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Diversifying Affordable Housing Financing

Aff ordable Housing Development Summit - Oman , 2012

Loay Ghazaleh – Advisor - B. Sc. Civil Eng. , MBA

Encouraging Development of

Public Private Partnershipsin Affordable

Housing

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Presentation Index

MENA Social / Affordable Housing

Global Affordable Housing Sources

Housing Mortgages , Securitization

Concepts In Affordable Housing

Adpoted PPP Model for Housing

PPP’s As Sustainable Housing Solution

SOCIAL RENTAL HOUSING IN EUROPE

Egypt

West Bank & Gaza

Lebanon Syria

QatarUAE

Oman

Yemen

Saudi Arabia

Jordan

Iraq

Kuwait

Bahrain

JLL 2011 Report

Country Population Households - 4-6 / Family Assumed

Unmet Housing Units Demand

2011

Additional Housing Units Demand

Per Annum

Egypt 84,000,000 20,220,499 1,500,000 370,000 Morocco 32,000,000 6,229,348 600,000 60,000 Iraq 32,000,000 4,754,505 1,000,000 63,000 KSA 26,000,000 4,723,683 400,000 100,000 Oman 3,000,000 472,531 15,000 9,000 UAE 6,000,000 1,097,880 20,000 14,000 Bahrain 1,200,000 274,959 40,000 16,000

Total 184,200,000 37,773,405 3,575,000 632,000

MENA Affordable Housing Market

Only a few markets in the MENA region are addressing their housing issues. A mix of delivery models from traditional design and build to the development of Public Private Partnerships are being used.

Roughly 50% of the population in MENA region can fit in one form or another of the social / Affordable Housing

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Affordable Housing Demand Forecasts,….

Country Population

------------------Average

household size

No. of potentialHomes needed

=x

% ofUrban

Population

% ofrural

population

% ofurban

householdsIn low

income bracket

x

% ofrural

householdsIn low

income bracket

x

JLL noted that there is no commonly agreed definition of what comprises Affordable or Social housing within the MENA region. Definition varying significantly between markets

● Affordable is generally associated with Households with less than 60% of the median income…● Social is generally associated with bottom 40% of the households on the income distribution…● Defined cost wise based on income bracket, Housing that generally consumes 30% of net income

JLL did not split the demographics, so there are Questions on the final numbers,…

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Media Opportunities in MENA Social Housing• ? Iraq - The Iraqi government in June 2011 approved plans to build 3.5 million new homes within

the next ten years to meet the housing crisis that it is facing. A $70 billion reconstruction package announced included the allocation of $25bn investment for housing.

• ?? Libya - The Libyan government was in the process of launching its first development program to invest across the infrastructure of the Country including Housing. The housing program was to develop over 300,000 new houses at a value of $35 billion.

• Kuwait-The Government is pushing ahead with a number of affordable housing schemes using the Build Operate Transfer (PPP) procurement models.

• Bahrain - Bahrain Government signed in early 2012 a record BD208m ($550m) with a local Developer to build more than 4,000 affordable homes. Bahrain forecasts the need for about 350,000 new residential units to be added to existing stock by 2030 with $1.1bn to be spent every year up to 2020, and then $242m annually up to 2030, (EDB report).

• Saudi Arabia needs 1.65 million new homes by 2015 .Total commitment is $130bn on social projects with $67bn allocated for 500,000 new homes and $400 billion for infrastructure projects. KSA Construction Housing Pipeline Projects valued at US$ 29 billion for 2012.

• Saudi Arabia nationwide accommodation needs have been estimated at more than five million new housing units by 2020. The plan says Saudi Arabia will require SR 2.4 trillion (US $640 billion) of investment in real estate over the next 20 years.

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Top Trends for GCC Real Estate in 2012 - 2020 An increased focus on realism is likely to be the trend influencing the GCC real estate

sector in 2012 and years ahead, resulting in more attention to the needs of the consumer or customer, more emphasis on financial returns and bottom line performance and a reduced future supply pipeline as more projects are cancelled or delayed.

Also the affordable housing can be an enabler of social stability in the Middle East, and green building can help give money back to communities, according to an executive of a leading ecological project investor. Developers are turning to government-led housing initiatives in order to compensate for a decline in public spending and a decrease in demand for new projects.

Other key trends are expected to be:

An increase in sales activity at the lower end of the market, although there will remain limited interest from international institutional investors.

More emphasis on estate management of the public realm within master planned projects.

More awareness of the commercial advantages associated with green buildings and sustainable practices.

More choice for tenants, particularly in the office markets. Greater variation in performance between winners and losers within each asset class.

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Examples of the New GCC Real Estate Trends

• Diyar Al Muharraq, one of Bahrain's biggest mixed-use residential urban developments, is launching what it terms a ‘crafted affordable housing program’ to address the Kingdom’s growing need for social housing.

• Jeddah is scouring the world seeking most advanced technologies to implement the need for affordable. The specifications call for service life span of 100 years, concrete based products offering ductile properties (seismic zones), 4 hour fire rating at 1200 degrees Celsius and highest thermal properties

• Jeddah, KSA awarded an International real estate firm a SR1.1bn contract to building affordable housing over 1million m2.

• Kuwait is to develop an expansion plan for Kuwait City in line with the country’s Kuwait 2030 initiative. Also More than 350 housing plots will be made available for new projects in Kuwait’s Al Qairawan with Kuwait Oil Company

• Al Falah is a $2.5bn, 1,200ha housing development for UAE nationals near Abu Dhabi, with 4,857 villas and an expected population of 60,000.

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• Jeddah needs almost one million housing units over the next 20 years, according to a strategic plan prepared by the Jeddah municipality released at the Jeddah International Real Estate, Finance and Housing Exhibition 2010 (JIREX 2010).

• The Jeddah municipality’s plan is based on present shortages and future requirements. Currently there is a shortage of 283,000 housing units, including 80,000 in the low-income group.

• The plan calls for immediately building 151,600 units for accommodating people living in underdeveloped areas, and 51,500 units to meet the demand of population growth.

• With regard to future requirement, the strategic plan foresees a need for 570,000 units in the next 20 years, adding that demand for housing was increasing due to the presence of a large number of expatriate workers and inflow of people from villages and cities, apart from population growth.

Jeddah Low-Cost Housing , One Million Units

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Bahrain Affordable Housing Program

Bahrain Ministry of Housing Sources - 2011

The Housing Sector in Saudi Arabia

– Population growth and lower family sizes push greater demand for housing. – 40% of population is younger than 15.– Only one third of Saudi nationals live in apartments, – The preference for most Saudi’s is villa living rather than apartment living, however apartment living is

more affordable. The cost of villas in Urban major cities is out of reach for the common Saudi.– Housing is considered a basic right to be provided by government to those citizens who cannot afford it.– 80% of households cannot afford to own units of greater than 200 sqm. 60% of Saudi Families may

require assistance to own housing units up to 125 sqm.– Affordability improves if traditional subsidies are available (zero interest loans, land grants, government

rent to buy, free infrastructure).– REDF has provided 80% plus of home finance with loans being increased from SR 300,000 to SR 500,000

and SR 40 billion of additional capital injected.– Estimated waiting time for Saudis who apply for REDF has been nearly 15 years with the aim to reduce to

5 - 8 years.– The government needs to take an active role in delivering affordable housing, the private sector cannot be

relied upon to perform this function as largest developers deliver roughly 1000 new units each year.– Private sector see the mid to low housing sector as low margins business and as such some developers

show little interest in this sector with major costs to develop the primary infrastructure requirements (waste water, water, electricity and district cooling) to enable the development of new communities.

