Affordable housing: opportunities for the private sector
Having focused on the potential progress of Public Private Partnerships (PPPs) in the previous article, this article will provide an overview of affordable housing opportunities focused on the private sector within Sub-Saharan Africa, highlighting the investment potential within this property market
Through a series of articles, JLL’s Strategic Consulting team have been investigating the key issue of the affordable housing segment in Sub-Saharan Africa (Article 1, Article 2, Article 3, Article 4). As Sub-Saharan Africa has one of the fastest urbanisation growth rates in the world, the demand for affordable housing is on the rise. Developing affordable housing units is not only a priority, but an opportunity for sustainable strategies.
Having focused on the potential progress of Public Private Partnerships (PPPs) in the previous article, this fifth article will provide an overview of affordable housing opportunities focused on the private sector within Sub-Saharan Africa, highlighting the investment potential within this property market. While our intent is to cover the whole of the Sub-Saharan Africa region, the countries upon which we have focused our analysis are primarily South Africa, Kenya, Nigeria, Ghana and Tanzania. In these countries, not only has the residential asset class, but all the “traditional” asset classes have become saturated. As a result, private developers are increasingly struggling to achieve returns over 10-15% on real estate projects. However, developers and investors would be wise to pay attention to the strong and long-term demand for affordable housing which represents a largely under-serviced segment of the residential market, for both rental and purchase options.
The potential of the affordability segment, a large untapped market
This demand for affordable housing has been generated by the steadily growing lower and middle income populations of South Africa, Kenya, Nigeria, Ghana, and Tanzania, of which, in 2015, the Center for Affordable Housing Finance in Africa (CAHF) estimated an annual deficit of 178, 000 units, 200,000 units, 700,000 units, 120,000 and 200,000 units respectively.
The supply of affordable housing units by developers has been highly limited and is insufficient in resolving the acute housing deficit in the afore-mentioned countries. The estimated housing shortage that is currently required to be filled, varies widely across the continent. For instance, it is estimated that the current housing deficit stands at 17 million units in Nigeria with funding requirement of USD 363 billion, and at 1.7 million units in Ghana, which would require a funding requirement of USD 51,8 billion (CAHF, 2016).
The affordable housing market in Sub-Saharan Africa presents potential for both international and local investors, the private sector therefore has the opportunity to tap into this significant demand for quality homes at affordable prices.
The challenges for affordable housing developments
A minority of investors and developers are recognising the opportunity to invest in affordable residential units. Vacancy rates are consistently very low in the affordable segment and high absorption rates have been observed for affordable housing schemes. Despite this, only a few investors and developers are venturing into the segment.
Some of the challenges that investors have been facing thus far include:
- The absence of data (on housing quality, prices, land ownership, property transactions)
- The high cost of land and infrastructure
- The costs of housing construction along the production line
- The barely inexistent mortgage markets (in order to enable an affordable mortgage for target purchases and secure stable interest rates)
As the affordable housing market grows in Sub-Saharan Africa, the support of the public sector will likely streamline related processes, particularly as a result of the general presence of political impetus behind developments of this nature. Early-stage investors, which integrated themselves into this ecosystem, will likely reap the benefits as the segment matures.
- It is easier to enter in affordable housing markets in countries where the government is involved through dedicated housing
- Innovation is key to business sustainability, especially when it comes to construction methods and alternative construction materials (article 3 highlighted how new construction technology is playing a role in reducing construction costs).
- Offering units that contain quality finishes helps maintain a good state of repair and improves the future capital value growth of the assets for the investors playing a role.
A new business model to develop successful projects
In the affordable housing segment, governments have a key role to play alongside the private sector, such as the implementation of Public Private Partnership (“PPP”) structures, which were discussed in article 4. Additionally, public policies, which encourage and sponsor investments in affordable housing are effective facilitation tools. Public policies are still evolving and adapting to the current condition of the affordable housing market. Governments are indirectly alleviating the housing shortage, by focusing on creating an environment conducive to the pursuit of affordable housing developments.
Numerous governments have adopted a series of incentives to support private investments in affordable housing. The public sector in South Africa has been encouraging private investors by offering a series of incentives to support their investments, such as a reduction of corporate tax, subsidies or an infrastructure rebate.
In 2017, one of the largest banks in South Africa accepted the affordable housing challenge. The company invested approximately USD 10 million into an affordable housing project in Cape Town, developed by a private developer on behalf of a social housing association. The construction of the first phase began in 2015, this development will add 630 dwelling units to the affordable housing market, which are already fully booked. Thanks to a PPP structure, both the bank and the developer were assisted by the Western Cape Provincial Government and the Social Housing Regulatory Authority. The public sector support included a land grant and subsidies reserved for the development of affordable housing projects. Further, the housing units delivered were sustainably built with a high level of resource efficiency. As a result, this program is the first affordable housing development in South Africa to be preliminary certified “EDGE Green Building” by the Green Building Council of South Africa.
The Sub-Saharan affordable housing sector is waiting for large-scale private investments.
Through effective collaboration, the public sector will be able to address the current severe housing deficit whilst the private sector, with high volume construction, is able to see a return on investment in this under-serviced space.