‘The best way to achieve is always to remain curious.’
Providing affordable rental accommodation for the ‘missing middle’, the Johannesburg Housing Company strives to tackle housing challenges in cities across the country. CFO, Prosper Mpofu, explains how JHC have pioneered a model for developing social housing.
CIARAN RYAN: Today’s podcast is sponsored by Draftworx, which provides automated drafting and working paper financial software to more than 8000 accounting and auditing firms and corporations. CFO Talks is a brand of the South African Institute of Business Accountants. It’s a great pleasure today to welcome Prosper Mpofu, who is group CFO at the Johannesburg Housing Company, which was launched in 1995 to tackle housing challenges, not just in the great city of Johannesburg, but across the country. Over the past three decades, it has developed more than 4,500 rental housing units for the needy and set up homes for more than 13,500 people in the middle to lower income brackets. As part of a programme to diversify its income base, the Johannesburg Housing Company has now moved into the management of non-owned buildings, and we’ll find out more about that in a minute. Prosper has been at the Johannesburg Housing Company since 2015 and prior to that, he was Vice-President at Barclay’s Africa Group, where he was charged with the development of short and mid-term financial plans aimed at driving profitability and achieving revenue objectives. He was also responsible for developing and implementing procedures and processes, as well as financial controls to ensure operational efficiency. First of all, welcome Prosper, we’re talking to you, no doubt, from the great city of Johannesburg. Is that correct?
PROSPER MPOFU: Yes, it’s great to be here, thank you for having me.
CIARAN RYAN: You’re most welcome. Tell us a little bit about the Johannesburg Housing Company and its business model, who owns it and is it focused exclusively on middle to lower income groups?
PROSPER MPOFU: Yes, absolutely, I think your introduction was spot on. Just a quick correction there, it’s not necessarily housing for the needy, we term it the missing middle, it’s affordable housing. Essentially the Johannesburg Housing Company was started in 1995 through grant funding from the European government and also from the Norwegian government. So these funds were routed through the Kagiso Trust, which is an old NGO in South Africa. So the grants came through that and that mandated JHC to be regarded as an NPO or NPC, non-profit organisation, as it were. So as we stand now, we do not have an owner because we are an NPO, we have Kagiso Trust as being a member. Another chunk of the funding came through and now defunct NGO called NewHCo., it’s no longer in existence. It’s only Kagiso Trust that’s a member, just charged with ensuring that there’s governance and so on into perpetuity but they do not own any shareholding. As part of our corporate structure, we do have a Pty that we use to fundraise when we have new products or new developments that we want to implement. So we focus particularly on what we call the missing middle. So is your rentals anywhere between R1,500 to R5,500. Your R1,100 is in particular rooms in the inner city with shared facilities, and then the rent goes up from there, like you have your bachelor [flats] going from anything between R2,400 to R3,000. Then you’ve got your one bed, two beds, three beds, I think our maximum rental will be about R7,500, but these are huge three bedrooms, of which they are quite small in the portfolio. We’re currently operating mostly from the greater Johannesburg are, so literally the inner city, Newtown, Fordsburg, east of Johannesburg, and also in the Hillbrow and Berea areas. We do have one development in Cosmo City, in fact JHC was a pioneer in Cosmo City. There are so many beautiful developments that have since gone up since JHC did our complex there, which is called Hlanganani Gardens. So that’s what we’re doing. As you mentioned earlier on, we have jumped into the property management business, where in the last six or seven years we have seen a lot of listed funds coming into the inner city as well. A lot of them had property management agreements with the owners of the properties that they had bought [unclear] and those previous owners are really just keen on going on retirement.
‘During Covid and even now it’s been completely business unusual.’
CIARAN RYAN: Interesting. I was just looking at the website and the quality of your stock, if I can call it that, if it is stock, and it’s quite avant-garde, it looks really like you’ve got some artists involved to make it look attractive, and yet your pricing seems to be very, very reasonable. You’re starting in at R1,500 per month for a rental unit, going up to, as you said, about R5,500. So my question would be what’s the experience been like during Covid when some people probably had a drop in income or lost their jobs. Are you able to make arrangements with them and how do you vet this, do you go through the normal credit approval process? Just tell us a bit about that.
