Investment in Affordable Housing and Housing Microfinance in Africa

Barbara Hewson

CEO, New Urban Finance Facility for Africa Fund Manager: NewLine Investment Advisors

144 East 44th St. New York, NY 10017 USA

bonnie.hewson@newlinecapital.com barbarachewson@gmail.com

Focus on Africa

Investment opportunities to stimulate real-estate related lending in Ghana, East Africa, and South Africa, based on:

– Recent past investment experience

– GDP growth

– Relatively stable politics

– Rising household income

– Government support to expand affordable housing and housing finance

– Capital markets exit potential from investments

What attracts investment in real

assets and related lending

• Rising income levels

– Increasing disposable income and purchasing power

What attracts investment in real

assets and related lending • Housing demand by end users, with local FI’s seeking to serve

end users in this segment

0%

20%

40%

60%

80%

100%

<$2,

000

$2,0

00-5

,000

$5,0

00-1

0,00

0

$10,

000-

20,0

00

>20,

000

Composition of African Consumption by Household Income Bracket

(% income based on 2005 PPP dollars)

Other

Telecom and other

serivices

Transport

Housing

Consumer Goods

Source: McKinsey, Lions on the Move

Total Consumption Demand

• Africans spent US $860 billion on goods and services in 2008: – 35% more than the $635 billion spent in India, – Slightly more than the $821 billion spent in Russia

• If Africa maintains its current growth trajectory, consumers will buy

$1.4 trillion worth of goods and services in 2020 – A little less than India’s projected $1.7 trillion – More than Russia’s $960 billion

• Housing expenditures in particular are projected to grow by

approximately $100 billion from 2008 to 2020 (to $242 billion), at a compound annual growth rate of 4.5%

(McKinsey and Harvard Business Review data)

Constraints on Investment

Cost or lack of availability of:

• Public infrastructure

– Transportation

– Basic services: water, sanitation, electricity

– Urban planning (streets, schools, shops, other amenities)

• Land or secure tenure property

• Building materials

• Construction finance, takeout finance

Constraints on Investment (cont.)

Capacity issues • Limited capacity and capital in real estate development sector

outside of South Africa • Housing support services unavailable for progressive home

improvement – House plans, architectural and engineering advice, building code

compliance advice, bulk purchase options for building materials

• Community organization gaps and gaps in self-help savings programs

• Weak support or ties with local, regional, national government programs

• Lack of coordinated use of subsidy and donor funding

What should policy makers do

• Focus on where the needs are: urban as well as rural

• Support housing markets in a holistic fashion – Integrating infrastructure development, community-based urban

development, building codes and planning and urban design, public and private funding sources, subsidy for the neediest, and progressive home improvement as well as green-field development schemes

!

What should policy makers do • Support non-standard housing finance solutions, because

mortgage markets reach only the top few in Africa

• Promote growth of well-regulated FI’s lending to real estate developers and housing microfinance borrowers

Source: Centre for Affordable Housing Finance in Africa

What investors should communicate

• Affordable housing projects need developmental support, solid financial analysis and project planning to be bankable

• Housing microfinance must be designed to reach those with informal incomes

– While ensuring that financial products are suitable for and affordable to target borrowing population

• Investors require a clear investment structure, good project management and predictable returns – for affordable as well as high end housing projects

Role of local financial institutions

• Banks in Africa have higher liquid assets and lower lending rates than banks in other regions, with the exception of the Middle East

• Possibility for expansion of lending and consolidation in banking sector; and bringing MFI’s into formal banking

!

Role of Catalytic Impact Investment

• Private equity/catalytic investment role in increasing availability of construction finance, rental housing finance, takeout finance through local financial institutions

38%

43%

15%

4%

NUFPor oliobyTypeInvestment

Project-relatedInvestment

BankTierIICapital

RegionalProgramEquity/1stLoss(IFC/KfW)

CashReserve

74%

26%

Por olioInvestmentsbyPopula onImpact

Micro

Mixed

Capital markets role

• Financing at regional and national level for: – Financial institutions,

– Building materials suppliers

– Real estate development companies

– Other service providers

• Exit for private equity/catalytic investment

• Asset-based funding source – Structured finance

– Securitization

Capital Markets role and exits less likely in smaller countries

• Making consolidation through regional M&A more likely

Investment example: Ghana

Investment through local banking partner in construction finance and takeout finance of mixed-use low-income low-rise building Shop rentals and toilet and shower block revenues lower cost of units to low-income purchasers Up to 50% of the construction cost can be financed by a local commercial bank. A combination of subsidy and community savings is needed to finance the balance.

Investment Example: Uganda

Development of savings and microfinance lending program for low income communities through catalytic capital provided to local banking partner Local bank provides construction and take-out finance for qualifying families Families enroll in savings program to build credit history – with local bank or participating MFI’s Local government provides infrastructure National housing ministry provides SME fund for entrepreneurs, job training program, and subsidized land for construction

Investment Example(s): South Africa

• Refurbish inner city rental units

• Reclaim informal settlements

• Add lower income segments to greenfield real estate development projects

• Increase point-of-sale lending at building materials suppliers