Can Rent-to-Own 2.0 offer an affordable path to homeownership in emerging economies?

The last decade has been turbulent one for the global housing market. First came the COVID pandemic, which created a spike in demand for housing outside urban areas; then came higher interest rates to dampen inflation, puncturing the home ownership dreams of young middle-class families. In the meantime, rising rents have led to greater housing insecurity for 44 million Americans  and many more around the globe who are currently renting their homes – sparking “rent protests” in different cities.

However, times of crisis often spark innovation. Over the last few years, the US housing sector has seen a new cohort of ambitious start-ups, such as Home Partners of America, Verbhouse, ZeroDown and Divvy Homes, offering “rent-to-own housing” –designed to sidestep the obstacles to qualifying for a mortgage or coming up with a down payment: a family picks a property (either owned or purchased by the company) with the goal of eventually obtaining a mortgage. They pay a monthly fee which is usually structured as part rental and part down payment. Divvy, for example, sets aside a monthly percentage that in three years will turn into a 10 percent down payment for a home in the tenant’s financial range. Investors have embraced the concept: Divvy is now valued at over USD 2 billion, after attracting hundreds of millions in equity funding. Home Partners was acquired by the world’s largest alternative investment firm, Blackstone, for USD 6 billion.

Making housing more affordable to more people is always good news. Rent-to-own, however, is not likely to be a panacea for affordable housing in either the U.S. or Europe, where supply has failed to keep up with demand and prices remain out of reach for many. But those billions funding startups signal that this model could become a game changer in Africa, Latin America and Asia, where the financial opportunities for investors are exponentially larger due to massive housing deficits and mortgage markets that remain inaccessible to the great majority of households.

In fact, the Rent-to-Own housing concept dates from the 1950s and ‘60s as way for local developers to sell slow-moving properties. The practice soon devolved into a way to take advantage of poor families without access to banks and other lenders:  miss a payment, and you lost the right to buy the house – and forfeited months of fees and even risked eviction.

Rent-to-Own 2.0, which emerged in the US and Europe after the 2009 financial crisis, replaces local developers with financial technology firms whose mission is to offer consumers an alternative to the predatory fees and opaque term limits offered by banks and other lenders.  Unlike developers forced to unload property under local market pressures, these fin-tech start-ups can take temporary ownership in properties across scores of housing markets, targeting future real estate owners at every economic level – from professional households needing to relocate quickly to families without the savings or credit history to qualify for a mortgage. Home Partners alone now rents a wide variety of houses in 40 areas of the US.

The demographic, geographic and financial benefits of this scaled-up Rent-to-Own model have not escaped ambitious housing developers, real estate firms and investors in emerging markets, where securing a mortgage is expensive and time consuming, even for qualified buyers. Banks, too, are often reluctant to consider loan applications from non-salaried workers who earn their living in the informal sector -- upwards of 80 per cent of all workers in some countries. Rent-to-Own not only requires no down payment but also has no realtor fees, no stamp duty, no exorbitant notary closing costs, all of which in often some countries can add up to over 25 per cent of the total property price.  Better still, the model combines the flexibility of a rental contract with the commitment of a mortgage loan – by allowing equity to build up but also providing a way out of the deal, if the client decides not to buy or move on.  Rents can also be adjusted in inflationary periods, while maintaining the growth in equity.  Start-up firms have sprung up in South Africa, Zambia, Vietnam and throughout Latin America embracing variations of this scheme.

Also testing these waters are reform-minded governments eager to provide affordable housing to low-income households without resorting to traditional mortgages.  Senegal’s Sovereign Investment Fund is currently partnering with IFC in a new venture to develop 20,000 new homes for low-income workers on a rent-to-own basis.  Egypt has renewed its efforts to modernize the rental sector under the World Bank’s USD 1 billion Affordable Housing project, using fintech partners to streamline rent payments. Kenya, too, has long had Tenant Purchase Scheme (TPS) used by public institutions, such as National Housing Corporation and some Pension Funds. Connecting TPS to the banking system and capital markets via institutions such as the Kenya Mortgage Refinance Company has the potential to offer a more direct route to ownership to households than the nation’s existing, convoluted mortgage system.

Rent-to-Own 2.0, however, is not risk-free. Though the US fintech start-ups promote transparency and guaranteed prices, in emerging markets government and private Rent-to-Own efforts will require regulation oversight to protect consumers from bad actors eager to claw back accumulated equity in cases of early termination of a contract or if housing prices suddenly crash.

The good news is that governments, institutional investors and start-ups– around the world – are re-imagining the housing sector. It’s time for them to join forces to develop adequate legislation and tax policies that will promote – and police – this new path to affordable housing that has the potential to improve the lives of hundreds of millions of people.