HOUSING!MARKET!DYNAMICS!IN!AFRICA!

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1 HOUSINGMARKETDYNAMICSINAFRICA IssaFAYE AfDBMResearchDepartment AUHF2015 GardenCourt,MarineParade,Durban(SouthAfrica) October26 28,2015 Africa srapidurbanizationandincreasingpopulationgrowthhassharply increasedthedemandforaffordablehousingacrossthecontinent Source: Hofinet Urbanizationprocessesandhousingdynamicsareinter5related Source: The Economist Urbanpopulationgrowthandurbanizationputpressureoninstitutionalandresourcecapacitiesofurban authorities Twindevelopmentprocess formal and informal settlementsdevelopinginparallel Citiesbeingbuilt backtofront 2

2 resultinginwidespreadshortageofaffordablehousingsupplyinafrica Morocco(pop.33.01mn) growing178kp.a. Cameroon(pop.25mn) Housingbacklogofover 700kunits Ethiopia(pop.94.1mn) units;100kannualshortage IvoryCoast(pop.20.3mn) Housingbacklogofover 700kunits Nigeria(pop.173.6mn) Housingbacklogof17mn; annualshortageof700kunits Angola(pop.21.5mn) estimatedannualshortageof 100K Source:(CAHF,(UN0Habitat,(National(Sources( SouthAfrica(pop.53mn) 1.5mnhouseholdsliveinslums Uganda(pop.37.6mn) Estimatedannualhousing Kenya(pop.44.4mn) Housingbacklogof2mn units;estimatedannual Thislackofaffordablesupplyhastranslatedtothegrowth ofinformalsettlements Over200millionAfricansliveinslums Citiesaccommodate72%ofslumdwellersacrossAfrica Thehousingissuesshouldbelookedatunderthebroaderperspective ofurbanization Data(sources:(UN0Habitat( 4

3 Fourmainissuestodealwithtoaddresstheshortage ofaffordablehousing^inanceonthecontinent Majorconstraints toproviding affordablehousing atscale: Lackofaccessto^inanceforpoorand lower5middle5incomefamilies,aswellas realestatedevelopers Unsecuredlandtenureandweakland governanceinhibitstheactive participationoftheprivatesector Risingcostofconstructionmakesit priceforthemajorityofhouseholds Inabilitytoprovideinfrastructureand lackofhumanandinstitutionalcapacity acrossthehousingdeliveryvaluechain 5 CHALLENGES&OPPORTUNITIES HOUSINGFINANCE

4 Underdeveloped^inancialmarkets(1) LowLevelofIntermediation Credittotheeconomy/GDPstilllow:18% LackofLongMtermFinanceandInadequateInstruments Lackofequityfordevelopers Untappedcontractualsavingsindustry PensionFundsandinsurancecompanies,etc. (WAEMU,Tanzania,Nigeria,Algeria,Egypt),shallowcapitalmarketsincludingbond markets(highlydrivenbytreasurybills) 60.0% AfricanBondMarketsizeas%ofGDP 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% CEMAC WAEMU Angola bostwana Zambia Nigeria Tanzania Namibia Uganda Ghana Kenya South Africa Source:(African(Market(Initiative((CONSUMAF((cumulative(issues( )(CREPMEF((market(capitalization)( Morocco Underdeveloped^inancialmarkets(2): MortgagemarketsquasiMinexistent

5 Underdeveloped^inancialmarkets(3): Lowmortgagepenetrationrates ResidentialMortgageLoansoutstandingas%GDP 3.5% 40.0% 20.0% 3.0% 35.0% 18.0% 16.0% 2.5% 30.0% 14.0% 2.0% 25.0% 12.0% 20.0% 10.0% 1.5% 15.0% 8.0% 1.0% 10.0% 6.0% 4.0% 0.5% 5.0% 2.0% 0.0% 0.0% Namibia RSA 0.0% Source:(AfDB,(World(Bank 9 UnmetDemandofResidentialRealEstate LoansinSSA Diffusion index (50=neutral) 65 Supply of Residential Credit Demand for Residential Loans Q4 12Q2 12Q4 13Q2 13Q4 14Q2 14Q4 Source:IIF