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Affordable Housing

Mortgages & Long Term

Finance

Program Management,

Price & Quality Control

Environmental/ Sustainability –

Eco Concept

Social/ Cultural

Acceptance

ConstructionTechnology /

Modular Systems Land and

Infrastructure Cost

Developer Business Model

Effective Planning /Budgeting

Potential Solutions on Housing MENA

HousingSolutions

≠ Low QualityIncrease Access to Finance /

Mortgage & Enact Securitization

Mass Building Systems Solutions

New PPP Arrangements w/ Subsidy and JV considerations

Reducing Land Cost, Land Tax Laws

Reducing Infrastructure Cost ; Sharing / Cost Recovery Concepts

Blocks Near Urban centers; Multi Story Higher Density Solutions

Innovative Design Solutions for Privacy, Use, Common Areas

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Demand Enablers

• Growing population• Generally house values

appreciate in MENA – a strong security for future borrowing and advances

• Declining household size

• Young population• Growing middle class /

Urbanization• Mature market

mortgage interest rates in some countries

• Despite global recession there is growth in economies, especially in property markets

Supply Side Opportunities

• Large scale development sites in new suburban areas

• Opportunity for securitization.

• Mortgage laws near enactment

• Political stability, with the exception of a few pockets

• Abundance of primary raw materials

• New Real Estate Investment Funds

• GCC developers entering the affordable housing market

Barriers to Entry

• Little experience among local Developers in low margin products

• Few capable contractors for large projects

• Scarcity of long term credit

• Escrow accounts laws• Unclear Developer

default regulations• Owners default

foreclosure procedures unclear

• Liberalization of financial markets

Demand Inhibitors

• Off plan purchases not desired

• Cost / Affordability Issues

• uncertain employment• Diverse households• Cultural acceptance of

community developments

• Accommodation alternatives: rentals, parents

• Fear of home finance covenants

Housing Delivery – Supply Demand Factors

Affordable Housing

Building Material, System

Mortgage Finance

Land

Infra-structure

Productive Labor

Building Industry

Policy , Regal & Regulatory Framework

The Affordable Housing Perfect Supply Inputs

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MENA SUPPLY GAP DEMAND GAPS

FINANCE

Public sector funding is predominantly inadequate

Available private sector funding are shallow & short term in nature

Foreign capital not available

Mortgage credit culture at best is poor Available mortgage alienates the poor & low

income people Microfinance Banks are still young and

currently focusing on working capital needs of poor

Existing funding pool not adequate for mortgage

REGULATORY

Policies that incentivize private sector participation are largely absent – taxes, capital markets etc.

Public sector too predominant in the sector. The public sector should rather be an enabler

Strategy to attract foreign direct investment or multi & bi-lateral support to the sector not apparent

Microfinance banks to be supported to offer micro Mortgage credit. In many countries the Central Bank microfinance policy does not cover housing microfinance

INFRASTRUCTURE

Poor or lack of basic infrastructures to support housing development adds to cost of housing

Cost sharing infrastructure and proximity to urban centers are considered

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Investors , Borrowers & Financial Institutions Perspectives

Investors• Require

reasonable return• Aspire diversified

portfolios • Safety which

mortgages offers

Borrowers• Require fixed

rates / installments contract

• Availability of full amortization term

• Various refinancing options, no foreclosure

Financial Institutions• Balance risk/profit• Assets recovery if

default• access to the bond

market

MENA Affordable Housing – Owners - Developers

Owners

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•High mortgage interest rates•Low levels of income•Lack of affordable housing supply / limited availability in desired areas

Lack of effective Housing demand

•Limited long term funds•High Cost of building materials•Planning/green regulations•Prohibitive cost of infrastructure / Land

Lack of affordable Housing supply

Developers

WIDESPREAD HOME OWNERSHIP & DEVELOPMENT CANNOT BE ACHIEVED WITHOUT A ROBUST FINANCIAL SYSTEM ACHIEVED BY EFFECTIVE LINK BETWEEN RESIDENTIAL MORTGAGES AND THE LONG TERM FINANCIAL MARKETS

Government / Private Sector Roles

Tax and Fiscal policies: Reduce cost of mortgage and development borrowing, Micro financing needTax and Fiscal policies: Reduce cost of mortgage and development borrowing, Micro financing need

Government : Legislation on foreclosure / mortgage & securitization is key to jump start the marketGovernment : Legislation on foreclosure / mortgage & securitization is key to jump start the market

Urban Issues: Relaxation of development green guidelines. Land designation for affordable housingUrban Issues: Relaxation of development green guidelines. Land designation for affordable housing

Real Estate Funds : Setting up funds dedicated to the affordable housing marketReal Estate Funds : Setting up funds dedicated to the affordable housing market

Zoning : Increase the density of housing units in a given area along with the associated infrastructureZoning : Increase the density of housing units in a given area along with the associated infrastructure

Land banking : Access to cheap land with basic infrastructure. Land appreciation tax (Zakat) neededLand banking : Access to cheap land with basic infrastructure. Land appreciation tax (Zakat) needed

Delivery : New business models / JV’s between Government and Private sector, PPP’s, etc.Delivery : New business models / JV’s between Government and Private sector, PPP’s, etc.

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MENA Affordable Housing PESTEL Analysis

P

• Politicians – controlled by office tenure; short term Public policy / strategy• Government institutions: can be a barrier to private sector growth and sustainability;• Financial markets liberalization; need structural unpopular foreclosure laws

E

• Lack of steady income › credit risk. Collaterals in question combined with lack of financial history• Underdeveloped capital markets, savings commitment lacking, volatile interest and inflation rates.• Repeated housing demand due to labor mobility and migration at the lower strata.

S

• Rural-to-urban migration – leads to development of slums;• A move from communal housing to the high-density housing not fully embraced • Cultural dread of indebtedness , large families with limited income

T

• High building green standards imposed by authorities – makes housing finance expensive and increase the premium.• Modern standardized building materials not responsive to local conditions leads to resisting the use of new technology;• Due to advances in technology, what passed as a house not too long ago no longer qualifies to be called a house;

E

• Changing climatic conditions leading to high risk premium;• Local and traditional housing materials challenged by unstable environmental conditions;• Expensive imported building materials.

L

• Security of tenure hampers development; Biased contracts drafted by financiers discourage borrowers;• Bureaucratic /absence of foreclosure laws discourage lending;• Inefficiencies in registering mortgage and title transfers create bottlenecks.

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HOUSING & FINANCE POLICIES / PROGRAMSIn setting policies & programs Governments target the stimulation for personal construction thru the development of effective financing / credit of housing development for individuals and companies. Among the measures;

• Formation of land concession policy for housing and commercial aims to individuals and institutions while establishing an efficient housing supply chain which focuses on removing obstacles to the release of land by government; providing / funding the respective infrastructures and clearing construction bottlenecks

• Enactment of sophisticated title structures to allow variations in lease arrangements

• Enhancing mobilization, supply and growth of long-term funds and making loans affordable to more borrowers for the purpose of building, purchasing and improvement of residential houses. Establishment of Trust structures to allow for shared ownership

• Encourage commercial and merchant banks to allocate a stipulated minimum proportion of their credit to the housing/construction sector

• Establish National Housing Fund as an investment vehicle for banks or as saving facility or a contribution scheme (the number of participations / contributors need to be benched with the national work force) in order to mobilize cheap and long term funds.

