Urbanisation and growing populations incentivise emerging markets' governments to solve housing deficits

 

Urbanisation is a mega-trend redefining contemporary life in both developed and emerging markets across the world. According to the UN, in 1950, 751m people lived in urban areas; however, by 2018 this number had risen to 4.2bn, equivalent to roughly 55% of the world’s population. By 2050 the UN estimates that this figure will rise to 68%. This growth is likely to be disproportionately concentrated in the developing world, with high rates of population growth and urban expansion in sub-Saharan Africa, the Middle East and Asia. China, India and Nigeria alone are expected to account for 35% of urban population growth between 2018 and 2050. Against this backdrop, governments are under pressure to deliver a combination of safety, security, wealth and opportunity for their urban citizenry.

Growing Problem

Access to housing is an important determinant of quality of life and human welfare. US consultancy McKinsey estimates that 330m households worldwide suffer from a lack of access to affordable, quality housing — a number that could increase to 440m by 2025 if sufficient action is not taken. Therefore, without concerted policies to meet the growing need for housing that is both socially acceptable and financially sustainable, an estimated 1.6bn people will find themselves living under unaffordable, informal and inadequate conditions by 2025.

Social Issues

The scale and scope of the housing challenge will be felt most acutely in cities where slum populations have skyrocketed in recent decades. An estimated 880m people could be categorised as slum dwellers, according to a 2016 UN report. Unaffordable and substandard housing closely intersects with a range of social challenges, from petty crime and gang violence, to income inequality and environmental degradation. If not responsibly managed, rapid development and the accompanying influx of foreign capital can magnify disparities in housing access and affordability by drastically driving up urban real estate prices. Speculative investment in rapid-growth markets can price migrants and lower-income residents out of the formal housing market and into illegal, poorly built accommodation. Investment in affordable housing currently remains far below the level of public demand. Without trillions of dollars in new capital allocation to revitalise existing housing stock and accelerate the construction of new units, developing countries will struggle to meet the needs of urban populations, potentially excluding millions from the benefits of growth and development.

Strategies & Solutions

Governments generally rely on a number of mechanisms for delivering affordable housing. Although public housing provision remains a common approach, states are increasingly looking to the private sector to address housing shortfalls. Through public-private partnerships (PPPs) and targeted interventions, governments are deploying financial incentives and regulatory inducements to mitigate risk while encouraging participation from private firms. On the supply side, land costs can hinder the development of affordable housing. Expanding access to unused land and creating incentives for redevelopment through updated land-use regulations can help to lower costs, as can cracking down on speculative practices and opening up government-owned land.

Improving efficiencies in construction processes offers another avenue to reduce the cost of housing development. The World Economic Forum estimates that revising outdated construction regulations would significantly cut down on both production costs and housing delivery times. Additionally, companies who embrace standardisation will be better positioned to deliver cost savings. In particular, by relying on prefabricated parts developed off-site, builders can decrease costs and improve product quality. Incorporating new forms of ICT can also help lower costs by improving modelling and design processes, and making logistics systems and procurement management more efficient.

Access to finance remains a major obstacle for developers, as well as the end-users struggling to find an affordable home. Lower-income urban populations in developing markets often work in the informal sector and remain excluded from formal mortgage financing channels. A combination of measures, including subsidies for developers for the establishment of better collective savings programmes, government-backed mortgage banks and improved systems of risk assessment, can help drive down loan costs and reduce the lending risks faced by financial institutions. Furthermore, legal reforms that clearly delineate ownership, secure property rights and provide land titles can work in tandem with effective mortgage lending to pave the way for improved access to secure home ownership.

Asia

Indonesia, the country with the largest population and GDP in South-east Asia, has seen surging demand for housing among its rapidly growing urban population. Roughly 20% of housing stock is considered to be in poor condition, and the World Bank has estimated that Indonesia requires over 1m new units per year to address the deficit.

In response to these challenges, the government rolled out the One Million Houses initiative in 2015. The World Bank is supporting the programme, pledging to provide $450m in investment between 2017 and 2021. The initiative has already seen promising results; in 2018 the country exceeded the target of constructing 1m new affordable homes in a year for the first time, with around 50% built through government assistance schemes and 50% funded by private developers.

