To meet the housing challenge, developing countries need to create new housing production models integrated into a sustainable overall urban policy. They need to collaborate with the private sector and support the entire housing sector in an integrated manner to achieve this. Securing land ownership and increasing funding for sector are the key conditions necessary to encourage private stakeholders to produce affordable housing on a massive scale.
Public housing policies in developing countries – often supported by international funding agencies, applying formulas that have worked in the North – are struggling to meet the needs of rapidly growing populations. Housing generally remains accessible only to the better off, while the number of people living in substandard accommodation is growing by 25 million a year. Cities often expand haphazardly, with the majority of people living in informal settlements where sanitation and security are extremely poor.

© John Hogg - World Bank Photo Collection
© John Hogg - World Bank Photo Collection

Moving from an accommodation policy to a housing policy

Confronted with proliferating slums, governments, as in South Africa and Côte d’Ivoire, initially concentrated on building free or low-cost social housing. These programmes, however, primarily benefitted state employees rather than those in poverty, while insufficient funding made them incapable of meeting growing demand. Then, governments turned to the private sector, tasking it with the mass production of low-cost housing. In Angola, Brazil and Mexico, for example, real-estate developers were granted fiscal incentives and subsidised land to build industrial-scale housing on the periphery of urban centres. With little planning, and driven solely by the need to recover production costs, many of these developments proved poorly suited to the needs of local people. Geographically marginalised and disconnected from urban networks – infrastructure networks (electricity, water, roads), economic networks (transport, retail, business districts) and social networks (education, healthcare, etc.) –, their unsuitability was quickly revealed, with housing sometimes abandoned by people who had received subsidies to facilitate homeownership or remaining vacant.
The failure of these real-estate projects highlights the need to analyse local populations’ requirements more effectively and understand people’s living spaces within a wider context. These days, it is generally agreed that it is imperative to adopt a new method of housing production, integrating it within overall, sustainable urban policies. A genuine paradigm shift is therefore taking place as housing policies progressively abandon a narrow focus on buildings in favour of more broadly framed strategies.

Public funding will never be sufficient to meet housing needs entirely – which means that collaboration with the private sector is indispensable. Yet this is not about artificially supporting a sector by means of subsidies; rather putting in place incentives designed for optimum effectiveness. These incentives are especially important where the aim is to promote access to housing for low-income populations – a market that is not naturally taken into consideration by private developers. Governments must endeavour to create an environment favourable to private investment, while at the same time establishing a regulatory framework to guarantee the system’s stability – and without forgetting to accurately identify the reality of housing demand across all population segments: a key factor in ensuring success. Furthermore, to be effective, a housing policy needs to involve integrated action across the entire sector, from macroeconomic fundamentals through to the types of building permitted – and include land availability, sector financing and the building of infrastructure (Figure). It is also crucial to actively involve all stakeholders.

FIGURE HOUSING FINANCE VALUE CHAIN

 

 

Securing ownership and planning land use

The risks inherent in real-estate operations – legal uncertainty in transactions, slow registration procedures and increased production costs – very often deter private investors investing in the production of affordable homes. The most frequently cited issues are those of land tenure and the legal system governing ownership. Across the developing world, particularly in Africa, land regulation remains inadequate, increasing the perceived level of risk for private investors. The coexistence of state and customary laws – which effectively govern land rights in many developing countries – creates serious problems: difficulties in establishing clear land ownership, lack of clarity in land regulation, low availability of land-related data, etc. The resulting land insecurity obstructs private investment and requires radical reform.

To establish a stable legal framework, governments particularly need to work to integrate customary law within the legal system. In Ghana, South Africa and Uganda, for example, reforms of this kind have led to the adoption of new land laws. Other measures such as land division using the cadastral model, simplifying plot registration procedures, establishing anti-eviction regulations and granting collective rights would also help (Paulais, 2012). States also need to clarify the laws governing real-estate collateral, taking account of specific local circumstances, to facilitate the growth of mortgage lending. In India, for example, a regulatory framework enabling lenders possessing the original mortgage deeds to assert their rights without recourse to law has been adopted. Together, these measures should help improve land regulation, a key first step towards the emergence of a sustainable local housing sector.
Land-use planning, which naturally follows on from the process of land organisation, has also been neglected by governments and international funding agencies, especially in Africa. Its absence creates a market bottleneck, impeding the housing sector’s development. In the absence of public investment, developers often have to bear the cost of infrastructure before construction can begin. This additional cost is ultimately passed on to households through the increased price of the buildings and can undermine the profitability of real-estate programmes. Indeed, many African developers have had to shelve projects because they lack the necessary capital for these infrastructure investments; when these developers go bankrupt, they swallow householders’ deposits, undermining market confidence. Morocco is an exception: with the support of international funding agencies, it created Al Omrane, a public operator dedicated to both housing and planning, actively facilitating an integrated approach to urban development policies. To encourage the construction of social housing, Al Omrane allocates productive land to stakeholders. This type of operator – public or quasi-public – effectively puts the issue of land-use planning back at the heart of housing policy and demonstrates why creating such institutions is a priority.

Responding to the scale of financing needs

Finance is the cornerstone of sustainable growth in the housing sector. Private developers need significant capital to start their projects and householders need to be able to borrow over the long term. The banking sector, however, is still reluctant to meet the financing needs of either people with low or average incomes, or private developers – focusing instead on the construction of housing targeted at higher-income households. The current investment deficit for new housing is estimated at USD 700 billion, while the mortgage market for Africa alone is estimated to be worth USD 1 trillion ¹ (CSAE, 2012).