• Providing incentives for the capital market to invest in property development, Encouraging a multiplication of housing finance institutions

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List

to B

oost

the

Affor

dabl

e H

ousi

ng S

ecto

r – G

over

nmen

t! • Recognize housing finance as an economic empowerment/activity that contributes to economic development rather than a social engagement;

• Make more budgetary allocations to housing as a springboard to other social promotions such as education, health etc.; land and housing policy essential.

• Have a stratified approach to housing finance thru the use of smart and targeted subsidies for specific geographical/environmental domains to lower the credit risk to the second tier households and employ conditional grants to the lower end of the market (not linked to bailout packages);

• Play facilitation role to the bankable segment and give space to private sector participation and diversify domestic funding models how to

• Resolve obstacles in areas of land titles, foreclosures, appraisals. Support for rental market and other forms of ownership

• Lobby housing finance private institutions to consider incremental lending to housing development; encourage housing microfinance, risk sharing through legislative institutional framework development to finance low/informal income households thus deepening banks penetration and sound lending.

• Educate borrowers on the workings of a mortgage and savings schemes and information (data) access.

• Embrace “securitization framework” to deepen funding base thru simple , transparent models and legal/regulatory framework. ; limit/identify property bubbles

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Affordable Housing Government policies ,….

• National Land & Housing Development Schemes –Urban & Rural

• Government Affordable / Cooperative , etc. (Housing Direct Delivery - 100% Gov. funds or PPP or mixed JV w/ private sector)

• Sale of Government Low Cost Houses

• Various Rental schemes of Government owned Houses

• Mortgage Guarantees / Mortgage Liquidity Facilities /

• National Housing Funds

• Home / Land Loan Banks

Government long term policies optimal goal is to provide affordable and comfortable housing for all that needs it. In the short to medium term Governments target to improve the housing situation through the following strategies:

Stages In Housing Delivery

1

State sponsored housing production & delivery

2

Lowering standards to reach lower income segments

3

Involving future beneficiaries in housing production

4

Intervention in housing input to facilitate housing production

5

Enabling policies, less Government intervention

Gov.Suppl

y

Market

Supply

Global Affordable Housing Sources

WIDESPREAD PROPERTY OWNERSHIP IS A DESIRABLE GOAL OF EVERY SOCIETY

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US ResourcesAffordable Housing Institute (AHI)African Resources The African Union for Housing Finance (AUHF)An association of mortgage banks, building societies, housing corporations and other organizations involved in the mobilization of funds for shelter and housing, on the continent of Africa. Based in South Africa. The Southern African Housing Foundation (SAHF)A catalyst for networking, conferencing and workshops for Africa. Based in South Africa.Centre for Affordable Housing Finance in Africa (CAHF), which is a division of the Fin Mark Trust (a non-profit independent trust, funded by the UK's DFID Asian ResourcesHousing finance agencies in Asia Paper by BIS, January 2008 European ResourcesInternational Union for Housing Finance (IUHF) Based in the UK The European Liaison Committee for Social Housing (CECODHAS)Brussels-based European Union network for the promotion of the right to decent housing for allConstructing Understanding of the Homeless Population (CUHP)European Commission funded research network

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Example , The African Union for Housing Finance (AUHF) - Statement by the members of the AUHF at their annual general meeting in SA, on 8 September 2011.

We, the members of AUHF confirm our commitment to the development of sustainable housing finance markets that address the broad spectrum of needs throughout Africa, we are committed to: • The development of appropriate housing and housing finance products, which are

affordable to our populations, and contribute effectively towards adequate housing across our nations

• Promoting consumer education and financial literacy so that households can

participate effectively in their housing processes and training across the spectrum of the housing value chain

• An integrated delivery approach in which the development of housing occurs within

a sound planning framework that includes the delivery of infrastructure services, and social and economic amenities

• Professional development Working in collaboration with each other, and other

stakeholders, whether in the public or private sectors, to promote the realization of sustainable human settlements across Africa.

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Good Book to Read

Housing Finance Policy in Emerging Marketsby Loic Chiquier and Michael Lea (Paperback - Jun 19, 2009)" $42

Fixing the Housing Market: Financial Innovations for the Future by Franklin Allen, James R. Barth and Glenn Yago (Hardcover - Feb 24, 2012)$35

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National Association of Housing Redevelopment Officials - US

Chartered Institute of Housing - UK

Provincial Government of the Western Cape Department of Human Settlements - SA

Other Sources

HOFINET- HOUSING FINANCE INFORMATION NETWORK

• A portal website for sharing information on housing finance, started a data collection exercise

• Hosted and run by Wharton School, University of Pennsylvania with support from World Bank, IFC, FMO

• Aim to have contributors/editors to the site from all over the world sharing knowledge and best practice

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The World Bank is a vital source of financial and technical assistance to developing countries. Its mission is to fight poverty for lasting results and to help people help themselves and their environment by providing resources, sharing knowledge, building capacity and forging partnerships in the public and private sectors.

• Urban development strategy: cities are also built the way they are financed (avoid slum proliferation)

• • Poverty reduction & social stability: empowerment, retirement, asset

building, community strengthening• • Integral part of the global financial sector liberalization (banks, non -

banks, bond markets, pension funds, etc.)• • Housing is a sizeable and durable investment: needed market debt

leverage

World Bank - WHY HOUSING FINANCE

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WORLD BANK’S HOUSING FINANCE

PROGRAM

• Growing scope 30+ countries & ambitious reforms

• Broad range of policy reforms, new legislation, pilot programs, studies

• Financed using IBRD loans, IDA credit or grants and trust funds

• Global, regional, country conferences & training programs

• HF flagship book published

• Collaboration with Urban/Slum upgrading/Land projects

WB TARGET COUNTRIES

• Has had stability in its banking sector and macro economy

• Undertaken legal reforms with new mortgage law, condominium law, program to formalize land ownership

• World Bank providing support thru:

• Creation of a liquidity facility, mortgage market development

• Housing Microfinance Fund , capacity building

• Several steps to expand supply of housing

MORTGAGE LIQUIDITY FACILITY - CHALLENGES

• Further Urbanization to adapt to city living, smaller houses/multi-family

• Offering solutions across the income spectrum

• Developing rental finance, housing microfinance, developer finance

• Integrating urban policy with financial sector reform

• Creating capital markets and a source of long term funds

• Making Progress on Land issues

WB MORTGAGE LIQUIDITY FACILITIES

• Operating already in Egypt and Jordan

• Provides a solution to maturity mismatch issue and shortage of long term funds

• First step onto secondary mortgage market without the risks associated with securitization

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No. Householder Capacity to Own Suitability – MENA Region1 Home Ownership – Villa Type High end MENA market and GCC in particular2 Condominium/ Sectional Title First home - urban professionals

3 Co-Operative Independent organized professions – Eng. Doctors, Lawyers Housing Associations.

4 Limited-Equity Co-Operative Gov. Employees like Teachers , Public Servants Housing.5 Rent to Own Became popular in GCC to dispose Hi end Housing stock

6Shared Ownership Trusts (stair-casing)

Similar to Islamic Musharaka, like 50% equity ( mortgage payments) & 50% lease with options to buy more equity

7 Rental Conventional open market.

8Resident Controlled Non-Profit Rental

Charity organizations housings offerings for followers including Islamic endowment and Churches.