PROSPER MPOFU: Yes, absolutely, during Covid and even now it’s been completely business unusual. So a lot of our tenants were affected by this, about 30% of our tenants are in the sectors that were completely shut down at level 5 [of the lockdown]. So whether it’s restaurants or their own small businesses such as hair salons and so on. They literally had no income, zero income with no alternatives. Our tenants had a very difficult time, we also had a very difficult time as a result because you can imagine when running a corporate of this size, there are monthly fixed costs that you must pay up, in particular utilities. So the city would want their utilities, people are staying at home consuming those utilities, yet they have no money to pay. So what we did, apart from the processes, is first of all we had to ensure that the people who are sitting in our flats still have a home with us and have some food. We partnered with a number of NGOs to try and get food parcels into our buildings. We had hundreds and hundreds of food parcels that we sponsored ourselves and that we got other NGOs to sponsor to assist our tenants. Then secondly, we then entered into discussions with our tenants, where we discussed alternatives with the tenants, could they possibly downgrade the units that they’re staying in, can we enter into payment arrangements, how can we work things out. So for the most part we were quite successful in negotiating with our tenants longer payment periods, and then in some cases you won’t be successful because bear in mind, this was a no contact period, as it were, in the height of Covid. So you could not knock on anyone’s door and talk to someone. So we had to rely on WhatsApp, on phones, on emails and so on. Some tenants chose to ignore us, and some engaged with us, and we arranged with them. Some obviously subsequently absconded soon after the regulations allowed people to move. Some left but they are still paying us. We suffered heavy financial losses and we still are, but I am glad that at a humanitarian level our tenants were not worse off, they were in their units and they had a roof over their heads. A lot of them came to us and benefitted through those food programmes. In terms of the commercial tenants, those that were not operating such as preschools, small mechanics and so on, that were deemed non-essential services, we had to freeze the rentals for that period of six months plus because we could see that if you can’t work, you can’t work. A lot of our people were not sitting with large savings that they could use to pay rent.
CIARAN RYAN: Have you got other projects on the go at the moment, are you doing more developments? Even though you’ve gone through this very difficult time, are there new projects that you’ve launched?
PROSPER MPOFU: At JHC we’re always looking for opportunities to add to our portfolio because it’s always important to ensure that the revenue line keeps ticking up. As you can appreciate, by looking at our units there, we prefer large walk-up units. So developing a project like that, whether it’s greenfields or refurbishing an old hotel or whatever, it takes a minimum of 18 months. So it’s always important that at any point in time, one is always on the market. So we have been busy with doing land assembly at the moment. So in our areas that we operate on in Newtown, in particular, we’ve been buying pieces of land, which we would then amalgamate or combine for developments. So yes, there is work that we’re doing, and we are hoping to be breaking ground early next year on some of the projects that we are busy with. We have put some offers in in Hillbrow for some of our competitors, or frenemies as we call them, that are looking to exit. So it’s just negotiations because valuations are very difficult at the moment because of high vacancies and high arears. Pre-Covid, the sellers are probably just hung up with the pre-Covid numbers. We are seeing pre-Covid numbers but there will always ultimately be a recovery. So we have put some offers in on some buildings in Hillbrow.
CIARAN RYAN: One of the things that obviously comes to mind is the fact that given this difficult market that we’re in at the moment, where you’ve got rental problems, surely there would be a drop in property prices. This is typically a cyclical business and a moment like this is a good opportunity to be acquiring properties. Is that correct?
