Growing pressure on emerging markets to solve housing deficits

Urbanisation is a mega-trend redefining contemporary life in both developed and emerging markets across the world. This mass rural-to-urban movement of people and expansion of cities to absorb formerly isolated villages is a relatively recent phenomenon, at least in the developing world. According to the UN, in 1950, 751m people lived in urban areas; however, by 2018 this number had risen to 4.2bn, equivalent to roughly 55% of the world’s population. By 2050 the UN estimates that this figure will rise to 68%. This growth will not be distributed evenly, but rather disproportionately concentrated in the developing world, with high rates of population growth and urban expansion in sub-Saharan Africa, the Middle East and Asia. China, India and Nigeria alone are expected to account for 35% of the urban population growth between 2018 and 2050. Against this backdrop, municipal, state and national governments are under growing pressure to deliver a combination of safety, security, wealth and opportunity for their urban citizenry.

While urbanisation is closely tied to economic development, social mobility and poverty eradication, the massive influx of urban migrants poses serious challenges for governments and firms. One of the central issues confronting policymakers across developing economies concerns the lack of affordable, high-quality housing. For the UN, access to affordable and sustainable housing forms the centrepiece of its New Urban Agenda, adopted in October 2016. In the years ahead, failure to adequately meet rising demand for affordable urban housing could constrain growth and hinder the achievement of development objectives, exacerbate income inequality and further inflame existing social tensions across developing economies.

Growing Problem

Access to housing is an important determinant of quality of life and human welfare — one that is both crucial to family well-being and essential to the overall health and vitality of urban communities. While definitions of “adequate” and “affordable” are context-dependent, there is broad consensus that housing outcomes must meet a range of parameters: family privacy and security; structural integrity and safety; credible property titles; and access to adequate water supply, sanitation, heating and ventilation systems. Housing stocks should also be located within reasonable proximity to workplaces and core social services such as hospitals, schools and public transportation systems.

Affordable means that housing must not be financially punitive relative to individual and family income. US consultancy McKinsey estimates that 330m households worldwide suffer from a lack of access to affordable, quality housing — a number that could increase to 440m by 2025 if sufficient action is not taken. Therefore, without concerted policies to meet the growing need for housing that is both socially acceptable and financially sustainable, an estimated 1.6bn people will find themselves living under unaffordable, informal and inadequate conditions by 2025.

Social Issues

The scale and scope of the housing challenge will be felt most acutely in cities where slum populations have skyrocketed in recent decades. An estimated 880m people could be categorised as slum dwellers, according to a 2016 UN report. Unaffordable and substandard housing closely intersects with a range of social challenges, from petty crime and gang violence, to income inequality and environmental degradation. If not responsibly managed, rapid development and the accompanying influx of foreign capital can magnify disparities in housing access and affordability by quickly and drastically driving up urban real estate prices. Speculative investment in rapid-growth markets can price migrants and lower-income residents out of the formal housing market and into illegal, poorly built accommodation. Investment in affordable housing construction currently remains far below the level of public demand, and the stakes are high for the world’s emerging markets. Without trillions of dollars in new capital allocation towards revitalising existing housing stock and accelerating the construction of new units, developing countries will struggle to meet the needs of their urban populations, potentially excluding many millions of lives from the benefits of growth and development.

Strategies & Solutions

At present, the lack of effective stakeholder coordination — between governments, local communities, businesses, financial institutions, housing developers and NGOs — continues to inhibit affordable housing construction and redevelopment. Barring state intervention, it is unlikely that the current housing deficit can be meaningfully addressed. Systemic, whole-of-government approaches towards housing provision — with a focus on localisation and municipal-level initiatives — are seen as critical to ensuring sustainable urbanisation.

Governments generally rely on a number of mechanisms for delivering affordable housing. Although public housing provision remains a common approach, states are increasingly looking to the private sector to address housing shortfalls. Through public-private partnerships (PPPs) and targeted interventions, governments are deploying both financial incentives and regulatory inducements to help mitigate risk while catalysing robust participation from private developers. On the supply side, land costs can be a significant impediment to the development of quality, affordable housing in locations that provide access to employment opportunities and social services. Expanding access to previously unused land and creating incentives for redevelopment through updated land-use regulations present important avenues for lowering costs. Furthermore, by engaging in reclamation projects, cracking down on speculative practices and opening up government-owned land for affordable housing states can begin making headway in addressing affordable housing deficits.

Improving efficiencies in construction processes offers yet another avenue to reduce the cost of housing development. The World Economic Forum estimates that revising outdated construction regulations would significantly cut down on both production costs and housing delivery times. Additionally, companies who embrace standardisation will be better positioned to deliver cost savings. In particular, by relying on prefabricated parts developed off-site, builders can decrease costs and improve product quality. Incorporating new forms of ICT also helps lower building costs by improving modelling and design processes, and by delivering more efficient systems of logistics and procurement management.