9 Affordable Rental Delivery by either Gov. or Private. Rent is controlled by Gov. or pre-agreements with private. Minimum quality

10 Informal Rental More like bed space rents. Undersized, undesired units.

Ownership FormsThe gap from pure rental to homeownership is large: down payment, financial literacy, mortgage ability, and family situation/ stability all can represent obstacles to households seeking to move up the ladder. Intermediate forms frequently involving government incentives, regulatory schemes, or subsidies. The following ownership forms have been successfully used throughout the world arranged in descending order by capacity required of the householder;

Concepts In Affordable Housing

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Target Housing Issue Program Goal MENA

1 Increase Supply

The market lacks enough affordable housing.

Create more new houses and consider regeneration projects. Phenomena across MENA region.

2Regeneration /

Improve Communities

Housing exists but is uninhabitable, or located in declining neighborhoods.

Renovate existing housing stock and revitalize neighborhoods.

Jordan , Egypt, Yemen, Iraq , Jeddah (KSA)

3 Job / Housing Disconnection

Jobs and housing exist in separate places.

Migrate people permanently, increase commutability, or produce new homes in job growth centers.

GCC in general, UAE in particular

4 Non Affordability

Ample housing exists but at prices far above the target population's ability to pay.

Lock in rent levels or subsidy streams to assure that target population residents have access to quality housing.

UAE - in the context of strong economies, continuing immigration or population attraction.

5 Barriers / Limited Access

Housing exists with intangible barriers like unawareness, lack of creditworthiness, or landlord prejudice.

Improve market fluidity and break down intangible barriers through education, and equitable remedies.

Jordan – Weak mortgage markets

6 Poverty Alleviation

Target households cannot afford a reasonable rent

Raise the segment rent-paying ability.

Egypt , Morocco and in high density countries

7Social

Welfare / UN Refugees

Target households have personal / imposed issues that impair their ability to rent.

Use housing within an arrays of social services to work with target households.

Homeless, Palestinian & Other Refugee camps in MENA.

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WHY IS IT IMPORTANT? • Facilitates consumer protection• Promotes the benefit of home ownership• Fosters responsibility• Minimizes default risk• Provides understanding of the housing

finance options

EDUCATION AREAS • Tenure options ( Owning - building or

buying - , Renting, Social housing)• Affordability and Savings• Housing Finance ( Mortgage, Non-

mortgage, Micro loans)

EDUCATION PROGRAMS • Borrower education for : - First time buyers - Mortgage and non-mortgage• Home ownership education : - Current and potential home owners - New and potential tenants

OWNING HOUSING EDUCATION

• Deed of Sale, Title Deed• Purchase price , transfer costs• Bond registration costs• Service connection fees, water, electricity• Monthly municipal charges• Home loan installments• Maintenance and repairs• Monthly insurance premium (home owner

cover)• Learn the Advantages of owning

(appreciation, business from house, etc.)

HOUSING EDUCATION

WHO SHOULD BE EDUCATED? • Aspiring home owners• First time home owners• Tenants• Train-the-trainers programs

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Housing tends to be a long-term financial commitment with associated advantages and disadvantages e.g. :

• Some employers in an attempt to assist employees to acquire housing, will encourage the use of Pension/Provident Funds as collateral, but when the employees default on the loans, they could lose both property and pension

• Some people, in desperation to acquire housing will do so through micro-loans, which could be costly and short-term to finance a long-term commitment

• Others, still will purchase property when all they need is accommodation and in most cases they are not yet ready to own property

In order to mitigate against all the above issues, people need to be educated, even before they consider any housing/accommodation option.

EXAMPLES ON HOME LOAN EDUCATION NEEDS

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ADVANTAGES OF OWNING DISADVANTAGES OF OWNING

Asset grows in value Can run business from your house Can rent out room and get extra income Can sell the house at a profit

Long-term financial commitment Monthly installment, services and taxes Costly to maintain the property Insurance costs May take long to sell

ADVANTAGES OF RENTING DISADVANTAGES OF RENTING

Easier to exit the rented property Not responsible for major maintenance May run a business from rented premises (subject to

prior approval from landlord) Not responsible for services and taxes No insurance costs on the rented property

No financial benefit from monthly lease No accumulation of wealth in the form of asset value

appreciation Rent will usually escalate (10%?) Bound by the terms of the lease, i.e. cannot vacate the

property before expiry of the lease

ADVANTAGES OF SOCIAL HOUSING DISADVANTAGES OF SOCIAL HOUSING

Living in affordable, good quality housing Be part of a close community Have security of tenure, subject to adhering to terms of

agreement In a co-operative, contribute towards the financial

growth of the co-operative May be entitled to financial growth in value of property

in a co-operative

Have to live according to the House Rules Monthly lease rental/use fee will increase each year No title to the property, except in rent-to-buy, where

title is only registered after full payment of property value

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Affordable Housing Communities – Eco Cities ConceptHousing is like an evolving ecosystem - healthy and self-sustaining, or diseased and inherently unstable – AHI first core principle

Healthy Community Creating a sense of well-being, comfort and 'quiet enjoyment' for adults, children, and the elderly.

Physical AppearanceThe property must provide a safe, clean, habitable, defensible physical environment. It must be well cared for and look well cared for.

Compliance Mechanisms Failure to comply must inevitably trigger appropriate enforcement.

Financing & Funded Operations

The property's ongoing income sources must exceed its ongoing recurring operating costs, including intermittent costs like capital

Downstream Responsiveness / Flexibility

The property must be owned and regulated by people capable of adopting to change.

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SOCIAL RENTAL HOUSING IN EUROPE

FACTORS INFLUENCING GOVERNMENT CHOICE IN SOCIAL RENTAL HOUSING

Many countries in Europe and North America have experienced a wide range of solutions, at different times in their history. The main factors influencing their choice are:

Importance of Housing Needs: State involvement and emphasis on object or subject subsidies are not the same when the volume of new construction is large or small compared to the stock.

Availability of Long-Term Private Finance to The Housing Sector: This depends greatly on the degree of development of national financial markets. A fundamental issue is whether social housing finance should separate system by itself or be a part of the financial system. Most West European countries have been striving to integrate housing finance more and more into their financial markets; social housing is sometimes the only sector remaining off-market.

Availability of Public Funds for Social Housing: This is both a technical (tightening of budgets) and a political problem, at national and local levels. The political aspects include national trends such as emphasis on home ownership and local issues such as not in my backyard syndrome.

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SOCIAL RENTAL HOUSING POLICY ISSUES• Social rental housing may be regarded as housing stock whose access is not based on

market rules whereas most often, a maximum rent is in use and but is defined by a number of criteria like income, target groups and allocation procedures.

• There are a large variety of social landlords they may be public (state, local authority, public company) or private (non-profit organizations; property companies).