PROSPER MPOFU: Absolutely, JHC has always in the past acted counter-cyclical in terms of corporate actions or corporate transactions. We always buy at the precise point in time. Unfortunately, pricing and Covid or in between pre-Covid or whatever, where we are now is very difficult because then people know that the prices are going to pick up, there’s going to be stability. So from a valuation point of view, remember valuations are a long-term view that you look at anyway, in particular with residential rental accommodation. I think the sellers are justified as well to say, look, there is a temporary drop in prices, so if we had a valuation of R100 million on a huge complex, there’s no way we are going to have R80 million today because we know that in two years it will be R100 million or better. So really it just becomes the sweet spot that takes a while longer to find. They are justified in a way but the issue is that if you buy a building at the old valuation, you are going to have maybe 12, 15 or 18 months of poor performance anyway. So I think that’s really where the issue is. So unlike other events that would have happened in the past, whether it’s a recession or whatever it is, I think with Covid the impact was just too severe in all the key residential property factors such vacancies, arears and so on. So valuations are very difficult at the moment.
‘We have fewer tenants in the buildings, but they are paying better.’
CIARAN RYAN: Have you seen any improvement now in the payment of rentals in the months, let’s say since the beginning of this year, have things improved?
PROSPER MPOFU: Absolutely, obviously we changed all our processes in terms of collections. We now have a separate collections department of eight people, these are new people, they were not there before and they are actually based at the buildings to support of building managers, who live and stay there. So we have seen some improvement but this improvement is actually qualified because we have written off a lot. So this improvement is after a lot of clean up. So for us it was like a double or triple hit, obviously we had to write off what we can’t, we are still chasing whatever we can chase but there are regulations around that debt that occurred during level 5 of the lockdown anyway, legally, so we are working with that. But now we are sitting with a situation where we have cleaned up, written off, our tenants have left because they couldn’t afford [rent], we have fewer tenants in the buildings, but they are paying better, but the revenue base has slowed down. Arears are doing much better but vacancies have not picked up yet. My view is that us going into level 2 or level 3 in January, I think it was level 2, that also gave doubt to the market. So people who were making decisions to come to Johannesburg and to relocate and get into the units and so on in the industry, people then delayed personal decisions. I suppose the delays in opening the universities as well because in this market that we serve, we also have a lot of students, whether it’s undergraduate students, honours and so on, I think that was delayed. So arears is doing much better but vacancies are still very high.
CIARAN RYAN: Student accommodation, there’s a lot of discussion about that, students like to party and son on, but it sounds like you you’ve got people on the properties who are looking after the complex, so things don’t get too out of hand.
PROSPER MPOFU: No, they do not, absolutely not because we do have very strict rules, we have our building managers there and we have security as well. You mentioned earlier about how our buildings look, we invest back into our buildings, so we actually have the right security companies that have the right level of security guards who can understand and follow instructions, follow house rules. Over time when tenants go in and they see s functioning complex, they want to follow the rules as well because it’s peaceful for them as well. You obviously do have the odd tenant here and there who will have to be brought quickly into line. Our tenants are pretty sticky as well, so we have tenants who stay with us for very long periods of time and move on when they have to move on, whether they are buying their own properties or relocating. Generally, in a building you will have enough people who understand the rules and who also promote the rules.
CIARAN RYAN: I see that you were previously with Barclays Africa, and before that with Ernst & Young, tell us about your career journey. Where did you grow up and how did you end up where you are now?