Access to finance remains another major obstacle for developers looking to undertake affordable housing projects, as well as the end-users struggling to find a home. Lower-income urban populations in developing markets often work in the informal sector and remain excluded from formal mortgage financing channels. A combination of measures, including subsidies for housing developers for the establishment of better collective savings programmes, government-backed mortgage banks and improved systems of risk assessment, can help drive down loan costs and reduce the lending risks faced by financial institutions. Furthermore, legal reforms that clearly delineate ownership, secure property rights and provide land titles can work in tandem with effective mortgage lending to pave the way for improved access to secure home ownership. Across emerging economies, national and regional governments are engaging in policy experimentation and taking proactive measures to ensure socio-economically vulnerable population segments can successfully access affordable housing.

Asia

Indonesia, the country with the largest population and GDP in South-east Asia, has seen surging demand for affordable housing to meet the needs of the country’s rapidly growing urban population. At present, the lack of cost-effective, high-quality housing options, coupled with strained infrastructure, increased income inequality, weak labour productivity growth and a lack of access to basic services, is limiting the benefits of urbanisation for many of the country’s recent migrants and lower-income earners. Roughly 20% of the country’s housing stock is considered to be in poor condition, and the World Bank has estimated that Indonesia requires upwards of 1m new units per year to adequately address the deficit. In response to these challenges, the Indonesian Ministry of Public Works and Housing under the administration of President Joko Widodo rolled out the One Million Houses initiative in mid-2015 to build the required units.

Indonesia has gained support from the World Bank to pursue the initiative, with the two actors agreeing to the National Affordable Housing Programme in early 2017. Under the deal the World Bank has committed to providing $450m in financial support between 2017 and 2021 to supplement government efforts to improve access to affordable housing. The programme is based on three pillars: mortgage-linked down payment assistance; home improvement assistance for low-income families; and housing reform policy technical assistance. Other policies, like the Housing Finance Liquidity Facility, provide government subsidies to banks engaged in mortgage lending to lower-income families at favourable rates. The government’s efforts are starting to reap rewards: in 2018 the country exceeded the target of constructing 1m new affordable homes in a year for the first time, with around 50% built through government assistance schemes and 50% funded by private developers.

Finding innovative means of addressing the housing deficit is also a policy imperative in the Philippines, another fast-growing South-east Asian economy. The World Bank projects that by 2050, 80% of the country’s population will reside in urban areas, up from 46.7% in 2017. With substantial rural-to-urban migration accompanying economic development, urban areas have seen a growing level of strain on infrastructure and social services, exacerbating the rise of hundreds of thousands of informal settlements. In an effort to address these issues, the Philippine government is seeking to facilitate the construction of 2m new homes between 2017 and 2022. In February 2019 President Rodrigo Duterte signed a law creating a new Department of Housing and Urban Development, tasked with addressing the chronic shortage of affordable homes. Part of the department’s mandate is to monitor and maintain records on idle land, housing stock and housing beneficiaries. The department will also control and administer government-owned land, setting the scene for a potentially more efficient PPP environment when private developers are called upon to build cost-effective units around the country.

In Metro Manila modern construction processes are crucial to delivering affordable housing while also ensuring quality for residents and value for investors. Prefabricated housing presents one method for cutting down on time and costs. “The production costs are lower in the first place compared to traditional home building,” Robbie Antonio, founder of Revolution Precrafted Properties, told OBG. “Moreover, because of streamlined processes, the production timetable is between two and three months, which allows investors to recover their investment faster.”

Middle East

Governments across the MENA region have rolled out an array of initiatives to meet demand for housing. Saudi Arabia has committed to build 300,000 new housing units and increase the level of home ownership from 50% in 2018 to 70% by 2030. To achieve this objective, the kingdom has mobilised a range of government entities and undertaken action on both the supply and demand fronts. In 2018 the country unveiled a series of programmes designed to improve access to mortgage financing, allocating SR18bn ($4.8bn) to provide loan guarantees to banks and SR12.5bn ($3.3bn) to help homeowners make down payments. In addition, Saudi Arabia’s Public Investment Fund, working in conjunction with the Ministry of Housing, also provided liquidity to launch a new real estate refinancing company.

In Bahrain, the government has mixed state housing with PPPs to alleviate demand for affordable units, establishing a finance scheme in 2013 that offers subsidised mortgages and incentives for private sector development. Residential construction, particularly in the affordable segment, will likely serve as a major catalyst for growth in the country’s construction sector over the medium term, although Bahrain faces the challenge of land constraints. Mohammed Khalil Alsayed, CEO of Ithmaar Development Company, sees PPPs as a viable and efficient model which should boost confidence in the investment climate. “The PPP model allows the government and the private sector to work together to provide affordable housing with greater efficiency than either party would be able to achieve on its own,” he told OBG.