• As with any long-term investment with public support, social housing finance is a mix of loans or bonds, subsidies and own funds. Many combinations are possible to achieve the best possible combination between private and public funds;

• Subsidies can be granted through tax relief or direct support from a national or local budget in the forms of object subsidies (housing allowances) and subject subsidies (construction materials & operations / investment)

• Those in charge of housing policy have to see that investment and operation costs are under control, which refers to various aspects such as quality standards and rent collection and management and also make the best choices concerning:

- Rent setting in the social housing sector;- The most efficient ways of financing investment in this sector;- The balance between housing allowances and object subsidies.

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MARKET RENT AND A RENT AFFORDABLE GAPRent setting is a key element, as choices in this field heavily influenced by the financial balance of the investment and operation accounts as follows; Investment account

Investment costs Investment financeDevelopers’ profit Direct subsidiesLoan takeout costs LoansConstruction costs Own fundsLand improvement costs Land costs

Operation accountExpenses Revenue

Maintenance costs Chargeable rentsManagement costs Billable chargesUtility costs Operating subsidiesProperty tax Loan repayment Losses due to vacancy Losses due to unpaid rents and charges Equity rebuilding

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INVESTMENT & OPERATION ACCOUNTS EFFECT ON RENT

Heavy allocation of funds from the state budget, with very low rents resulted in a draw back in East European countries before transition while fully private rental housing, with rent controls eventually discourages investors.

The balance of the operation account implies that lower rents should be associated either with higher operating subsidies or with lower loan repayments (or both). Lower repayments mean a smaller loan

The balance of the investment account then requires that either investment subsidies or own funds (or both) to be increased.

Setting rents at the lowest possible level is a way to avoid paying housing allowances, but investment and operation must then be highly subsidized.

Generation of resources for investment and operation used by socialist economies was very inefficient from an economic viewpoint as households are not encouraged to adapt their housing consumption to their needs. Also, some households that do not need subsidies will receive them.

41

AFFORDABLE RENT AND SUBSIDIESMarket Rent ProfitCross Cost Rent Object Subsidy ( production + Investor)Net Gross Rent Residual GapRent Affordable with Housing allowance Subject subsidy (Housing Allowance)Rent Affordable without Housing allowance

Subject Subsidies

• Are a housing allowance or payment designed to increase the rent that a given household is able to pay. “Rent affordable with a housing allowance” is the rent that target groups benefiting from this subsidy can afford.

Object Subsidies

• Aim at lowering the cost of supply on the rental market. They can intervene through construction costs (production) or operating costs (investor subsidies) that enable eligible landlords to offer a lower rent for a given housing unit. Object subsidies are sometimes called “bricks-and-mortar subsidies” or supply-side subsidies

42

INVESTMENT & OPERATION ACCOUNTS EFFECT ON RENT

The subsidies sometimes will increase the housing affordability beyond needed, by lack of initial targeting or because target group income rising over time .

In Western Europe, “equilibrium rent” are calculated according to cost rent principles, the rent which balances the investors’ account over time. Drawback is the subsidization may increase the estimated construction & administration costs.

“Object subsidies” are used to reduce investment and operation costs, cost rent before object subsidies is here called “gross cost rent”; cost rent including the impact of object subsidies is called “net cost rent”. Rent levels depend on the program finance and rents can be disconnected from local market levels.

Almost all of the important subsidy policy aspects of social rental housing revolve around balancing the gap between “affordable rent” (frequently set at 30 per cent of net income) and the “gross cost rent”.

Austria, Denmark, Finland, France, the Netherlands and Sweden use cost rent Germany sets initial rents according to tenants’ income Belgium, Luxembourg and Portugal calculate a cost rent then adjust to income. UK and Ireland ; Rent setting is decided by local authorities Italy sets rents according to local market rent levels.

43

SOCIAL RENTAL HOUSING FUNDING POLICES SHIFTS Many Countries developed off-market finance for social housing thru direct state loans

In economies in transition, the state provided housing loans by establishing public funds to promote housing construction and purchase. Examples;

- Housing Fund of Slovenia (1991), - State Fund for Housing Development of Slovakia (1996)- National Housing Fund in Poland (1995). - Slovakia State guarantees on construction loans (1999)

The shift from state or off-market loans towards market lending was possible by the liberalization of the financial sector and the stability needed to enter the Eurozone.

- France and Austria are the two in the Eurozone that use state subsidiary to finance the social rental sector.

- Austria has developed a mixed system of grants and low-interest state loans to non-profit developers which results in revolving funds at the provincial level.

- Germany also uses public banks, but only partly and as secondary lenders.- Outside the Eurozone, the Norwegian State Housing Bank provides loans, grants and housing allowances funded by the treasury.

- Still specific intermediaries are needed in Finland, the Netherlands and the United Kingdom to help smaller investors access capital markets.

44

MORTAGE LOANS ISSUES IN SOCIAL RENTAL HOUSING

These loans are long-term, often more than 30 years, which makes it difficult to raise matching funds in countries with high LTV (loan-to-value) ratio, thus increasing the risk premium,

On the other hand, As part of the rent is usually paid by the state through housing allowances, the risk to the lender is reduced while Social landlords, face increasing regional imbalances resulting in higher funding costs in the poorer regions.

Unlike for individual investor, Banks risk is spread over a number of properties. Hence the risk of such loans is often overestimated; whereas the loss given default (LGD) is high, the probability of default (PD) is low.

Mortgage guarantees are often provided by public entities, often local authorities, or by funds (when the landlord is public, repossession of a public property is often impossible). Future rents can also be used as collateral.

Recent loans to housing associations in UK were secured by legal mortgages over social housing properties and cash reserves in favor of the issuer and bond trustee; in the event of non-payment, the bond trustee will have the right to collect the rents and manage the secured property.

45

FUNDING SOURCES IN SOCIAL RENTAL HOUSING

• The interest rate risk is shifted to investors by the direct issuance of bonds by the lender

• Danish or German mortgage banks.The Mortgage or Bank Bond

Model.

• A separate agency provides liquidity for mortgage lenders against collateral and issues uncollateralized bonds

• CRH in France, FHL in the United States.

The Secondary Mortgage Facility, Or Liquidity Facility,

Model.

• The agency provides liquidity & buys the assets; the asset will be “securitized.” Used in USA by two Government-sponsored agencies (Fannie Mae and Freddy Mac).

• In Western Europe it has been unevenly successful

The Secondary Mortgage Market Model.

Due to the nature of the financial needs of the social sector (large volumes and long-term Finance), institutional savings are favored as sources like pension funds and insurance companies. In other words, “wholesale funding” is preferred to “retail funding.” Three different wholesale funding models:

46

NOTES ON FUNDING SOURCES IN RENTAL HOUSING Countries in transition moved towards introducing wholesale funding

In underdeveloped capital markets or regionally segregated banking system, a central liquidity facility could serve as an interim wholesale funding source.

Institutional investors, pension funds and insurance companies, usually finance housing through lending, buying mortgage bonds, and mortgage-backed securities.

Social landlords may also issue their own bonds on the capital market; however, specific needs of social housing (low interest, equal access, specific guarantee) impose constraints that may not easily match the demand of investors.

