located urban precincts with scale accommodating low income earning households in well located amenity, rich and safe neighborhoods is imperative through developing integrated neighborhoods in centrally located areas, Divercity is bringing historically marginalized households positioned on the urban edge back into the urban core.
Welcome, Carel.
Thank you, Alexia. Thank you for having me.
So maybe we start today's questions with coming back to what has happened recently in South Africa, which is this big fire that claimed so many human lives, which is a reflection of the broader housing crisis in South Africa.
Yes, I mean, this is, this is just an that really took place just a couple of our office where I right now.
And I think what, what is as tragic as it is, what is interesting about this story is that it really speaks to the incredibly harsh conditions that people live in and choose to live in, in the Johannesburg inner city.
As is the case in many, you know, densely populated urban centers and developing countries around the world, despite having the opportunity and alternatives to live further away.
And I think this says quite a lot about the value of living in a central location, close to economic opportunity that a lot of people are choosing quite literally voting with their feet to, to endure these conditions for that access.
Thank you so much, Carel for your reflection on these horrific events and it must have been particularly painful for you to watch.
Especially as you are, you know, one of the key drivers of trying to make a change in this space.
So I would like to ask you to introduce us to the story of diversity and to the story of yourself and, and how it came to be.
Yeah, it's a great pleasure for me to tell you a little bit about Diversity.
So Diversity is a, a property developer and owner and manager of affordable residential accommodation in South Africa.
And I think what sets diversity apart from perhaps the norm for affordable housing development in South Africa is that we are very deliberately following a model of development that is that stands in stark contrast to to really the norm for affordable housing development in South Africa.
And what I mean by that is that tragically, the reality is that the vast majority of new affordable housing that gets built in South Africa gets built at the urban periphery and, and we can get into the reasons of why that might be the case.
But, but you know, suffice to say that is the case at the moment.
And what diversity is trying to do as a business is pro prove that it can be commercially liable to at scale, provide a well located alternative to low age earning households in South Africa's urban cores.
So we develop fairly large projects of affordable housing, typically 2000 apartments and up in well located areas and then what we also do as a core kind of founding belief and investment mandate of diversity is we also provide all the supporting amenities that households typically need within a, within a housing community.
So we would develop the primary schools and the high schools, we would do primary healthcare clinics, sporting and recreational amenities, basic retail amenities and even some limited places of employment with all with contained within the communities that we develop.
So just to go back a little bit to the story of how diversity came about, diversity really was formed as a joint venture between two very established South African property businesses, both of which have been going since the early nineties in South Africa.
Really one is called the Tembo Group.
It is a, a legacy developer and manager and owner of affordable residential property pri primarily in the inner city of Johannesburg.
And then the other is the largest commercial development in South Africa who's really been at the forefront of retail and commercial development for the last 30 years.
And the the vision for creating a company that can provide these mixed use kind of integrated communities with an affordable housing backbone, really required both the skill sets of these two businesses to come together.
And we were very fortunate to have that happen in around about 2017, which is, yeah, what about six years ago?
And yeah, I mean, since then, the business has really grown from strength to strength.
We had the great pleasure when we were traveling in South Africa with our teams to actually visit Jewel City, which is to my understanding, please correct me if I'm wrong to date your biggest and most advanced housing project, which is in a very, very core location in Johannesburg.
And it was phenomenal for our team to, to visit and, and to see how, you know, driving the communities there are and, and, and sort of to get an idea of these amenities too, we were on the roof of one of the buildings that had barbecues and we looked down and there was a football court and everyone, especially Argentinian colleagues are very excited about that.
So it is really visible for even someone who is not from South Africa to see that this is different.
Do you find that there is demand for such type of housing and how do people respond who live in diversity developments?
I I think that's a very pertinent question and, and thank you for the kind words about Jewel City.
when we developed dual city, this was, you can imagine for a sizeable, you know, almost a billion rand.
So what's that about just over $50 million in capital investment, it was a sizeable investment at the time and our our financiers definitely we're asking the same question do you believe that there's demand for this product?
Because the reality is that the, the project really is without precedent in South Africa.
There has never been a mix residential development catering to really the, the lowest wage earning seg segment of the form, you know, of the labor market in South Africa, that has all these amenities wrapped up within it and that is in such a good location. And there were some, I think legitimate questions at the time around whether this can be commercially viable.
But, you know, we're fortunate to have, you know, quite visionary shareholders and diversity and the the backing was given for the project.
And I think the, the fact that the project today is 98% occupied on the residential and that the all the retail within the, within the neighborhood effectively because it really is, is almost a neighborhood scale development is, you know, some of the most successful retail and we'd be, you know, happy to say within the greater Johannesburg.