PROSPER MPOFU: I grew up in Zimbabwe, in a city called Bulawayo, the second-largest city. I went to primary and high school there. In January 2000 it was very popular for people in Zimbabwe to do articles straight out of high school or you would go to university and do articles after university. I was fortunate enough that I went straight after high school and I did my degree with Unisa, my honours and my CTA. So I finished my articles with Ernst & Young, I had lots of fun and enjoyed it thoroughly. I went into industry and went to work for Delta Beverages, I think by then it was a subsidiary of SABMiller, so it was a brewery business. I was with them for two years and then I decided to come to South Africa. I came with PwC in 2005, stayed with them for a while and then it became very fashionable for young CAs to go overseas, so I went to the UK with EY. I spent about two years with them and then unfortunately around 2008 the recession hit and a lot of our clients were effected, financial services were crumbling everywhere. So the prospect for growth for me became a little bit slimmer because EY made a commitment to keep everyone on board but they could only promote partners for a certain period. So in 2008 I decided to come back to South Africa with EY, I joined them as an audit manager, I rose quickly through the ranks, I had very good clients, I had Sanlam Emerging Markets, which is based here in Johannesburg, [unclear] but that also looked after the Africa business for Sanlam, so Botswana, Kenya, Tanzania, Ghana and even India. So it was lots of fun going into Africa, attending audit committees, doing training with my audit teams, I was also in charge of financial services training for EY in Africa. I had other clients like African Alliance that also had an African footprint. Investec Property was also my client. By the time I left EY I was an associate director. Then I decided to go into industry at that time because for CAs you either want to be an auditor for life, be a partner, it’s quite a cool job, but I always felt that I wanted to get some industry experience, be a CFO, and probably eventually end up as an entrepreneur. So being in audit you learn a lot of fundamentals about governance, reporting, processes, controls, so that was great. I went to Barclays and that was also a lot of fun, I was in group finance at Barclays in FDS, financial decision support, we did budgeting, reporting, analyst, [unclear], some REMCO stuff and special projects. I worked for Chris Snyman there, it was lovely, I enjoyed my time there. Fortunately, the role of CFO came sooner for me, I got a call from a recruiter who said, look, we’re recruiting for a CFO role in the property space, residential property, it paid very well, market related. But then for me it became a double whammy in a good way because there was an opportunity to make a difference to our communities as a CFO in this sector. It’s a company with a very good track record and they paid well, so it wasn’t that I came here to donate my time. I think for me, I knew that this was the role that I wanted, so I moved from Barclays to join these guys in 2015. On April 1 it was six years that I have been with the Johannesburg Housing Company. I think it’s been great to be here because I was then able to implement everything else that I had learnt in the bigger corporates but at the same time learning how busines is done because remember, in the bigger corporates you have got multiple divisions that end up looking at various sectors. Like at Barclays you’ll have a COO, who will be in charge of all of the infrastructure, whether it’s computers or projects and so on. Then HR is different, it’s in charge of everything. But as a CFO you have your board, your CEO, you have your EXCO. So I sit on the board, I sit on the EXCO, I sit on all the sub-committees of the board, I chair the procurement committee, I chair the pension committee. So I am actually able to see and influence how transactions are made from start to finish. There are various committees such as my finance EXCO that I run, all the managers who report to me, sit on that EXCO, where we look at key events, key transactions. Another example is the investment committee, where we look at acquisitions and disposals. So it’s very detailed in nature that you really get to understand where you can make up a yield or lose a yield or where you can say no to a transaction because it’s an end to end type role. So for me that was quite useful. Right now, we are busy, as an example, negotiating with our service providers, we cannot afford large increases or any increase at all. So we have service providers such as security, cleaning and all our normal expenses. But through those negotiations you get to understand that there are some statutory limits like minimum wage that are gazetted, so you get to understand what your service provider is working with. As I have explained, we have high vacancies and we are only pick up with arears now, so cash is not just flush. So then I get to understand how that security company is actually making their money or losing their money, and the cleaning service, and ourselves and so on.
CIARAN RYAN: As a CFO, and it sounds like you’ve had a tremendous career, the time that you spent in Africa must’ve been hugely valuable, learning how to operate a business across multiple jurisdictions, learning about the continent and the challenges that you have as a business in different parts of the continent. But as a CFO, how do you spend most of your time, is it on compliance issues? You’ve mentioned now that you are having to discuss freezes on increases with service providers. This is the type of thing that I guess a lot of CFOs across the country are having to do, but where is it that you spend most of your time, is it people issues, compliance, strategy, or is it fairly evenly spread across all of these different activities?