France’s funding system of Caisse des dépôts provides a rare example of private savings being used to finance social housing. Short-term deposits are used to fund loans of up to 50 years. The interest rate of the loans fluctuates with the interest paid to the savers (indexed on the average of the Euribor-1 year and annual variation of consumer price index), which eliminates the interest rate risk. Moreover, the deposits are guaranteed by the state.

47

MENA Housing Mortgages , Securitization

• The structure of Bank Deposit Liabilities as Deposit money banks tend to avoid fund mismatch i.e. borrowings short but lending long, which is required in mortgage financing.

• How to ensure adequate long term lending by financial institutions rather than the current short term lending practice. This requires significant intermediation efforts, especially, since housing finance is very sensitive to inflationary environment.

• Absence of National Credit Data Base to discriminate on risk as the inadequate data on credit history of households presents a challenge to mortgage. This results in limited mortgage finance accessibility as it is usually computed as annual minimum wage multiplied by a factor (usually four)

• Absence of ineffective foreclosure laws. A solution would be to;

- Remove the mortgagee obligation to take court proceedings and allow taking possession peaceably.

- Where a mortgagee is unable to enforce a right of possession in a peaceable manner the mortgagee may use the services of the police to evict the mortgagor or other person in possession pursuant to a warrant issued by a court.

The Classical Problem

48

OTHER ISSUES WITH MORTGAGE & NATIONAL FUNDS The usual low interest rate level stipulated by law on investment on NHF makes

the banks and Insurance companies reluctant to invest in the Fund especially, as there are some more profitable investment at the same time this law rate discourages the development of a commercial mortgage sector.

The high inflation rate negatively affected the macroeconomic environment especially with low interest mortgage financing. There is need to continue to keep the rate of inflation moderate to promote confidence in the value of a country’s currency thus lowering interest rates

The existence of a cumbersome process of title documentation of land ownership which is reinforced by inadequate cadastral system makes mortgage financing difficult. This has been seen as one of the factors responsible for slow disbursement of NHF.

A solution would be to develop a legal framework for property rights to include;

The need for a clearly defined title, right to sell land / property to increase the reliability of title deeds;

developing property laws (e.g. condominium law) and developer finance; and

developing efficient judicial processes to resolve disputes

Asset Liability Management

BorrowerReal Estate Developer

Home Owner

Mortgage Credit InstitutionAssets Liabilities

Mortgage Mortgage Loans Bonds

Bond Investor /

Holder

-Interest Rate Matching-Duration / Liquidity

Matching-Currency Matching (FX risk)

Installments Loan Divide

ndsPurch

ase

Traditional Model Subprime Model

-Bank sells mortgage bond

-Bank grants mortgage-Home buyer pays bank-Bank pays bondholder

Balancing Principle

-Bank grants mortgage-Home buyer pays bank

- Loans are on Banks balance sheets

Banks originate loans, hold them on their books and fund them through general liabilities of a bank or by issuing long term deposits or bonds (Risk assessment of underlying individual assets, bond rating , pricing & tenor are key issues). Government support for bonds can be in the form of a guarantee on the bonds e.g. liquidity facility.

Deep long term pool of funds both domestic and foreign that are cheaper & stable funds

50

Property is a bubble commodity it has and will continue to boom and bust. The trick is to get the cycles right.

Limited sub-prime direct effects on MENA markets due to;• Limited use of structured finance • Markets remain “prime” (smaller, more

conservative)Intensified indirect effects;• Slowdown in growth (affects demand)• Return of inflation , increase cost of funds• Liquidity squeeze and market distrust

Credit contraction• Additional credit risks (variable/adjustable

rate loans)• Bank de-capitalization , depressed capital

markets• Foreign banks withdraw/downsize.

• Steady demand (urbanization)• Access to finance remains a policy

priority• Continuance of undeveloped

mortgage markets• Easy expansion is over for many

countries• Vulnerable countries: liquidity, high

LTV ratio, variable loans, weak lending standards, etc.

• Liquidity crisis: securitization, roll-over refinancing

• Cost of funds to increase• Diversity tools: covered bonds,

liquidity facilities• Non-bank lenders require secure

access to bond markets• State support: liquidity, systemic risk,

etc.

HOUSING FINANCE IN MENA REGIONSUB PRIME EFFECTS ON MENA

51

SPVS AND SECURITIZATION – BANKERS OPTIONS

• In SPV - Bank sets up a SPV and sells loans to the SPV (off balance sheet)• In securitization - Bank sets up senior/subordinated structure (bank part), with

bond market buying the senior part Government support could guarantee a portion of the senior part, thus capping bond holder losses. Government role is to protect against systemic risk / promoting the credibility of the SPV, However,

guarantees can cause “moral hazard” (excessive risk taking, leading to taxpayer bailouts) . Added advantage of securitization is that it guarantees the investors access to the mortgages where on

balance sheet collateralization might not Institution that originates and manages the loans takes on the initial credit risk and passes on the

interest rate risk to bond market investors. In both structures no need to guarantee individual loans and risk is controlled by capital / stress tests

Which structure to choose, depends on regulatory and tax issues , however, banks and bonds are favored in emerging economies as it is less likely to require new laws, banks are best at managing credit risk and so can manage the principle/agent problem better Securitization improves market efficiencies, however, they require strong legal and regulatory framework as secondary market is exposed to risks which the primary market doesn’t have (secondary market is merely a vehicle for allocating capital)

52

In the past 20 years there has been the unbundling of the 4 major aspects of mortgage lending: origination, servicing, funding and credit risk

Depository based systems can do the same thing as secondary markets do (connect mortgage borrowers with people with money) without having to sell mortgages, but require stable interest rates.

Secondary market funding - securitization (package into pools), Debt or combination thereof. Payments

are made from pools to investors.

Market evolved to include private market pools, derivative securities (CMOs with up to 50 payment tranches, with a pool of 30 year callable securities being broken up into short, medium, long term bonds), futures, hedges against interest/prepayment risk, mortgage insurers etc.

Unbundling takes advantage of scale economics, division of labor, promotes competition among suppliers of the various bundles BUT it comes at a cost: 1) Each player is dependent upon the other players performing 2) Principal/agent problems 3)Transparency/moral hazard 4) Understanding of risk by investors

It is the function rather than institutional mechanism of connecting mortgage and capital markets that is important (several models available)

The “front end” creates a good mortgage market (proper registration, foreclosure and eviction procedures) as opposed the “back end” - doing deals/getting mortgages off balance sheet etc.

Controlling soundness and safety requires serious consideration of risk based capital (stress based tests, regular audits, risk based standards etc.).

53

Home Loan Bank Model/Mortgage Liquidity FacilitiesLong term fixed rate liabilities often not available in deposit markets; thus, Home Loan Bank Model/Mortgage Liquidity Facilities pools the mortgage loan portfolios of numerous banks and provides large scale financing to banks. Banks get attractive rates and mortgages are pledged as collateral with wide collateral margins.

• Promotes product standardization/transparency. Can becomes more sophisticated over time as market develops and can co-exist with other market instruments. The bank issues simple, classical debentures (or bonds) with short to long term maturities at favorable interest rates (AAA/Aaa) and may contain prepayment options

• Lenders adhere to best practice. Effective mortgage legislation, efficient mortgage/land registration systems, efficient judiciary, appraisers, credit bureau, including repossession upon default are a must

• Increases market information systems which in turn promotes better risk management. Must adhere to market based pricing (market distortion issue)

• Deepens the financial and securities market. Can be viewed as an in-between leading up to a full secondary market. Don’t need critical mass and can issue debentures

• Can be effectively used to promote delivery of policy objectives e.g. affordable housing

• Successful models Malaysia, France, Jordan, Algeria, and West Africa

54

Housing Fund is a public setup with juridical rights, administrative, financial and controlled autonomy to execute government policy for social housing promotion.