So I think that the, the the bottom line is, it's been a resounding success and, you know, it's even surpassed our wildest expectations.
And I think what the success of dual city reveals is the fact that, you know, if you were to ask, I think the the average current resident of Jewel City five years ago where they would like to live ideally, they probably wouldn't describe something like Jewel City because the consumer in South Africa, the, you know, the household just doesn't have access to these kind of, you know, well designed central located, fundamentally empowering urban spaces.
And therefore it's not even considered to be an option to them.
But when people are presented with the opportunity to live in a place like this, they overwhelmingly choose to do so. And you know, our, our commercial experience has has borne testimony to that.
That is a very interesting point that you are raising.
And and thank you for, for explaining this in detail too, which is how, how can you know what options you have if you if you don't see them.
So, you know, seeing that this is an option and that this is one that, you know, people can thrive, thrive in, will eventually likely increase demand for this even more as you are as you are.
I'm seeing it as you are.
I'm saying rightfully.
So so this means that if there is, you know, such demand for this kind of housing, is there a supply response, do you observe for now?
And supply response in South Africa?
I know you you are and your group are building more such neighborhoods, let's call it neighborhoods much more than, than buildings really or residential buildings.
And do you see other people follow?
And could you explain a little bit about why or why you don't observe that and, and you know, what's some constraints there?
It's an interesting question to consider in the context of, you know, kind of efficient market hypothesis.
So, you know, there is this very apparent, massive, almost insatiable, revealed demand.
So wh why is there not a, you know, a a equally proportional supply response?
So, and I think we can probably spend quite a bit of time in backing this.
But my quick, you know, anecdotal view of it is I do think that there is an incredible past dependency around patterns of development in South Africa as as is the case in many other places of the world.
So, you know, we had legacy of Apartheid spatial planning in South Africa where there was almost a psychology entrenched within the development, you know, environment, whether it be, you know, the public sector and, and p and the policy making space or in the private sector where it is just almost not questioned that affordable housing.
And if we're being blunt housing for pre predominantly previously disadvantaged individuals, what is built at the urban periphery.
And I think I do believe that a degree of what's going on here is almost just the the not questioning of that reality, right?
And along comes diver that just says, well, actually, like let's just question that assumption.
Why is that the case?
And and can it be done elsewhere now then then the next question is, is it commercially viable here?
I do believe that you know, a lot, perhaps part of the reason why this supply response isn't happening more quickly is because any developer who would want to try and you know, enter that space would face the same questions that we were faced with.
when we try to do your city where your capital writers ask you, OK, you're gonna make a, an a sizable investment here.
Is it actually gonna be commercially viable?
And, and can you do this?
And I think you know, a big part of our mission as diversity is to create this evidence base to essentially make it easier for other players to follow us and really start replicating what we are doing in diversity by providing this, you know, great quality, well located accommodation in urban centers. And hopefully we can do a lot more of that.
But there is, there are a million other small little reasons I think that this, this the supply response is slow.
But as Divercity we are, we currently have just over 2000 apartments under construction and our pipeline is to do another 3000 over and above that in the next 3 to 4 years.
So, you know, we, we aren't building as fast as we can raise the money frankly.
And and, and we hope that we can inspire others to do the same.
You find, you find that there are different barriers across different places too. So, something that our research found is that across cities in South Africa, there is quite diverse,, regulatory restrictions in cities too.
There are some cities in South Africa mostly the bigger cities, the metros that have a certain set of, you know, regulatory barriers to building, you know, up in city courts and then there are the smaller cities with a yet are set of regulatory barriers, for example, you know, still having parking regulations, having, you know,, and all sorts of minimum floor area ratio regulations, et cetera.
So do you find that there are some barriers that the national level or the local level authorities could, could bridge or could alleviate?
I do believe so and you know, I'm always cautious of turning this into just a, a complaining session about how govern government regulation prevents, you know, private market response.
But there is some truth to that.
I'd say you touched on some of the, the most pertinent ones.
So parking regulations, minimum parking requirements is the, you know, like a, like a the enemy of housing affordability in my view.
So, you know, just to put some numbers to this in, in the typical developments that we do.
And, you know, as I said, we've, we've developed just over 7,000 apartments over the last couple of years.
So, you know, we do a fair amount of this land component is actually not because South African cities are so sprawling and, and and have such low density.
It is actually possible to find fairly large in full development sites in well located areas where you can develop a scheme where the land cost is only about 10% of the total cost of the scheme.
Right now.