6 AffordabilityIssue:doubledigitsinterestrates deterborrowers Angola Botswana Burundi Cape Verde Chad Congo-Kinshasa Djibouti Equatorial Guinea Gabon Ghana Kenya Liberia Madagascar Mali Morocco Namibia Nigeria Senegal Sierra Leone South Sudan Swaziland Togo Uganda Zimbabwe Source:Author s observation, BCEAO, CAHF, Numbeo AveragemortgageinterestratesinAfrica, % 11.75% 8.47% 10.88% 6.73% 8.50% 10.33% 5% 5% 5.83% 7.30% 6.88% 9.50% 9.18% 15.71% 11.50% 13.49% 8.75% 8.40% 11% 10.02% 10.50% 9.10% 9.24% 14% 11% 12.50% 15% 15% 11% 13% 14.80% 9.13% 7.46% 15.80% 18% 18.50% 18.89% 18% 19% 19.75% 20% 19.50% 18.80% 20.50% 20.60% 24.83% 42.33% MostofAfricanLargeCitiesareunaffordable:high risk&informationasymmetries,inadequatelegalframework; highcostmtoservicecustomers;highinterestrates,in^lation 90 HousePricetoIncomeRatioinAfrica, sq m hse 80 sq m hse Algeria Egypt Morocco Tunisia Cameroon Central Africa Rep. Chad Congo-Brazzaville Mali Benin Niger Burkina Faso Gambia Senegal Guinea Ghana Nigeria Cote d Ivoire Kenya Ethiopia Burundi Djibouti Comoros Tanzania Malawi Mozambique Zambia North Africa Central Africa West Africa East Africa Southern Africa

7 OpportunitiesforDevelopingHousingFinance Markets(1):AdifferentwayofDoingBusiness ReducingRisk& uncertainties: Prudentlending practices Priorsavings(credithistory,income proxy) Independentcheckofstatedincome,e.g. periodicsurveys KYCrule,lendingtoexistingcustomers LowerLoan5To5Values&Debt5To5 CreditInformationsystems MissingLinks Developcapitalmarkets (CRRH5UEOMA,Nigeria,Algeria,Egypt, schemes) Linkagewiththeopeningofpension systemstotheinformalsector(kenya, Côted Ivoire) Equityfordevelopers Building/strengtheningcapacityoflocal developers OpportunitiesforDevelopingHousingFinance Markets(1):howtogodownmarketwhilecoveringtheinformal sector(i.e.irregularincomesandunstablecash^lows)? " AlternativeSecurity: # Equitablemortgage,depositoftitlecerti@icatewiththelender, # promissorymortgageliens # lienonpensionfundaccounts,withinlimits(kenya,rsa) # Personalguarantees,pledgedsavings,salariespayrolldeduction " MortgageInsurance&GuaranteeSchemes:rarecases # RSA,Kenya(self5insurance) Failureex.(Mali),orpilotswithno follow5ups(caissespopulaireduburkina) # Bestpractice:MorocccoDamaneAssakane # Manymarketsstillnotmatureenough