Africa

Meanwhile, nations across Africa are confronting a litany of governance challenges as they struggle to manage rapid urbanisation. A combination of rural-to-urban migration and robust population growth has resulted in massive housing deficits that are still largely unmet. The largest economies in sub-Saharan Africa all face shortages in excess of 1m units. For example, Kenya faces a housing backlog of 2m units, while Nigeria’s shortage is as high as 17m units. According to estimates from the Centre for Affordable Housing Finance in Africa, an independent think tank, roughly 60% of the urban African population in 2018 resided in informal slum-type housing without access to secure property rights.

However, in recent years governments partnering with private construction firms and developers have begun taking proactive steps to address the challenge. In Kenya the administration of President Uhuru Kenyatta unveiled a KSh2.6trn ($25.5bn) affordable housing programme at the end of 2017 as part of its Big Four policy agenda, aiming to develop roughly 1m new affordable housing units by 2023. In January 2018 the government established a short-list of 35 private construction firms cleared to participate in the tendering process for a pilot project targeting the development of 8000 two- and three-bedroom homes in the town of Mavoko.

“There are various opportunities for the private sector to work with the government to achieve the housing goals of the Big Four agenda,” Mucai Kunyiha, chairman of the Kenya Property Developers Association, told OBG. “For one, the public sector is in charge of the development of the counties’ spatial and urban master plans, as well as different incentives like stamp duties and tax rebates. The state is also taking action on the formation of a housing fund, the implementation of a mortgage refinance company, and the establishment of joint ventures and PPPs on public land.”

In Nigeria — where an estimated 80% of the country’s urban population lives in overcrowded, substandard housing — the problems are even more acute. In order to meet demand for affordable, quality housing, the government’s National Housing Programme developed a pilot project that commenced construction activity in 33 states in August 2017. The initiative studies and responds to different buyer needs, financial capabilities and cultural attitudes towards housing, as well as addresses different categories of land. “We are now at the infrastructure stage, and many of the houses are already finished. We are also building roads within and between cities in every state in the country, increasing access and connectivity,” Babatunde Fashola, minister of power, works and housing, told OBG. The pilot programme has attracted over 600 contractors and aims to deliver more than 2700 units.

Latin America

Throughout Latin America a surge of migration from the countryside to major cities has been taking place, particularly during periods of high commodities prices and pronounced economic growth. However, a combination of inefficient local government, corruption, insecure property rights and a high poverty rate has hindered progress towards the provision of financially viable, quality housing for a significant portion of the population, particularly for those working in the burgeoning informal sector.

In Mexico, where approximately 46% of the population live at or below the poverty line, the deficit of affordable housing remains a major policy issue despite significant increases in overall supply during the past two decades. Large-scale government initiatives aimed at boosting the country’s housing supply have mobilised billions of dollars and seen the establishment of partnerships with private developers, the World Bank and global financial groups. Significant results have been achieved, with the country’s overall housing stock increasing by 43% from 2000 to 2014. However, state approaches have drawn criticism over perceived corruption, a lack of overall strategy, inefficiency and poor execution. According to the World Bank, in 2017 roughly half the population still lacked access to formal, affordable housing.

Since taking office in 2018 Mexican President Andrés Manuel López Obrador, widely known as AMLO, has announced plans to reform the state-owned National Worker’s Housing Fund Initiative, the federal financing body for affordable housing and one of the largest mortgage lenders in Latin America. President AMLO aims to do so by enhancing institutional transparency, improving efficiency and developing affordable units that are located close to basic services, transportation links and employment. Key to the housing sector overhaul is the Shared Responsibility programme, which is geared towards supporting lower-income workers in paying off their mortgage debts and attaining housing deeds. Through a combination of subsidies, government decentralisation and policy incentives for developers, Colombia has demonstrated substantial progress in delivering affordable housing to its growing urban population. These housing projects are tailored both to the needs of lower-income citizens working in the informal sector and also to the country’s burgeoning middle class.

“Social housing programmes are currently working well and they have a double-sided impact: they create activity in the construction sector while also allowing people who have never had a home to receive additional contributions as a subsidy in order to make housing credit more affordable and accessible,” Edwin Chirivi, director of economic research at the Colombian Chamber of Construction, told OBG.

Private Participation

Private developers are set to play a central role in further alleviating Colombia’s affordable housing deficit. In 2018 the US-based Overseas Private Investment Corporation committed $50m in funding for the Avenida Capital Colombia Real Estate Fund II. The initiative will help address the deficit in affordable housing and targets low- and middle-income developments. Although the challenge of meeting affordable housing demand remains considerable in much of the developing world, governments that are working with private stakeholders to successfully deliver effective housing solutions should reap a range of benefits. These include increased productivity, greater social mobility and higher incomes for their citizens, thereby freeing up resources for capital investments and boosting consumer spending.