I realize that this doesn't necessarily hold in in all cities across the continent and certainly not globally.
But, but that happens to be the case here.
But what is a way larger determinant of whether or not a project can be commercially viable for us that and the land cost in a in a in and of itself is whether or not a there is a minimum parking requirement by the council and often, you know, it's imposed on the developer to build a certain amount of parking bays and those parking bays are not commercially viable because basically what they are worth to the consumer in in economic terms is dramatically less than the cost of building them.
So basically, there's just a a dead weight loss to building them.
And that effectively, you know, we think of that as being a a component of the land cost.
So that is something where, you know, taking those minimum parking requirements away can you know, significantly improve the affordability of the product to the end consumer but what's something that goes hand in hand with that is, you know, it's, it's pointless building a, like, let's say a housing scheme where you have no parking, but where the consumer actually genuinely does need parking because there is no other means of transport there other than, you know, private vehicle transport.
So it, it goes hand in hand with the needing to provide adequate public transport options.
Right.
And I think this is something that sadly also quite lacking in South African cities is that we don't have great, you know, public transport and you know, often and again, it's a bit of a circular reference because we've got this sprawling urban fabric, it's very difficult for public transport to be commercially viable and therefore it doesn't exist and therefore we create more, you know, private vehicle based, you know, sprawling urban development.
So it's there's definitely something to be desired here.
I do wonder with them with what you're explaining.
Are you are you starting to observe changes in, you know, the urban areas around your, your major developments, dual city, for example, are you starting to observe employers that, you know, somewhat are more connected to the people who live in dual city who, you know, find ways to provide public transport for their employees, et cetera?
I guess the question here is, do you believe that a change in the urban fabric in terms of where people can live, can make the urban fabric more efficient in terms of providing jobs in terms of connecting people, in terms of connecting people to opportunities.
No doubt, I mean, I can provide you with some small anecdotes.
So obviously, this stuff will take time.
But just if I look at what's happened immediately around dual city, it definitely has.
You know, the intervention that we've made in Jewel city, which is really an urban regeneration project, you know, almost you know, above it being an urban densification project has resulted in other third party investment in the immediately surrounding area which again, further you know, supports density in the area and I think makes it more viable for, you know, public for public transit services to be able to operate there.
So that is definitely happening but dual city happens to be, I mean, it being our first project, we did choose a location that was on a pre-existing public transit corridor. So I can't really say it, it was as a result of that.
But what I can say is if I extrapolate what we're doing in some other areas where there isn't as you know, frequent public transit available, I do think that we need to, we we just, we, we kind of have to in parallel prioritize urban densification and the rolling out of creative public transit options, we have to do them both simultaneously and it does take a little bit of a leap of faith.
But on, you know, on the part of the developer, you know, we are actually under respecting for, for parking just we kind of have this saying internally, which is that if you fill 40% of your apartments with no parking, then surely you could fill 80% of your apartment with no parking.
So we're kind of saying like either you build a parking ratio of one parking bay per every unit or you just actually, you know, back yourself and go for like 20% you know, a a 0.2% park a 0.2 parking ratio.
So for every 10 units, you basically build two parking bays and that's really kind of what we're doing and we're really relying here on the fact that we are, we're kind of backing the, the fact that we will move to a post private vehicle. You know, society where, you know, other modalities like e hailing, for example, become more prevalent and we are seeing a lot of that in our buildings.
We actually are retrofitting some of our existing buildings for e hailing drop off points because it's becoming like congestion challenge for us.
And it's interesting to see that even within, you know, really like, you know, the lowest wage earning segment of the market e heading is already very prevalent.
So the point I want to make is I think we just need to keep building denser and that really is something that, you know, we must prioritize and with that the public transit options will come.
Yeah, thank you for sharing some anecdotes and stories from there.
This is super, super interesting patterns that are already starting to develop and it seems that there is quite a response from from society across the board, right?
So a response from the private sector from civil society, maybe also from the financial sector in, you know, investing around where they see people, you know, now live and thrive and and will want to live in the future too.
That leads me to to two questions, I guess one question that I have from two sides of the same coin, I guess one is what can the public sector do to support this and then what can the private sector do to support this?
Right. What can the role of, of everyone in, in in civil society really be?
So I think, I mean, we've touched on some regulatory change that I think would be incredibly beneficial. So specifically re-relaxing of minimum parking requirements and and and not limiting density in terms of maximum density, perhaps within reason, right?
We we still have incredibly low den typical density allowances in South Africa in terms of zoning.