The Role of the Funds for Housing usually;

• To promote construction of houses for social habitation

• To improve credit interest rates granted by banks for housing construction

• To grant credit for housing construction, repairing and extension for citizens whose their household income is not over the minimum national salary

Advantages DisadvantagesSCENARIO I – CREATION OF A HOUSING CREDIT

High specialization on credit for housing, for acquiring construction material and other infrastructures

Increasing of business volume due to other areas incorporation

Additional financial effort

A Financial Society does not have the same prestige as a Financial Bank

SCENARIO II – CREATION OF BANKING INSTITUTION High capacity to mobilize funds for credit

grants

It is possible to diversify activities without harming the main housing objective

There are no remarkable disadvantages

55

Housing Micro-Finance – Non Existing in Most MENA Region

Housing Microfinance Mortgage Financeoften progressive lending one time lendingvarious housing needs buy or buildnot secured by property secured by theMulti purpose finance property financedcash flow lending collateral lendingmedium term long term3-7 years over 10 years

FEATURE MICRO FINANCE DETAILSBorrower Low income household

Purpose Improve, expand or build or land purchase

Loan Amount Ranges between $250 – $15,000, Capacity determined by income

Tenor Between 2 – 5 years

Repayment Regular installments (weekly/ monthly)

Delivery method Individual not group

Collateral Usually un-collateralized but guaranties can be obtain if available

Others Savings -driven

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Securitization Examples in Housing Microfinance

One of the 1st Microfinance Securitizations

Issuer : BRAC Microfinance, Issue date : July 2006Amount raised: $180 million ; Tenor : 6 yearsCovered by : receivables from loans securitizedParties involved:

Lead Arranger - RSA CapitalCo-Arrangers and Funders - Citibank, FMO & KfWFMO & KfW cover Fx risk for foreign investment

A pioneer Housing Microfinance Securitization

Issuer : Hipotecaria Su Casita (a housing finance company in Mexico); Issue date: (1st) 2003, (latest) : April 2007 Amount raised (1st) : $50 million, (latest): $260 million; Tenor : 5 yearsIssues done so far : 9About 40% of total funds raised committed to low income people

57

• Measures to guard the market from levels of speculation that artificially inflated prices in other GCC states during the boom of 2004 - 2008 years

• The formation of private specialized mortgage companies to increase the availability of funding. Restrictions on low loan-to-value ratio to relatively regulate the market.

• Rules that define the provider of a loan as the owner of a property rather than the borrower to create a smoother foreclosure process and removes a legal ambiguity that has deterred banks from lending (Islamic Ijara financing) . Regulation on registering mortgages

• Facilitation of bank ownership and repossession of properties through a number of steps including prosecuting police officers who refuse to carry out eviction orders.

• Resolving disputes on mortgage securitization and approved penalties for violations of the rules.

The mortgage law has now been in the pipeline for almost a decade. A draft of the law was approved in 2011, which paved the way for its approval by the government.

KSA Mortgage Law – In the PipelineExpected to boost house sales by 50%

Saudi GDP growth in 2011 reached 6.8% , GDP expected to be 3.8% in 2012 and 4.4% in 2013 with inflation near 5% (World Bank predicts 2.5% average global growth rate)Current population is 27.1 million with an annual growth rate of approx. 3.2%.Ninth Development Plan announced in 2010 with spending of $385 billion in 2010-2014

58

Bahrain Affordable Housing Support System Bahrain - Ministry of Housing & Economic Development Board Sources - 2011

59

Bahrain Mortgage Guarantee System (MGS)

Government

• Switches roles from being a provider to a facilitator.

• Serving more People with the same funds

• Continues to supports its citizens

Financial Institutions Financial Institutions

• Reduces inherent risk (credit & liquidity) making it more attractive for banks to lend.

• Mortgage Guarantee Fund Guarantee mechanism provides a clear exit for the lender (in lieu of foreclosure)

• Access to liquidity via securitization / the eventual establishment of a secondary market

• Reduces inherent risk (credit & liquidity) making it more attractive for banks to lend.

• Mortgage Guarantee Fund Guarantee mechanism provides a clear exit for the lender (in lieu of foreclosure)

• Access to liquidity via securitization / the eventual establishment of a secondary market

BorrowersBorrowers

• Low income families’ benefits unchanged and ability to access immediate liquidity

• Middle income families have access to funding with the guarantee

• Low income families’ benefits unchanged and ability to access immediate liquidity

• Middle income families have access to funding with the guarantee

Entities & Benefits of the Mortgage

Guarantee System

61

Multi Mortgage Agencies Cooperation

62

The scale and nature of housing ecosystems are such that the public and private sectors must act in concert if sustainable improvements are to be realized. Only solutions which align public and private capital can reliably achieve system-wide outcomes. Ultimately, this means that 'hard' (market rate and terms) capital must be strategically blended with social needs. – AHI 3rd Core Principle

Needs for PPP• Weak mortgage regulation & markets in the region – What to do in case of

Developers or Home Owner default? Laws are still in the making.

• Developers housing over stock from previous boom – Will they take the market risk again in affordable housing ? Likely NO.

• Weak Financial markets in the region – Banks thrived thus far on retail personal banking & credit cards. Will they transform to reasonable interest project finance? Likely YES with Government off take agreements / mortgage guarantees.

• Weak Property Development Model in the region – With off plans sales and high margins of the market ending, Can Regional Developers survive the open market without Government back up – Likely NO.

• Loan Securitizations – Still a big unknown – Government Funds needed in the absence of loan market funds.

PPP’s As Sustainable Housing Solution

63

PPP Program Integrated Approach

No perfect design for regulation and institutions

Changing market condition needs to be reflected in PPP framework by modifying and updating regulatory and institutional design

Competition & transparency principles need to be kept

Government’s proactive use of vision, policy & sustainability in market creation is important.

Taxpayers / users engagement in PPP dialogue

Supporting local financing institutions / local development funds is key.

In house skill within the government is of crucial importance to build capacity , to monitor and create PPP pipeline projects

Visi

on – Str

ong

Political

Will

Acc

ept

ed

By T

he

Public /

Us

ers(E

mpower

ed

Public)

Institutional Framework – Building Capacity, National Policy

Legal & Regulatory Framework – Clear & Friendly Business Environment To PPP’S . Oversight Procedures - Transparency, Competition, Monitoring

Viable / VFM PPP Projects Pipeline

64

PPP POLICY AND LEGAL FRAMEWORKS & SUPPORT

Comprehensive PPP Law – Investment , Funding , Subsidies & Technical (PPP Contract Type/s) Legal Powers to contract out the services Dispute Resolution Mechanisms – Independent Chamber Open & Transparent Public Procurement / Tender Law Clearly Defined Gov. / PPP Unit Role in – Budgeting Allocation / Oversight , Progress Monitoring & PPP Projects

Approvals and Contract Management – performance-linked payments/penalties.

