Asia Pacific Real Assets Leaders’ Congress 2021

The lack of affordable housing across the world has always been evident – but it has been a problem that the world has dragged its feet to address. That is till the pandemic struck. Overcrowding in informal housing created the perfect hotbed for infection surges and the harsh realities of social divides reverberated beyond its socioeconomic implications.

As the pandemic stretches into its third year, Knight Frank India’s report – Brick by Brick: Long Term Capital to Fund Affordable Housing for All – launched at APREA’s Asia Pacific Real Estate Leaders Conference, serves as a stark reminder of the world’s housing conundrum and the pressing need for sustainable solutions.

The demand for safe affordable housing is growing across the world, not least in the region’s developing markets. “For every nation and the world to really grow into an economically productive place, housing challenges have to be addressed,” said Shishir Baijal, Chairman and Managing Director, Knight Frank as he introduced a panel discussion that was held in conjunction with the report’s release during APREA’s conference.

He noted a stark statistic in the report, which estimated that about US$5.8 trillion of investments is required to meet the current demand for affordable housing globally, of which India needs over US$600 billion. The panel discussion, helmed by Saurabh Mehrotra, Executive Director, Valuation and Advisory for Knight Frank India Executive, and one of the report’s principal authors, puts these issues into perspective and illuminated on the way forward.

Here are the key takeaways.

Private Capital Integral to a Sustainable Solution

The onus to provide affordable housing has traditionally fallen on the shoulders of governments but this has become untenable in the face of rapid urbanization. Shishir noted that despite policy efforts by governments globally, the population living in substandard housing continues to rise as the supply of affordable housing has failed to keep pace with the migration of people in search of economic opportunities.

Globally almost 325 million households continue to live in substandard housing. Saurabh noted that while policy initiatives, such as buying assistance and regulatory reforms, have been effective, it remains inadequate to the development of a full-fledged, well-functioning marketplace that is critical for the sector to be sustainable.

“The biggest bottleneck for the sector is availability of patient long-term capital. If we really want to bridge this huge gap of 325 million housing across the globe, we would need in excess of US$5 trillion to move into the sector,” he said.

Mainstreaming Affordable Housing

Miss Anita George, Executive Vice President and Deputy Head of CDPQ Global observed that a key part of the solution lies in mainstreaming the asset class. She drew similarities to the renewable energy sector, which two decades ago were also considered niche. However, today it is a sector that has heavy private sector involvement.

“Renewable energy as an asset class got mainstreamed when it became profitable. So, the fundamental issue for us is how do we get the affordable housing sector to become profitable and therefore attract capital from both long-term investors as well as investors who can understand the push for making this a mainstream asset class,” she observed.

Vipul Roongta, Managing Director and CEO of HDFC Capital agreed as he echoed Anita’s thoughts. However, he believes there is now enough interest in the sector as there are clear signs of investment commitments emerging.

“It need not just be something which goes under the corporate social responsibility initiative or even a public-private partnership. It can be a purely private initiative and still make the returns at the scale at which would merit getting any of the big players interested in this asset class,” he opined.

Removing Demand and Supply Barriers

However, for the affordable housing sector to be viable, challenges at both ends of the demand-supply equation must be resolved to bridge the needs gap, especially in developing economies. These challenges reflect the market inefficiencies that are plaguing the sustainable development of affordable housing globally.

The report identified supply side challenges, which includes not only regulation linked anomalies, such as costs associated with land acquisitions, securing a marketable title as well as zoning laws, but also infrastructure connectivity as it can impact the viability of a development. Demand side challenges includes difficulty to access formal financing by low-income households.

Saurabh noted that the sector “requires different attention”, from the operating structure to the set of challenges experienced at each stage of development. All participants agreed that robust and efficient regulation, such as streamlining approval processes, is vital for the sector to be attractive to private capital; access to financing for the informal workforce also has to be improved.

“The focus is to explain and communicate to investors on this asset class, the ability for it to earn a right to be in a portfolio through returns, through impact, through ESG and all of these factors,” said Anand Unnikrishnan, Managing Partner, NIIF Fund of Funds.

Ample Opportunities to Deploy Capital

Vipul noted that for affordable housing in India, it is clearly a supply side issue as demand is readily supported by India’s massive population. He pointed out that while demand for affordable housing in India is estimated at US$600 billion, supply across the residential sector is at just US$15 billion of which only a fraction is in affordable housing.

Anand believes that there exist huge opportunities to deploy funds in the sector. He identified private commercial capital, development capital and concessional finance as three major types of capital that would be motivated by scale in the affordable housing sector. As each class of investors would have different returns expectations, it would be critical to cater to the demands of each of these.

“If different types of structures are offered to these investors, show them that what they need is possible with flexibility and be innovative in how they are structuring products, there would no lack of capital for affordable housing,” he said.

Managing Costs and Margins Remains Key

One of the key challenges in attracting private sector participation into the sector are the compressed returns and tight margins. Ashish Singh, Partner, Actis, estimated that in the affordable segment, returns can compress to between 10-20%. However, if there is certainty of returns to investment, attracting capital will not be a major barrier. In this case, execution challenges must be ironed out.

“That's where you must have very strong discipline on both timelines and cost of delivery and also very good predictability in terms of demand,” he said.

He further elaborated that investors will not tolerate delinquencies on payment or delays in approvals and will demand a reasonable cost of entry. In this case, there is a crucial role that governments can play to facilitate the process. He also highlighted that the development process has to be underwritten.

“There is a lot of risk that must be batten down and ring fenced for the segment to be profitable and predictability is key. The returns must also be commensurate with risk. If the returns are compressed, then the risk must be compressed to find the capital that can unlock the opportunity,” he said.