Solving the affordable housing equation

George Meltzer is a senior social specialist at FMO. He has researched the deeper and wider social and economic impact that affordable housing projects can have in developing countries.


In my previous position at FMO – director of investment and mission review – I came across several housing project proposals for developing countries. While most of these proposals were already complex, including factors such as land purchase, construction and mortgage potential, most developers were not placing sufficient emphasis on social aspects. I got the feeling that they were making the same mistakes as those previously made in developed countries. In other words, too much emphasis was being placed on financial viability and too little on environmental, social and governance issues.

I believe the benchmark of a successful, sustainable, affordable housing project is whether the residents still enjoy living there after 10 years. In my view, FMO needed to spend more time researching what people really wanted. The business case is clear: there is a tremendous need for housing for millions of people in developing countries. But while our projects were helping to meet demand, some of them weren’t fully meeting people’s needs. As a result, we found that some projects weren’t appropriate for their particular market, because the plot was too small or the design was not appealing. Consequently, demand for the finished product was much lower than expected.

My research into this subject – which is unique among DFIs – has taken me to Dhaka, Mumbai, Johannesburg, Cape Town, Lusaka, Kampala, Nairobi and a mining estate in Zambia. I have also been involved in discussions with (potential) clients, such as a pan-African housing construction finance fund, and residential and commercial real estate property developers. The following sections summarise some of my most important findings.

The value of a home
A house is much more than just four walls and a roof. It has many meaningful characteristics, such as location, building materials, design, number of bedrooms, etc. Also, in the sense of what a house means to people, there are many determining factors: shelter, community, status, access to education and health, safety and security, and a way to save for the future.

What housing means to different people is open to almost infinite interpretation. FMO is particularly interested in low-cost or affordable housing, however, for which the obvious common denominators are: economic, financial and social.

From an economic perspective, housing is important because it contributes to the GDP of a country: both directly, by using (unskilled) labour and including the production of building materials for the construction industry, and indirectly, by stimulating demand for furniture and other items. In addition, construction provides an opportunity to develop building skills and gives a chance to small building contractors.

Financially, constructing houses creates a demand for finance and the assets created can serve as a basis for capital markets. One could say that a house is a basic asset both for a household and the economy at large: a property can be leveraged to obtain credit which, in turn, can be used to generate further investment. By recognising that slum dwellers are not just poor people without prospects, but customers, entrepreneurs (suppliers) and workers with ambitions to better themselves, they can become a more active part of the formal economy.

Socially, the value of a home can perhaps be summarised by the concept of empowerment. Having a home, whether owned or rented, is key for a person to develop him or herself and his or her family. I use the terms ‘His and hers’ intentionally, since the gender issue is omnipresent. It is not difficult to understand what it means to a single mother to have her own secure place, and housing is an important part of the emancipation process. Since affordable housing is always produced in larger quantities, the end result is not only a home but a (new) community with the potential to develop new networks and structures for common development.

The bigger picture
There are many other ways in which socially responsible, affordable housing projects can benefit whole communities. For example, a home can be a base for social and economic mobility; a house with proper sanitation (drinking water, sewerage, etc.) contributes to public health; proper living conditions support and facilitate education, thus improving the quality of the workforce; and by reducing the gap in living conditions between different income groups, housing can ease tensions within society.

Furthermore, housing provides a great opportunity to create a more sustainable and better world. Large-scale housing, for example, increases density, thereby making use of economic, social and cultural infrastructure more efficiently. In addition, housing always involves the three groups of local government, business and consumers, thus reinforcing the social fabric and strength of an economy.

In sociofinancial terms, the size and long-term nature of a property investment provides opportunities to improve financial literacy; people build a credit history that can be used in many other financial transactions; and home ownership can serve as an investment for the long term and retirement.

Moving forward
All the information and experience I have gathered to date demonstrates just how developmental affordable housing projects can be, if they have a clearly defined set of goals, designed to meet the needs of the local population. Consequently, I have drawn up a list of recommendations based on my research. My aim is to make these recommendations part of a larger ‘developers toolkit’, including checklists of important elements for successful projects, at different stages and in varying situations.

Before I can do this, however, I need feedback on my research and recommendations to date. I need to know whether the parties concerned agree on the most important elements, whether anything is missing and whether the recommendations actually work in practice.

It is clear that developers in emerging markets can benefit enormously from each other’s experience, but they do not easily come together. While FMO made the right choice to make affordable housing one of its core activities, we still have to facilitate development and construction in more ways than through finance alone.

The do’s and don’ts of developmental housing projects

Study your market, get to know your customer and his/her specific needs. Take the housing deficit as an excuse to build just anything.
Check land titles, including rights of use, customary rights and previous owners. Assume that a clean title is enough.
Make a stakeholder analysis and start early consultation. Maintain relations with supportive NGOs throughout the project. Ignore or underestimate environmental and social impacts.
Design neighbourhoods with a mixed income composition.Benefit from cross subsidisation of infrastructure. Build for one income level only.It is financially unsustainable and socially undesirable to build low-income neighbourhoods.
Provide pre-sales coaching to your clients (debt counselling, responsible lending, homeowner training).Many will own a house for the first time. Ignore livelihood issues.
Promote after sales coaching (homeowners associations, estate management). Hire dedicated staff focused on community development.
Check for potential public-private partnership. Build without proper (urban) planning.
Build with low densities.
Build with inflexible architectural building plans.
Have take out finance in place. Rely on cash payment.
Keep time to delivery/market short.Reduce the impact of inflation and construction interest.
Be transparent. Promote a legal environment focused on the protection of owners.
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