Whenever there’s a huge systemic problem, the causes are rarely traceable to just one factor. It is usually the case of multiple issues stacked on top of one another. Therefore, the solutions to these problems have to be equally multi-faceted and dig to the roots in order to stand a chance of making a dent.
In 2015. The United Nations released a report stating that the average cost of a 2 bedroom home in Sub Saharan Africa is around $50,000 and only about 5% of the population in Africa can afford the homes that are currently available for purchase.
They also stated that only about 5% of adults took out a mortgage from a formal bank in the past year.
These are scary numbers for a continent on track to hit 1.2 Billion residents by 2050 and with a current housing deficit of around 56 million units across the continent, it is obvious that we have a crisis on our hands which will only get worse if we keep moving at this pace.
Some of the causes of the dysfunction in the housing sector in Africa are;
- Lack of access to appropriate financing for affordable housing: Institutional financing for property development on the continent tends to be directed towards luxury and commercial development because of the perception of lower risk that these types of properties have. This means that affordable housing developers who need specialized kinds of financing are effectively starved of much-needed funds and has the direct effect of reducing the supply of affordable housing available.
- Poorly developed consumer financing system: The vast majority of people who need to buy a home in Africa have to either pay the full amount upfront or break it down into monthly payments for a maximum of 3-year timeframes, the monthly payments are usually as high as $500 monthly, another very high barrier for most of the people who live and work on the continent.
- Fragmented and irregular regulatory system: The processes for obtaining regulatory approval for construction is currently difficult and wildly differs across various jurisdictions within the same country. There is also considerable corruption in the process and this negatively affects the ability of small developers to successfully obtain permits or makes it incredibly expensive even when they can.
- Flawed land titling system: In most African countries, the process for titling and registering land is still very flawed and irregular, leaving a lot of the land open to disputes. This is greatly discouraging for small developers who don’t have the muscle to push through these land titles successfully.
By far the biggest issue affordable housing developers face in the course of their work and the biggest barrier to increasing the supply of affordable housing on the continent is lack of access to appropriate financing.
The financing for affordable housing has to be fit for purpose, i.e the financier must understand the nature of the project being undertaken and commit to patiently wait for project maturity before the payback period begins. They must also understand that the returns are dependent on market conditions and cannot be as much as expected from luxury developments.
Currently, affordable housing developers finance their projects through a couple of ways;
- Off Plan sales
- Bank loans (Non-Construction loans)
The challenges with these financing methods are that they are not very scalable, so the developers can only build a limited number of units at a time using these methods.
Property development is one of those sectors that benefit heavily from economies of scale, so the more homes a developer can build within one location, the less the cost to him overall and potentially the less he can charge the end consumer.
And while it has been established that traditional financiers are reluctant to finance affordable housing, they simply cannot be excluded from a sustainable solution to the housing crisis.
To their credit a couple of commercial banks, government agencies and developmental organisations are beginning to develop innovative solutions to aid financing for property developers, unfortunately, these funds seem to be finding their way into the hands of the usual suspects who end up using them for upper-middle-income housing.
Crowdfunding for affordable housing
An emerging means of financing housing projects in West Africa is crowdfunding, with the rise of Crowdfunding platforms like Cofundie, Crowdyvest, Coreum, the growing middle-income demographic can now access quality real estate deals which were previously the exclusive reserve of financial institutions, wealthy individuals and investment groups.
Property developers can raise small amounts of money from large groups of people, these funds can then be directed towards construction, when these homes are sold or rented out, everyone can enjoy the profits.
There are however some challenges to this method of funding home development;
- Lack of investor education; Through crowdfunding, a developer is expected to raise money from anyone who has the funds, however, there is still a huge knowledge gap for the average potential investor, who is not aware of the nature of the investment being made and the expectations and associated rights, as well as how to read the investment materials and brochures before making a decision. This could become a problem when challenges arise and could lead to unnecessary panic on the part of the investor.
Also, small scale developers cannot effectively carry out education campaigns due to their limited resources thereby limiting their access to this method of raising funds.
- The difficulty of scaling; As mentioned above, economies of scale are very important for affordable housing construction. Due to the unpredictable nature of crowdfunding, developers would find it difficult to raise the funds necessary to carry out large scale projects.
- Management difficulty; Developers would find it difficult to manage a large number of financiers as they are just not set up for that. Poor management could affect the profitability of projects and reduce the confidence of investors to participate in future projects.
The Role of Blended Financing
A new approach towards bridging this financing gap, and beginning the journey towards solving these problems is blended financing. i.e taking the different forms of financing and applying them towards solving the problem strategically.
“Blended financing is an approach to financing projects in a way that brings in multiple types of investors or financiers”
A key element for financing is diversifying risk. Decision-makers typically work to ensure that the risk-reward balance tilts solidly in favour of reward after all the risks are clearly analysed.
Different types of financing have different goals, uses and expected outcomes, blended financing will allow property developers to take advantage of these different financing methods to increase output and capacity while still allowing the different financiers to reach their goals and targets which will, in turn, ensure that they recycle and even increase their investment in future projects.
By blending the different financing methods, stakeholders can ensure that property developers have access to the kind of financing they need.
Some of the key characteristics of blended financing are;
- There must be a financial return
- Must be addressing a key developmental issue
- The investment must be catalytic
An example of a blended financing structure for a large scale affordable housing construction project would look like this;
- Developer contribution: Typically between a minimum of 15-20% of the total construction cost, this ensures that the developer has some skin in the game and can come in the form of labour contribution to the project, as cash contributions or a combination of both.
- Construction loans: Either in the form of a bank loan or as a form of advanced mortgage tied to the end consumer but provided in advance to the developer to use for construction. This is ideally up to 20% of the total project cost. This helps to de-risk the project by providing off-takers ready to move into these homes immediately after construction reducing carrying costs for these properties.
- Development finance: Raised from developmental agencies to whom the main goal is not financial return but creating impact. Usually up to 30% of the total project cost.
- Crowdfunding/Syndication: Money raised from private investors who have a shorter-term outlook but less stringent payback conditions. Around 30%
All these different sources of financing have their different objectives and putting together an effective blended structure requires skilful navigation of these competing needs to ensure that all stakeholders can achieve their goals for being part of these deals which in turn ensures that they recycle and increase their investment into future projects.
Other sources of financing could be;
- Government grants
- Impact investors
- Family offices
- Off Plan sales
- Investment groups etc
At its core, Blended financing does 2 things;
- De-risk investment
- Increase the availability of funds for development
And this might provide the best opportunity to direct financing towards the SDG’s creating sustainable solutions for them.
Albert Einstein famously said that “We cannot solve our problems with the same level of thinking that created them.”
The problems we are looking to solve for the SDGs are systemic issues that have been created through years of dysfunction and mismanagement, if we stand any chance of achieving these goals by 2030, it’s important for us to think critically and creatively about the root causes of some of these issues and apply the right solutions.
Blended financing is an approach to solving the housing crisis in Africa while not a silver bullet, could be the much needed shot in the arm to get us on the way to bridging the financing gap that exists in the sector.
To learn more about how Cofundie is applying blended financing structures to solve the housing crisis in Africa, send an email to email@example.com.