The Philippine government is also seeking to construct 2m new homes between 2017 and 2022. In February 2019 a new Department of Housing and Urban Development was created to address the chronic shortage of affordable homes. Part of the department’s mandate is to monitor and maintain records on idle land, housing stock and housing beneficiaries. Additionally, the department is responsible for control ling government-owned land, setting the scene for a potentially more efficient PPP environment.

Prefabricated housing is increasingly being used in Metro Manila to reduce construction time and costs. “The production costs are lower in the first place compared to traditional home building,” Robbie Antonio, founder of Revolution Precrafted Properties, told OBG. “Moreover, because of streamlined processes, the production timetable is between two and three months, allowing investors to recover their investment faster.”

Middle East

In the Gulf, Saudi Arabia has committed to build 300,000 new housing units and increase the level of home ownership from 50% in 2018 to 70% by 2030. To achieve this aim, the kingdom has mobilised a range of government entities and undertaken action on both the supply and demand fronts. In 2018 the country unveiled a series of programmes to improve access to mortgage financing, allocating SR18bn ($4.8bn) for loan guarantees to banks and SR12.5bn ($3.3bn) to assist homeowners in making down payments.

In Bahrain, the government has mixed state housing with PPPs to alleviate demand, establishing a finance scheme in 2013 that offers subsidised mortgages and incentives for private sector development. Residential construction, particularly in the affordable segment, will likely serve as a major catalyst for the sector’s medium-term growth, although Bahrain faces the additional challenge of land constraints. Mohammed Khalil Alsayed, CEO of Ithmaar Development Company, sees PPPs as a viable and efficient model which should boost investor confidence. “PPPs allow the government and the private sector to work together to provide affordable housing with greater efficiency than either party could achieve on its own,” he told OBG.

Africa

The largest economies in sub-Saharan Africa all face shortages in excess of 1m units. For example, Kenya faces a housing backlog of 2m units, while Nigeria’s shortage is as high as 17m. In recent years governments partnering with private firms have begun taking proactive steps to address the challenge.

In 2017 the Kenyan government unveiled a KSh2.6trn ($25.5bn) programme to develop roughly 1m new affordable housing units by 2023. In January 2018 the government also established a short-list of 35 private firms cleared to participate in the tendering process for a pilot project to build 8000 two- and three-bedroom homes in the town of Mavoko. “There are many opportunities for the private sector to work with the state to achieve their housing goals,” Mucai Kunyiha, chairman of the Kenya Property Developers Association, told OBG. “The public sector is in charge of the development of urban master plans, as well as incentives such as stamp duties and tax rebates. The government is also working to form a housing fund, a mortgage refinance company, and joint ventures and PPPs on public land.”

In Nigeria, the government launched a pilot project in August 2017 to construct over 2700 units in 33 states, with over 600 contractors involved. “We are now at the infrastructure stage, and many of the houses are already finished. We are also building roads across the country, increasing access and connectivity,” Babatunde Fashola, minister of power, works and housing, told OBG.

Latin America

In Mexico, where approximately 46% of the population live at or below the poverty line, the deficit of affordable housing remains a major policy issue. Large-scale government initiatives aimed at boosting housing supply have mobilised billions of dollars and seen the establishment of partnerships with private developers, the World Bank and global financial groups. Significant results have been achieved, with the overall housing stock increasing by 43% from 2000 to 2014. However, there is still more to be done; according to the World Bank, in 2017 roughly half the population still lacked access to formal, affordable housing.

Meanwhile, Colombia has demonstrated substantial progress in delivering affordable housing to its growing urban population. These projects are tailored to both lower-income citizens working in the informal sector and the burgeoning middle class. “Social housing has a double-sided impact: it creates activity in the construction sector while also allowing people who have never had a home to receive additional contributions as a subsidy to make housing credit more affordable,” Edwin Chirivi, vice-president of sectorial development at the Colombian Chamber of Construction, told OBG.

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Colombia 2019

Construction & Real Estate chapter from The Report: Colombia 2019

Cover of The Report: Colombia 2019

The Report

This article is from the Construction & Real Estate chapter of The Report: Colombia 2019. Explore other chapters from this report.