The Global population growth numbers forecast for the coming years can be extremely daunting, with 2 billion more people on our planet by 2050. When one considers that each of these global citizens will require shelter, health care, education, sanitation, transport, the numbers become even more formidable. Looking at housing needs alone, for the period 2015-2020, global population will grow by 350 million people, amounting to around 70 million new households each requiring a home. Breaking down the numbers annually means 14 million new houses. Based on a conservative estimate of $30k per unit, the total investment needed per annum over coming years is $420 billion. This is a large number but only around 0.6 per cent of global GDP . There are additional costs naturally associated with getting infrastructure and services to new houses, such as roads, water, and sanitation. A recent McKinsey study estimates that in 16 large emerging markets alone there is a $600-700 billion market for affordable housing. Nevertheless, with the right systems in place this level of new investment should be feasible.
So why do we still have market failures in the housing sector which are in plain sight of many emerging market cities in the form of slum housing? Where can the money come from for housing investment? How will it reach the population which is going to need it the most in sub-Saharan Africa and parts of Asia, which will see the most rapid population growth and urbanization?
The reality is that the money is there already in many cases in the form of accumulated savings, pension funds, investment funds or social security funds. These are the long term resources which are in fact looking to be put to good use in the form of long term investments. The challenge, especially in emerging markets, is connecting the two. This is where capital markets can help to intermediate through tools such as mortgage backed securities (MBS), covered bonds, real estate investment trusts (REITS) or institutions such as mortgage refinance companies that provide the bridge between long term investors and housing.
One of the broader challenges to tackle over the coming years will be to make these capital flows work better on a global basis, ideally, channeling some of the long term liabilities from the ageing populations of North America, Europe and parts of Asia to the housing needs and opportunities in emerging markets.
At the country level the challenge is how to reach those households that will need help in building their homes. This requires smart systems and products to be in place adapted to local needs and conditions. Traditional mortgage loans are not going to satisfy all the pent-up demand, especially for those on lower incomes. Also housing is not just about ownership, rental housing also requires investments funds. In the context of urban growth in emerging markets, with a growing and mobile workforce, this is what workers and the economy actually need. For those working in the informal sector with irregular income which can be difficult to verify, it is hard for a lender to extend a long term loan without taking on significant risk. Yet in many of the markets which will need investment, this reality is further complicated in that property is then difficult to use as collateral if ownership rights are not formal.
However, this is not an impossible challenge, World Bank Group projects in India, Tanzania and Nigeria are working towards ‘underwriting informality’. This means doing the extra work to better understand a borrower’s income stream and designing products that are better suited to their needs. It may mean smaller loans, shorter repayment periods, but this is better than the alternative of building incrementally over a much longer period. It allows a borrower to buy materials in bulk, take on builders and have the work done to a higher standard. Ultimately, it means getting access to better quality housing in a shorter space of time.
The World Bank program in Tanzania is seeking to expand housing finance both through mortgage loans to the middle and upper income Tanzanians, but also through smaller, housing microfinance loans to those on lower, informal incomes. The Tanzania project is all about bringing together capital markets and connecting investors with those needing housing.
During a recent trip to Tanzania, I had the privilege of meeting some clients of the Women’s Advancement Trust Savings and Credit Cooperative Society (WAT SACCO). One of the clients, ’Mary’, is in her late 30s although she looks much older. Her face betrays the tough life she has had. She was widowed and left with 4 young sons to raise on her own. She lives in Dar Es Salaam in what is described as a slum area due to the fact it is largely unplanned. She lives in a traditional Swahili house, which is a single floor structure, with a corridor running down the middle, three rooms either side and an open verandah area. This house was hers, but in very poor condition. She told us her story, of how she was determined to make a life for her children. She made a small income by selling a type of doughnut to morning commuters going into the centre of Dar es Salaam. Based on this income, Mary took out a small loan from WAT SACCO to improve the house and to rent out one of the rooms. She repaid the loan and took out another slightly larger loan. She repeated this multiple times, and built additional rooms, showers, sanitation and expanded her stock of rental rooms. In doing this she created jobs for ‘fundis’, (local builders), she employed the informal rental agents who find her tenants within a matter of hours each time, and she provided affordable and convenient accommodation for office workers in the city. Most importantly she earned enough to help educate her children and to build up an income generating asset she can count on in her old age.