8 OpportunitiesforDevelopingHousingFinance Markets(2):Howtogodownmarketwhilecoveringthe informalsector(i.e.irregularincomesandunstablecash^lows)? Loweringthefrontier:somepromisingmodels " Combinationofhousingcooperatives/banks # TripartitearrangementsBanquedel HabitatduSénégal/cooperatives/landor buildingdeveloper # KenyaNACHU:savings&creditmobilizationforcooperatives " FinancingtheInformal:SomeFeasibilityevidenceexperiences # India:severalspecializedlendersactiveinthissegment bestpractice:gruhfinance, veryperformant(npls:1,5%) # MoroccoFOGARIMguaranteescheme510yearexperience,20%marketshare # Colombia:FondoNacionaldeGarantia providentfundandhousinglender,opento informalhhsince2007 " Supportthedevelopmentofhousingmicro^inanceproducts # Supportdevelopmentofsavings5linkedHMFproducts(Indonesia) # ProvidetechnicalassistancetolendersandborrowerssuchasCEMEX spatrimonio HoyinMexico,Lafarge shmfprogram(e.g.capacitybuildingformfistaff,design speci@ications,billsofquantities,etc.) # Homeimprovementsubsidiesforself5construction;improvedtargetingmechanism needed OpportunitiesforDevelopingHousingFinance Markets(3):Complementarityofpublicandprivateactions needed " Developmunicipalbondmarkets # Developcitiesascreditworthyborrowers(Dakar) # Expandskillsets,trainingandcapacitybuildingtolocalgovernments # Creditenhancementcriticalasitincreaseslendersperceivedsecurity " Fiscaldecentralizationforlocalgovernmentstohelpfund urbanizatione.g.collectionofcertaintaxes(licensingfees,property taxes,etc.) " LandValueCaptureasaFundingSourceForUrbanInvestments " Promotecontractualsavingsindustryaswellasprivateequity investmentsforlongmterminfrastructure^inance " Diasporasavingsandremittancesremainanuntappedresource " Supportconstruction^inancefacilitiesforsmallscaledevelopers andcontractorse.g.nurchainsouthafrica,ifcmciticinvestment platform,etc.

9 Leverage REITstructuretoattractprivatesectorcapital forrentalhousing(forillustrativepurposesonly) SPONSOR (AfDB, IFC, etc.) Wholly or partly owned REIT MANAGER SHAREHOLDERS (Pension funds, insurance firms, IFIs, DFIs, private investors) Distribution in the form of dividend Management services Management fees AFFORDABLE HOUSING REIT LTD Investment for an equity stake in residential assets Acts on behalf of shareholders Trustee fees TRUSTEE Net property income Ownership of residential asset RESIDENTIAL PROPERTIES Construction of 4,000-units housing development Acquisition of 120-units multifamily housing Purchase of affordable mortgage portfolios CHALLENGES&OPPORTUNITIES LAND&INFRASTRUCTURE

10 FinancingLand&InfrastructureforHousing:a challenge MUrbaninfrastructurecompeteswithhugeglobalinfrastructure needsinssa(15%gdp/year,onlyhalfofwhichissatis^ied) MFinancinglandanditsequipmentischallenging Estimated Infrastructure needs as % of GDP Infrastructure spending as % of GDP ( Source:(World(Bank( Lowdensityurbanexpansioncomesatacostfor urbanization MuchofAfrica surbanexpansionisoccurringthroughunplanned andlowmdensityconsumptionofrurallandatarapidpace $ Implicationsofurban sprawlinclude: Highcostof retro@itting infrastructureandservices Poortransportconnections betweenresidentialareas andcitycenters/placesof employment Environmentaldamage Acceleratedlossof agriculturalland

11 DividedCities:Multiplelandtenureregimes " Amajorityofurban residentsareunable toaccessorafford landorhousingin theformalsector " Onaverage,only around10%ofland isformally registeredto individualsas privateproperty % Diminishessecurityoflandrightsofhousingconsumersduetolackofclearlandrights % Crowdoutprivateinvestorsfromhousing % Complicateslandassemblyfornewhousingprojects.Clearchallengeforurbanization % Contributestorisinghousingprices,asformallandsupplyisconstrained Thelandtitlingdebate:Whichtenureregimeto support?(1) ContinuumofTenureCategories Fullsecurity Degreeof tenure security Pavement dweller Squatterregularizedand unregularized Tenantwith contract Leaseholder Freeholder Nosecurity Zerolegality Degreeoflegality Fulllegality Distinguishde(jure(andde(facto(tenure:thereismorethan1legallyacceptablesystem Source:GeoffreyPayne,2001