PROSPER MPOFU: I think it’s fairly evenly spread. There are things as a CFO that you must do anyway, one is supervising the whole reporting cycle throughout the month, just ensuring that we are doing what we need to do. As an example, a week ago we were doing payroll, so obviously you can’t opt out and say I’m not interested in payroll this month because I want to do strategy, you have to do it. So there are very specific deliverables that I must do or supervise that they get done such as payroll, VAT returns, tax returns, monthly management accounts, annual budget, board reports and auditing. So I think there are very structured accounting processes that must be done. I must say, that takes about 30% of my time. Then from there there’s a lot of operational issues, in particular now because of Covid, now that we pretty much had to work from home, with less contact so that we are not in the office, there are less opportunities for managers across the business to manage their people or tenants directly. Over the last year I spent a lot of time on processes, we had to rejig all of our processes to work in an environment of minimum contact. That’s once-off but otherwise typically processes for me are key as well and that takes about 15% of my time because process improvement is critical. Then operations as well, it’s quite critical, as a smaller entity you then get pulled into operations one way or the other, I did mention that I am the chair of our procurement committee, it’s just a company process because I look after the budget, so I must see what goes through procurement. So the way we procure our staff is that there are items that come to the procurement committee, then items that don’t. So if there’s a need to refurbish an entire building, as an example, it’s not as easy as getting three quotations or tenders and it’s approved, there are processes where I will have to do site visits, we have to understand the thinking around this, we have to do the maths and do the numbers. So all of that is operations. Tenants do at times demand to talk to me, particularly commercial tenants. On the lower levels of our residential buildings there are always commercial tenants, supermarkets, shops and so on, they belong to the person who owns the building. So people come to try to negotiate their rentals or more space, so I do spend a bit of time on that as well. IT is also quite critical for us, technology, in particular with Covid we had to ensure, and fortunately for us we are always ahead of the curve, everyone had a laptop, so all we had to do was deal with data. But we are always keeping abreast with IT, it’s quite critical. Strategy is very important, so I do spend a bit of time on strategy, supporting the CEO and the board. There’s obviously general strategy, there’s also financial strategy, but general strategy is where we want to go, in which areas are we wanting to buy. An example is what we have done now with property management, so managing that stream. It’s really ensuring that you are always ahead of the curve. Risk is also quite important, just managing risk in our buildings, it could be operational risk like a risk of fire or it could be financial risks. So it’s also ensuring that your process like health and safety are happening and that there are inspections and that there’s enough pressure in the fire hydrants and so on. There is also a bit of work at a governance level as well, we have our social and ethics committee, our audit committee, our investment committee, our REMCO. We also have an IT sub-committee because we see IT as being an enabler, so in future if someone is sitting in Cape Town and they want to relocate to Johannesburg, they want to stay at Heritage View, it’s a beautiful building near the Nelson Mandela Bridge, just as an example, they should be able to get onto our website, do a virtual tour of the unit that they want, and a virtual tour of the building and surrounding area. So that they can say, yes, I want this, and be able to sign up online fully, and we just do FICA on the backend. So we have an IT sub-committee to look at IT strategies. But obviously, these sub-committees have to be supported by processes, so then we spend a bit of time outside of these committees doing our work to ensure that it then goes through those approval processes, and then preparing for board as well, so it’s very interesting.
‘For you to be an effective leader in this space, you need to acquire a lot of other competencies.’
CIARAN RYAN: Just a couple of quick questions here. We are running out of time, but I just wanted to get your opinion about a few things. The role of the CFO is changing, and you’ve probably seen that in your experience as a senior finance executive over the years, but there are certain things that a CFO is expected to perform. We’ve already spoken about leadership and you’re managing teams and strategy, and communication is perhaps one of the most important functions of the modern finance executive. There have been some studies overseas that have suggested that the role of the chartered accountant or the senior finance executive has evolved. There are so many more competencies and skills and disciplines that are required. The South African Institute of Business Accountants does have a CFO or certified financial officer designation, which is really in recognition of these skills that you’re not really going to learn in accounting schools. You’re not taught about communication, it’s one of the most important skills, you’ve got to negotiate with your tenants, you’ve got to negotiate with your board, you’ve got to be able to present complex subjects in a way that can be understood. Would you agree with that?
PROSPER MPOFU: I agree 100% and I think it touches on the point I made earlier, I think the sooner a CA or young professional has an idea of where they land up, the better, because then you are able to actually then invest. As an example I did an MBA with Edinburgh University when I joined JHC, just from a learning point of view to understand the theory behind human resources management, project management, strategy and so on, as is done in an MBA. For you to be an effective leader in this space, you need to acquire a lot of other competencies, far much more than your core competencies. I put my core competencies at 30%, which is the actual accounting and 70% is everything else. For you to be able to do the 70%, you need to really have those other competencies. Some through experience but I would recommend formal coaching, formal learning of those experiences and definitely looking for guidance from institutes like this, so that you don’t learn the hard way.