Housing Sector & Land Titles / Title Transfer Law Private / Public Land Acquisition Law Easements / Way leaves / Permits for Infrastructure PPP Implementation Structures – Technical Public / Private Interface Offices.

Integration of PPP into Public Procurement w/ Multi Stage Financial & Scio-economic Appraisal Procedures (Rationale for use of PPP’s (Business Case) , Suitability & VFM Assessment) , Guidelines for PPP’s Pre-qualification , Tender and Bidder Selection.

Standardized PPP Bidding Documents Unsolicited Bids Procedures. Standardized PPP Contracts / Asset (Facility) Type or PPP Model / Structure

Information dissemination – data, networking, training Guidance – model contracts, tools, case studies Facilitating functions – political/advisory support, funding

Polic

yLe

gal

Supp

ort

Fram

ewor

k

65

Guidelines for Social PPP ProjectsPPP Test

Affordability for the Public Sector & desired gains Financially viable for the Private Sector Appropriate Risk and Reward Balance for Public and Private Sector Public Sector - value for money (VFM – True Cost) Verses traditional PSC

Public / Government / Affordable housing (usually BOOT)

Private Partner to build, lease and maintain for a set period – e.g. Malaysia, GCC ( KSA, Oman, Bahrain)

Government agrees to minimum lease for a set period / off take and / or allows co-developments on site

Hospitals (usually DBOF) / Prisons (usually BOT)

• Government provides the doctors, nurse ,wardens etc and operates the core services – e.g. Lesotho, Australia

Schools/ Sports Venue / Shopping Malls (usually DBOF)

• Government runs core services of teaching / tutoring or agrees to use the facility for an agreed period

66

Input ContractsGuaranteed long term supply of inputs / feedstock

SPV / Project Company (Borrower) .Made up of Project Sponsors - Equity Investors.

Off TakerGuaranteed revenue stream to project. Can be the Public Contracting Authority or MoF

Contractor(s) ,EPC - Risk transfer – Turnkey Contract , penalties , bonds.

O&M Contractor(s)Pass down of penalties for availability payments , performance, etc.

Host Government / Public AuthorityLegal /regulatory framework & support functions

Typical PPP Model

Banks Syndicate

Equity Investors

Interface Contract

Advisors – Legal , Technical & Financial

Risk Transfer

3 – 5 Years 25 - 30 Years ( Risk by Project Company)Risk Duration

Equipment SupplierWarranties & Supply Agents Agreements. Can be bundled in EPC

Arranging Bank

Hedge ProvidersCurrency & Interest Rate, Multilaterals, Political Risk Insurers

Contracting PPP Authority (is)

67

What are the steps?Project Preparation – Funding Approval

Service Provider Selection – Technical

RFP & Bid

Contract Management -

Financial

1. Service Need

Output specifications

2. Option Appraisal

Report on EPC / PPP options, VFM

3. Business Case

Affordably/public interest

4. Project Dev.

Team, Governance,

Timeline, execution plan

5. Bid Preparation

EOI/ Short listing, RFP

6. Bid Evaluation

Preferred bidder selection

7. Final Negotiation

Signing contract, financial close

8. Contract Mgmt.

Construction, monitoring,

Dispute settlement,

communications and finally commissioning

Project/ Funding Approval

Bid Doc Approval

Project Finalizati

on Review

Steps in PPPs Procurement - PPP Project Life Cycle

1. Prioritise Key Project Objectives

2. Agree Project Concept3. Obtain Stakeholder Approval

10. Turn Over

Upon expiry of the concession agreement

9. Renegotiations

Due to changing conditions

68

The Limitations of the PPP Model for the Public Housing Sector

• Affordable Housing is intrinsically different from other types of PPP as mortgage laws , government guarantees to developers and land ownership issues are still evolving in the region and are subject to various considerations and are uncertain if clarity can be established once the regulations are passed.

• The relatively weak financial and construction local markets to undertake such projects whereas earlier lessons from the property development boom in the region demonstrated structural problems in the approach that can not be entirely pinned on the market down turn. It is therefore, unrealistic to assume that the regional Developers / Contractors can bundle JV ‘s / long alliances in areas of financing, facility management and assume the usual risks in PPP’s.

• Speedy delivery of Mega Projects are needed to accommodate the severe shortages in the region that are linked to socioeconomic stability. The luxury of a long drawn PPP bidding process simply is not there. Thus a need exists to explore other variations of PPP Models that considers the time frame, the Developers / Contractors strengths in the region and the local condition of the financial markets.

Adpoted PPP Model for Housing – BOOT (or BOT) & BTO (or BT)

Tranches of Structured Finance & Subsidies for PPP Housing

Senior Loan • Capital market mortgage at affordable terms

Loan of First Loss • Low interest loans of International Financial Institutions

Low Interest Loan / Grant

• Public subsidy as compensation for service obligation of general economic interest

Equity & Cross Subsidy

• Equity from shareholders or tenants, cross subsidies.

Land / Infrastructure

• Free of charge, in concession or at low costs from Municipalities / Government

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Project DeliveryHome Owners

Banks (Loan)

Developer / Construction

Company

Operating / FM Company

Public SectorAuthority

Finance

Project

Public Sector

Private Sector

PPP Recommended Model for Social Housing

One model that can explored for the region in the Affordable Housing Sector is the German Forfeit Model ( Build Transfer Model) in which the Developer / Contractor pre-agrees with the Government Unit / Contracting Party to transfer / sell his rights in the Project once completed to the financing institution, thus the relationship becomes between the Government Unit and the Financers and the Developer / Contractor is released. Known also as the pre-agreed lock in period model. This model guarantees that the Contractor performs for him to be released later on.

Mortgage Payments

Availability Payments(Performance)

BT (O) German Forfeit Model, Contractor Released

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Reducing Transaction Costs & Securing Competitive Bids

Planning Process

- Planning requires time and money - worth the investment

- Fund supporting project development – needed.- Cross sector dialogue including Treasury - required- Check and balance – are key

Market Testing

- Testing the interest of market is crucial- The market condition can impact risk sharing- Transparency should be kept

Procurement Method – Prioritization Solicited or unsolicited proposal Prequalification, 2 envelope bidding Award criteria (VFM , PPP Versus PSC ) Time management

• Managing the capacity and supply chains of the local and regional house building market to develop such a large scale developments.

• One delivery model cannot cope with the volume of housing. Multiple procurement delivery model processes are needed to meet the supply / demand equation.

• Developing the housing requirement both on time and within budget while Improving the quality of construction and in particular the professional qualifications of contractors.

• Enactment & Implementation of mortgage laws to settle and an active lending market.

• Mortgage law does not necessarily solve the issue of affordability for mid to low incomes, thus alternative programs needed

• Real estate / Housing sector stakeholders must realize that until housing is made available for the bottom masses housing crisis can’t abate.

• Designers / developers should design creative “economy” housing models affordable and accessible to low income market.

• Government to enable private sector to lead rather than play direct in that sector.

• Government should encourage housing microfinance through legislative institutional framework development.

• Banks, real estate players/ builders/ building materials suppliers should club/ syndicate to tackle both the Mortgage & Microfinance markets.

Conc

lusi

ons

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LOAY GHAZALEH – ADVISOR – UNDERSECRETARY OFFICE

MINISTRY OF WORKS - BAHRAIN