To promote the development of a market and attract private capital, public authorities need to facilitate access to long-term finance and put risk-sharing mechanisms in place. It is with this aim in mind that some governments have set up second-tier banks specialising in housing finance, enabling traditional banks to access long-term funds, making use of savings reserves held by pension and social security funds. These banks – public or quasi-public institutions, supported by international funding agencies – issue long-term real-estate securities guaranteed by mortgages and refinance local banks. Nigeria recently created such an institution – the National Mortgage Refinance Company.
To further encourage the banking sector, the public authorities can also put guarantee mechanisms in place to cover the initial losses of affordable housing construction programmes. Guarantee mechanisms of this kind can also be used to cover a portion of banks’ mortgage credit risk – as it is the case in Mexico, Nigeria and South Africa.

Finally, an increasing number of governments is supporting real-estate development programmes in the form of public-private partnerships, through the creation of companies dedicated to specific projects. Governments contribute the land, all necessary permissions and tax exemptions to reduce overall project cost. International or regional funding agencies cover the feasibility studies and the initial investment. The developers realise their programmes on behalf of the project company, which verifies the quality of the programme and subsequently sells the assets. The private investors can finance the operation in senior debt, ² guaranteed by the project sponsors – the government and the funding agencies. In this way the risks are shared between the public authority and the private sector. The Akumunigo project, initiated by Shelter Afrique (SAHF), Banque Rwandaise de Développement (BDR) and the city of Kigali, to develop a mixed residential programme of 2,500 units, is a good example of this kind of initiative.

New informal solutions to be encouraged and regulated

Public authorities should also take an interest in informal solutions developed by local people to meet their own housing needs (Box). Initially devised in response to an urgent need, these solutions spread rapidly and now need to be regulated. Here the private rental sector could make a valuable contribution as the vast majority of households worldwide rent their accommodation in unregulated environments. As a result, landlords can, for example, demand the payment of one or two year’s rent in advance, as in Tanzania and Nigeria, or demand high rents for substandard housing with impunity. Yet, an effectively regulated rental sector can meet the housing needs of all population strata, simultaneously providing a way of harnessing domestic savings – and the savings of migrants – and generating tax revenues for local authorities. The adoption of specific regulations relating to the private rental sector in South Africa has encouraged the emergence of new, profitable business models. One example is the success of South Africa’s Affordable Housing Company (AFHCO), which acquires former squatter settlements in the centre of Johannesburg, renovates them and rents units out.

Self-build housing is another example of spontaneous, grassroots initiatives. Households with informal or irregular incomes have been able to acquire plots of land and build their own housing by adapting traditional microfinance products. As these experiments have often resulted in poor-quality housing, the state should regulate this kind of initiative to ensure that these districts do not become permanent informal settlements and set up a dedicated legal framework for housing loans. Nonetheless these private initiatives have fulfilled a need and should therefore be supported. The construction industry is taking a close interest in such initiatives – the Mexican cement group CEMEX, for example, has forged partnerships with microfinance institutions to help householders purchase construction materials using microcredits. The scheme is accompanied by technical support for the design and realisation of renovation or construction. Lafarge, the French construction group, has developed similar programmes in Asia, Africa and Latin America. This industrial-sector interest indicates the potential of the self-build construction market.

To be effective, housing policy needs to create an environment that encourages private initiative. Its efforts should focus on establishing a secure operational environment and implementing targeted incentives to promote the emergence of a stable, autonomous housing sector. Traditional public policies, or those lacking sufficient legal foundation, have proved unfit for purpose. In most countries, structural reforms have therefore been initiated to enable investors to develop mass, affordable housing production models and to support the mortgage market. Confronted with needs on the current scale, it is urgent to move beyond familiar models and innovate – both in terms of the construction itself and the way the sector is financed. The challenge here, after all, is to facilitate the production of affordable housing on a massive scale – and in a way that is sustainable over the long term. It is a considerable challenge.

 

International funding agencies in housing sector actions

The community of funding agencies, led by the World Bank, has been active in the housing sector for many years. In macroeconomic terms, their efforts have primarily concentrated on defining rules for establishing land-tenure security and facilitating the emergence of a private homeownership market – to the detriment of the rental sector and other instruments such as rent-to-buy. Initially, most of the funding provided aimed to provide long-term funds at affordable rates of interest – to finance housing construction on the one hand, and mortgage lending on the other. After this came funding targeted at supporting buildings’ energy efficiency, viewed from a Northern perspective. Noting that the households benefiting from these programmes belonged to the affluent middle class rather than those in poverty, the funding agencies are now looking to develop a new model to encourage the private sector to mass-produce affordable, sustainable housing. In particular, a number of agencies and key players in the sector (notably World Bank, International Finance Corporation – IFC, African Development Bank – AfDB, AFD, the Department for International Development – DfID, European Investment Bank  – EIB, Finmark Trust) have formed a working group as part of the Making Finance Work for Africa initiative to coordinate action in this area.

 

Ed.: This opinion piece is taken from issue No. 19 of Proparco’s Private Sector & Development magazine

The opinions expressed on this blog are those of the authors and do not necessarily reflect the official position of their institutions or of AFD.

¹ Estimate based on 20 million households taking out loans of USD 50,000.
² ‘Senior’ debt benefits from specific guarantees and takes priority over other kinds of debt for repayment

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