12 Thelandtitlingdebate:Whichtenureregimeto support?(2) ContinuumofTenureCategories Registered individual freehold may not be necessary to provide adequate security Source:(UN0Habitat,(2012( Thelandtitlingdebate:Whichtenureregime tosupport?(3) Areformal(i.e.registered)andindividuallandtitlesneededasa premconditionforlargemscalehousingprovision? Formallandtitles areanabsolute premconditionif largemscalehousing provisionisto occur Thereare alternativesto formallandtitles thatarecheaper andeasierto implement

13 MakingtheLegalandRegulatoryFramework relatedtolandissuesright:strong GovernmentsandInstitutionsneeded $ Threemainprioritiesrelatedlandsupplyforhousing: % Reformingthelandadministrationandallocationsystems Improvinglandrightsdeliverysystem,includinglandformalizationand makinglandavailabletobuyersorallotteesatscale % Resolvethecontradictionsbetweencustomaryand statutorytenureforms: Traditionalsystemsoflanddeliveryarenowgenerallybeingintegrated intolandmarkets Mostcommonstateresponsetocustomaryauthoritiesisaprogressive integrationandsubordinationofcustomarysystemswithinthestatutory landmarketstructure % Makinglandandpropertyrightsenforceable LandPolicyreformsshouldbepartofa broaderurbanizationplan $ Decentralization:Linkurbanplanningtoregionalandlocalplans % Mappingofavailablelandatmunicipallevel(wellfunctioningcadaster) % Acquisitionoflandforrelocationofexistingpopulations,reservationof easementsanddevelopmentofthephysicalinfrastructurenecessaryforfaster developmentintheseareas(auc5eca5afdb2010). % PuttingthenecessaryconditionstofosterLandvaluecapture $ Liberatinglandforhousingandinfrastructure: % Vacant/idlelandtax % Pre5emptionrights/rightof@irstrefusalwithlandsales % Landreadjustment $ GuidedLandDevelopment(GLD) % Planningofperi5urbanareasthroughtheinstallationofphysicalinfrastructure inadvanceofsettlementdevelopment,followedbyservicing % GLD,a@lexibleplanningapproachandawaytocreatenewlandforhousing, involvingmultiplestakeholders includingalsocustomarylandowners, whereneeded.

14 CHALLENGES&OPPORTUNITIES CONSTRUCTIONCOST TheCostofConstructionDoubledwithin8Years Source:(AECOM,(AFRICA(PROPERTY(AND(CONSTRUCTION(HANDBOOK(2013(

15 Risingcostpersquaremeterforanaveragedetached house(brick,block,ortimberframe)signi^icantly impactshousingaffordabilityforlowmincomefamilies Price/sqmforanaveragedetachedhouse(Brick,block,ortimberframe) Source:(AfDB,(World(Bank(( Duetorisingconstructioncost,onlyanestimated15.7million households,or6.7percentofallafricanhouseholdscanaffordan entrymlevelhomesuppliedbytheformalmarketwithpricesusually startingatusd28, Priceof40m2house(USD) Source:(AfDB,(World(Bank((

16 FormalHousingConstructionCosts:Thecaseof Kenya ConstructionmaterialsandInfrastructure aredrivingthecosts Contingences 5% Financecharges 5% Professional fees 10% Land 10% Infrastructure 10% Direct Buildingcost 60% Labour 30% Material 70% Infrastructurecostcan accountforover20% oftheconstruction costsforaffordable housingprojects 40%ofthecostofa housingprojectrelies onthecostof constructionmaterials Source:(AfDB( AGovernmentMledSite&ServiceSchemetoReduce ConstructionCosts:LEMProjectinIvoryCoast(illustration onhowtoleverageppps) Subscriberstotheprogramtobuild60,000affordablehousing:60% arenot"bankable"(informaljoborincometoolow) "PlanB"hadtobedesignedbytheMinistryofConstructionto presentasuitablehousingproduct Saleoflandwithbasicservices atsubsidizedcost Pre5approvedarchitecturaldesign necessaryinfrastructuresandamenities Abilitytocarryoutself5build project Supervisionofworksbyacontractor theprojectinalimitedtime(2years)