So I think, you know, that that should be relaxed and to a degree the the risk risk should be borne by the developer for over building a site provided it's within, you know, you know, typical building controls, so not, you know, creating, you know, un you know, excessive shading on neighboring properties and this kind like normal stuff that we would all consider to be common sense, but provided you're sticking with you know, reasonable urban design principles.
I think that it should be left to the judgment of the developer to decide what the optimal uses of the site and that shouldn't be curtailed too much.
And I think that will assist us greatly in freeing up land that is currently not being used for dense urban development in well in well well located areas.
I do think that the we spoke also about the provision of public transit and and what you can really expand that to make a more general point about the provision of by the local government of good quality infrastructure.
So based infrastructure. Again, you know, within our context, sadly, this isn't always the case.
We have you know, challenges with bulk bulk services infrastructure like sewer, water and electricity connections to to many sites where there just actually isn't capacity within the area.
And that again, you know, ultimately drives it's easier to do new bulk infrastructure in a large kind of like mega housing development at the urban periphery than it is to lo lobby local government to upgrade a sewer link,, in a centrally located area that actually, you know, if you think of it in terms of the fiscus would be much cheaper,, for the local government to do, but it is more complex and there's like a willingness,, deficit there to actually do the slightly more complicated but ultimately cheaper work on the part of local government that I think is needed to support a, you know, a pro urban density.
What do you call it mode of development?
I'm trying to think what else would work. I could also expand this to, you know, basic services delivery. So if you are you know, I bartended in New York when I dropped out of university a long time ago and I remember being struck by how much garbage accumulated in New York City in the ma over the course of a couple of days during a big snowstorm. And this is just an incredible kind of eye-opener to me.
And it, I think it's an incredibly kind of poignant portrayal of how important service delivery is in a dense urban environment, right?
And if you wanna see urban density, you need to keep up the, you know, service delivery specifically around basic services like refuse collection, public policing.
And the like, it is interesting for you probably as you travel the world quite a bit. And you see many cities across many places in the world and, and probably you can close your eye on how do these cities function?
How do they function differently? Is there something we can learn from them? Is there something, you know, they could learn from our experience?
Sure, this is something I'm very happy to speak to and I'm gonna just bring it back for a moment to the anecdotal kind of experience of Jewel city.
So if you think of the the typical Jewel city resident, their current, you know, prior to moving to Jewel city, the options that would have been available to them. In terms of living environment would typically be probably an hour's commute.
In some cases, two hours commute from their place of employment, these people would be waking up, you know, very early in the morning, probably often before their kids wake up for school and to get to work.
We have out of interest, more than 50% of the people who live with us are female headed households and that is over 2.5 times the national average.
According to our general household survey out of interest.
And I think this speaks to the fact that often, you know, in the case of women, these women would be very prone to gender-based violence in, you know, in their commute to and from work, which is a tragic reality of South African society.
And, you know, I could go on to, to list, you know, many other aspects of their lived experience which are, would be dramatically different to what is the case now given that they live close to their place of employment in a safe urban environment that is amenity rich and where, you know, there's, you know, everything at their doorstep.
Now, something that strikes me that is often, you know, I think missing from the global dialogue around developmental goals, so, you know, pick your you know, pick your framework that you really want to measure this against call it, you know, take, for example, the UN SDGS almost any year in stg that you would pick somehow ultimately pulls back to urban form.
So a sprawling urban form that doesn't that special marginalizes especially low wage earning individuals will ultimately lead to developmental outcomes where you're lagging on pretty much any of those, whether it be, you know, gender outcomes or early childhood development out outcomes. And, and obviously, climate is a massive aspect of urban sprawl as well.
So I think something that's very core to our philosophy at diversity is this belief that if we wanna get society right, and achieve the developmental goals that we've set for ourselves, we really need to get our cities, right?
And what I mean, by that is specifically, we need to get urban form right within our cities and, you know, much more deliberately pursue an agenda of pro poor good urban form because you know, something that people often quote is, oh, you know, by 2050 there's gonna be, you know, the world is gonna be over 50% urbanized and there's all this additional, you know, you know, urbanization that still has to take place.
But what I think people, the the insight that people miss is that a lot of that still most of that still needs to be built, right?
These cities that we are talking about in the future, don't ex this today.
And that presents an incredible opportunity for us to get the future city right, by building them better.
And by the virtue of most of this development happening in the in the developing world, we are also talking almost largely about affordable housing in this context. So getting affordable housing right at scale really is I is en enormously important.
Thank you very much, Carel. This is a very interesting reflection and one that is hopefully going to be pertinent on policymakers and researchers mind minds globally. And with our conversation today, we are hoping to contribute to, you know, making this discourse a more a more pertinent one.