CIARAN RYAN: A couple of personal questions. What do you do in your downtime? Are you a family man? What do you do for fun on the weekends?
PROSPER MPOFU: I am a family man, I’m a father of four, so my hands are quite full, they are quite energetic. So I do spend quite a bit of time with my kids, whether it’s extracurricular, it’s been quiet now because of Covid. But otherwise, I like travelling when I get downtime, I go to the smaller game reserves and spend a weekend out there. I play golf a lot, almost every weekend I am out there with my mates just to squeeze in a round.
CIARAN RYAN: What’s your handicap, if you don’t mind sharing that?
PROSPER MPOFU: I think my index now is 11.4, so that translates on average to a handicap of around 14 or 15, depending on the complexity of the course that I play. I think the best-ever handicap that I played off was 12 last year when we all went back to the course and I was a little bit rusty. But I do enjoy golf and the reason why is because we spend quite a bit of time behind the computer, in meetings, on the phone, on emails, so at least on the golf course one can walk and just relax a little bit. Obviously, I love sports and I watch that quite a bit, in particular local and international soccer, and the premier league too. I also enjoy watching golf and athletics.
CIARAN RYAN: Final question, are there any books that you would recommend?
PROSPER MPOFU: I’ve been quite bad in terms of reading books but what I do is I follow a lot of the business publications on Twitter. Harvard Business School, as an example, and I find that I have time for the shorter versions of everything else. So that’s what I would recommend to people because where I’m sitting now I haven’t touched a book in a while just because there’s no time, but I’m able to go through snippets like three or four pages.
CIARAN RYAN: I think the internet has changed the way that we consume reading material enormously, where you go for shortened versions of things. As you said, Harvard business reviews. I think people are finding it difficult to sit down with a book these days because the internet has just changed the way that we access this stuff.
PROSPER MPOFU: Absolutely. But the last book that I read was one that our CEO got for our EXCO, called The Fourth Industrial Revolution by Klaus Schwab. I think it also depends on what one wants to look at, and this book was just around how technology is influencing everything that we do. So I think depending on what one is looking at, at some point in time, there’s always good material there in terms of a book or the internet. So if one is struggling with project management or people management. So there is always an opportunity to actually research on that and there are always recommendations anywhere on what to read, but on a specific topic. I would recommend, particularly for young professionals, how do I get better, therefore, I read this book, you must try and break it down into smaller chunks and say, okay, I want to focus on people management in this particular year or I just want to focus on managing in complex environments. At least then you have narrowed it down, so that you can get a book that is fit for purpose.
CIARAN RYAN: Prosper, we are going to leave it there. What a fascinating discussion, I really enjoyed hearing about this and it really is something that I would like to get you back on to talk about because you’re in such an interesting sector, the Johannesburg Housing Company, and the difficulties that you’ve been through over the past year with Covid. It’s good to hear that things are recovering. But what I really appreciated learning from you was the range of activities that you’re involved in and the kind of leadership that that requires from a senior financial executive position, it does require a broad range of disciplines and skills, and you really have to become a master of so many of these. So I really appreciate that insight and I think that’s valuable for people who are listening to this. So please come back on again in a little while, as the year progresses, and let’s have a catch up and see how things are going, if that’s okay with you?
PROSPER MPOFU: Absolutely and as a parting shot to young professionals in particular, as you talk about the range of skills, the best way to achieve is always to remain curious. Curiosity, curiosity, curiosity. As you go into a new environment, don’t be shy or scared to learn things, regardless of the fact that you are a CA with an MBA, you are always going to be taught by someone who probably has matric. So the more curious you are, the better you become, because in a very short space of time you would have covered ground and that becomes a subset of skills that you have and it makes you better and more effective. Thank you.
CIARAN RYAN: Thank you so much, Prosper. That was Prosper Mpofu, who is CFO at the Johannesburg Housing Company.