17 EncouragetheUseofLocalMaterialsandAlternative BuildingTechnologies(ABTs) % UseofABTsisonewaytoaddresstheconventionalbrickandmortar processofhousingconstruction,especiallycostandtime % Highconstructionscosts:Importsofmaterials,especiallyof^inishing products. Theuseofexpandedpolystyrene panelsinprefabricatedhomesin Kenya StartingpriceisUS$14,000(KES 1.25mn) Exampleof redbrick projectin Abuja,Nigeria 2bedroomapartmentstarting from12mnnaira(us$62,000) Source:(Urban(Shelter( LocalProductionofAlternative/BuildingMaterials: Howtomakeitsustainable? % Sustainablelocalproductionofbuildingmaterials: Industrializationapproach % Harnessingeconomiesofscalethroughregional integration.needcommonpolicies,standardizedbuilding codesandmethodsadaptedtolocalcircumstancesand realities. % ScaleProduction:lowercostofalternative/building materials % FinancingMechanism:PPPapproachwithGovernmentto providetherightincentivesforprivatesectortoinvestinnew industries

18 LocalProductionofAlternative/BuildingMaterials: howtomakeitsustainable?crowdingintheprivate Sector % TheEthiopiancase: % Constructionmaterials,includingcementshould beproducedlocally,whereverpossible.inthepast, onlygovernmentfactoriescouldproducecement % Estimatedproductioncapacity2milliontons/yrinsuf@icienttomeet demand(~7milliontons/yr) % PriceofcementUS$ perton % Followingprivatization: % 11cementfactoriesoperateinthecountrytoday,withacombined capacityofover13milliontons % Ledtoasharpdeclineincementpricesbyover50%(today,atonof cementcostbetweenus$110and124) % Asaresultoflowercementcost,theoverallcostofconstructionhas reducedbyabout5% SOMEKEYMESSAGES ROLEOFDEVELOPMENTFINANCE INSTITUTIONS/MDBs

19 KeyMessages:Challenges % HousingFinancingProblem:Notonlya@inancialengineeringissue.Thevaluechaindimensioniskey: % Multipletenureregime/Insecurityoftenure % Lotsofpressureonavailable@inancingforinfrastructure % Inappropriatelegalandregulatoryframework % Inadequateurbanizationplan/Weakinstitutions/Lackofcapacity&skills % Highconstructioncosts:Importsofbuildingmaterials,infrastructurecostsveryhigh % Financialsystemsareunderdevelopedorshallow % Lowlevelof@inancialintermediation % Lackoflong5term@inancingandadequateinstruments % Lackofadequateunderwritingprocesses % Lackofequityfordevelopers % Lackofprimaryandsecondarymortgagemarkets % Inexistentcapitalmarketsanduntappedcontractualsavingsindustry % HousinginmostofAfricanlargecitiesisunaffordable % Highinterestrates(doubledigit) % Highpricetoincomeratios % Collateralrequest % HousingMarketsissegmented:HousingissuemoreacuteforLow5incomegroupandtheinformalsector. % Signi@icantgapmarket/affordablemarketunderserved % Bottomofthepyramidnonserved % Widespreadshortageofaffordablehousingsupply KeyMessages(1):Opportunities % Banksneedanewwayofdoingbusiness:prudentlendingpracticesandinnovative instrumentstoderisktransactionsrequired.adaptingthe@inancialinfrastructureand engineeringtorespondtoariskyenvironment % Financialsectordevelopmentagendatobepromoted:gobeyondthebanking sectortodevelopnbfi(capitalmarkets,hfcs,mfisforincrementalhousingandslum upgrading,housingre@inancingfacilities,guaranteeschemes,dedicatedprivateequity, REIT,etc);attractthecontractualsavingsindustry(pensionfunds,SWFs,insurance) % Mechanismsto^inanceaffordablehousing:Godownmarketforagreater developmentalimpacts:pppapproachwouldbemostvaluablewithanactivist Governmentprovidingsubsidiesandrightincentivestoattracttheprivatesectorfacilitate itsabilitytoderiskthetransactions.forthepoorestofthepoor,somepublicsocialhousing programswouldbemoreappropriate % GettingthelandTenureissuesright % ImprovinglandGovernanceandsecurityoftenure % Streamlinepropertyregistrationproceduresandprocessesforresolutionofcontractdisputes % Makinglandandpropertyrightsenforceable % Reconcilecustomaryandstatutorytenureregimes:Traditionalsystemsoflanddeliveryarenow generallybeingintegratedintolandmarkets

