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February 1, 2013 Issue 05
Help wanted: Global affordable housing developers
By David A. Smith When trying to change the world one housing ecosystem at a time, you migrate your activity to the ecosystem's pinch point – because whatever is most scarce is likely what is controlling the ecosystem's growth. In country after country, including recent work on Haiti, Iraq, and Nigeria, what we find is something precious yet surprisingly overlooked – namely, capable affordable housing developers. In terms of growing successful housing, you may have the hungry townsfolk (effective demand); you may have the land; you may have the seeds (design concept); and you may have the fertilizer (subsidy) and sunshine (financing). But all of these come to nothing unless you have the farmer (developer), with his plow and his ox to pull it (development company) – and the farmer and the ox need to be paid for their labors.
Those apartments aren't going to renovate themselves or targeting affordable housing face risks both greater and harder to quantify, including these: Entitlement/ zoning risk. Urban land becomes economically valuable only if it can be formally owned and legally built upon. In many countries, both land title and development entitlement are complicated because of: registries of deeds (haq's in Egypt) rather than of title; land registries in paper form, not electronic, making search and verification difficult; long-term leasehold interests (affermage in Haiti); tribal land or communally owned land (ejido in Mexico); or zoning limitations (agricultural land that cannot be practically rezoned for residential). Construction cost/ building materials risk. While homes are built mainly out of the prevalent indigenous material (cement, brick, wood), they also need rebar, framing, joins (e.g. flashing, soffits, fixtures) and finishing, some of which are usually imported. Supply chains can be disrupted or prices can spike. Infrastructure delivery risk. Urban infrastructure delivery usually crosses multiple government ministries, agencies, or levels: roads, electricity, water, sewage, may all be under different entities, budgets, priorities, and queuing procedures – and the developer may be unable to control or rely on any of them.
Those homes don't develop themselves
New or renovated homes are the output of an eightstep supply-side value chain: land entitlement and zoning; trunk infrastructure; site infrastructure; site layout and homes configuration; development resource assembly; construction; sales and offtake; and post-offtake operations afterwards. These value chains are challenging to link even in developed nations with robust and efficient ecosystems of law, finance, and building codes and their large populations of accredited delivery professionals). In emerging markets, ecosystem components may be inconsistent, ambiguous, or entropic, and reliable delivery professionals (real estate agents or brokers, mortgage originators, appraisers, title insurance entities, notaries, lawyers, and accountants) are scarce. Where the value chains function, it is typically only for high-end customers. As one moves down-pyramid, what is black and white becomes progressively grayer – and that means more uncertainty, and hence higher risk.
A business riskier than you realize
Real estate development is inherently a high-risk business; developers working in emerging countries
Developing sustainable affordable housing ecosystems worldwide www.affordablehousinginstitute.org
People sometimes conflate development with construction. just drop an e-mail to dsmith@affordablehousinginstitute. But what happens if the government simply refuses to honor its offtake agreement? In many countries. be decisive. Pity the poor developer? As it says in the Bible. and minimum sustainable profit margins. some developers do surmount all these challenges and become expert at creating homes. government is a virtually uncollectible counterparty because litigating against the government is a fool's errand. police. and money you can't have Just as the buyers need demand-side financing. costs of development capital. money drains away speedily. risk-specific. development finance is economically infeasible to arrange. a bank) willing to guarantee government's performance. To address offtake risk. developers need supply-side financing: land acquisition or construction loans. and there may be no outside party (e. The pricing updraft means that true affordable housing development always requires some element of concessionary capital or resources (e. each essay covers a promising development or trend from around the world. Contractor performance risk. Because urban housing is expensive relative to people's annual income. The result is a country with an oligopoly of a few megadevelopers regarded as “safe” by the big banks. have a reliable and complete exit. or government workers). the homeowners' ability to pay for the housing depends on the output of the eight-step demand-side value chain that begins with eligibility and ends with enforcement – and in many of these countries. AHI publishes Affordable Housing Innovations. Between land costs. goes the theory. while smaller and intermediate entities cannot get the project financing to scale their pipelines. Offtake risk. and most importantly. The talent updraft means countries need Mission Entrepreneurial Entities with equal emphasis on both economic and social outcomes. Development is knowledge-specific. that value chain too has some weak links. and as they gain experience.org. Help wanted: affordable housing developers . better computers. To subscribe. they attract interest from high-end large developers. housing developers may find their cheapest homes are still affordable only to the top 5% or 10% of the population – and high-end properties are often easier to do. more financial resources. do not bind the mouths of the kine that tread the grain. Payment and performance bonds are virtually unknown. many developers quite understandably start by negotiating a bulk agreement with a benefactor entity such as major employer or civil service (e. land). Page 2. that nation needs to incubate and motivate affordable housing developers. but is it 'effective demand' – enough people with the ability to pay the full purchase price to take up all the homes promptly when they are delivered? Demand-side risk.g. Affordable Housing Innovations 05. a new baby. Debt. in the realm of affordable housing finance. or when the old computer or car dies – when the no-longer-young executive can be seduced away by high-end developers offering nicer offices. The pricing updraft and the talent updraft Remarkably. adapt. they encounter two enemies of affordability: The pricing updraft. Government counterparty risk. Then there a personal moment – a marriage. If a nation wants to grow its affordable housing. if you can build. and if construction stops.g. The talent updraft. army. and faster development execution. equity. why isn't that all you need to be a developer? As the above list shows. In many countries Subscribe (free!) to Affordable Housing Innovations Every 4 to 6 weeks. The people who do it are talented and work hard. inflexible engineerwritten standards of infrastructure or site layout requirements. and placespecific. so the sponsors wind up using equity. then when the time comes to act. which is even more expensive and harder to find. As they do. Real estate development requires something of the mentality of a commando raid: plan scenarios endlessly.g. We know there is desire for housing. developers take and manage massive risks that construction contractors do not. move quickly.