20 KeyMessages(2):Opportunities % Landreformsshouldbepartofbroaderurbanizationplan % Planningofperi5urbanareasthroughtheinstallationofphysicalinfrastructurein advanceofsettlementdevelopment,followedbyservicing % Fiscaldecentralizationtomobilizeresourcesto@inanceinfrastructure % Promotelandvaluecaptureforthebene@itofurbanizationandhousinginfrastructure % Liberating/reservinglandforhousing/infrastructure.GoingbacktoSitesandservices % Densi^icationwillreduceurbansprawlandthecostsofurbaninfrastructure % Developmentofrentalmarket % Promotionoflocalproductionofalternative/buildingmaterials:bring constructioncostsdown % Localproductionofbuildingmaterials:asourceofindustrializationandjobs creation.possibilitytocrowdinprivatesector % Regionalintegrationtobeharnessedforasustainableproductionof alternative/buildingmaterialsatscale % PPPsthroughoutthehousingvaluechainarenecessaryformassivehousing production % Anyprograminsupportofthehousingvaluechainshouldinvolve: % allstakeholders % FinancingandnonM^inancingelements(technicalassistanceandadvisory servicesincapacitybuilding,skillsupgrading,institutionbuilding,governance, etc) DevelopmentFinanceInstitutionsRoles(1) " DevelopmentPolicyOperations/programs(concessionallending)to supportgovernmentsreformsandactionsinhousingdelivery: Reforminglandtenuresystemsincludinglegalandregulatoryframeworks Promotegoodgovernanceanddigitizedlandregistrationsystems Resourcemobilizationatcentralandlocallevelto^inanceinfrastructureand urbanization Puttinghousingatthecenterofurbanizationstrategiesandplan Infrastructuredevelopment PromoteIndustrializationthroughlocalproductionofalternative/building materials(taxexemptions,seedprovisionofcapital,setupincubators,etc.) Improvementoftheinvestmentclimate,includingenforcingpropertyrights Ensurecompetitionintheindustriessupplyingbuildingmaterials(e.g privatization) Socialhousingprograms FiscalDecentralizationandempoweringmunicipalitiesandlocalgovernments forbetterlandadministrationandinfrastructurebuilding

21 DevelopmentFinanceInstitutionsRoles(2) " CatalyticRoletoCrowdinPrivateSector:AHousingFinanceFacilityto beputinplace Creditenhancement/guaranteeschemestoderisktransactionsinvolvingindividual intheinformalsectororwithoutregularincomes EquityandlongMtermdebttosupportthedevelopmentofthemortgagemarket EquityforDevelopersandIndustriessupplyinglocalbuildingmaterials Issuanceofhousingbondstodevelopcapitalmarketsandattractthecontractual savingsindustry " TechnicalAssistanceandAdvisoryServices: Buildcapacityandskillsfordeveloperstoenablethemtobuildatscale Buildcapacitiesatcentralandmunicipalitylevel(taxadministration,cadaster, landgovernance,buildingcodesandstandards,etc) Buildinstitutions(modernizeadministrativesystems,computerize/digitizeland registrationsystems,providenecessarytoolsandequipmentforabetter managementoflandandinfrastructure) RevampUrbanizationstrategiesandplanning Createhousingrelateddatabasesandindicestoprovideinformationonthe housingmarkettobene^itofcustomersandinvestors Financialliteracyprogramsforhousingcustomers ThankYou