A roof over our heads is one of our basic needs, yet for many it is out of financial reach. Affordable housing could provide a solution.
Public housing has received scant attention from investors so far. According to the Demographia International Housing Affordability Survey 2017, there are several unaffordable major housing markets including China (Hong Kong), Japan, the United Kingdom, Canada, Ireland, Singapore and Australia. Financial affordability is defined as cost of housing not exceeding 30–40 percent of household income. Governments around the world have started to take action.
Affordable Housing around the World
It is estimated that 54.5 percent of the world’s population currently live in urban areas and this number is rising. The overcrowding of cities has driven up property prices, for many making housing unaffordable. According to the McKinsey Global Institute, if current trends continue, the number of households that occupy inadequate housing or are financially stretched could reach 440 million (that gives around 1.6 billion people) by 2025. To fill this gap, the investment in construction alone would amount to 9-11 trillion dollars. With the cost of land, the total market value estimated could be as high as 16 trillion dollars.
Governments around the world have started to take action and launch schemes and plans which aim to develop housing infrastructure. The UK has announced plans to spend 3.7 billion pounds on affordable housing and housing infrastructure together. However, the affordability gap is too large to be met with government subsidies and income support alone and market-based approaches are also needed.
A Multi Trillion Construction (and Investing) Opportunity
The most powerful lever to create affordable housing is to reduce land and construction costs. By developing satellite cities outside the big centers but along public transportation networks, land costs can be reduced by more than 50 percent. Private companies developing land in partnership with government entities as well as manufacturers of rail-based local transport systems should benefit in this context. Adoption of productivity measures could result in savings of over 30 percent. Architecture, engineering and construction companies that pioneer the use of these new technologies are best positioned to capture the huge demand for affordable housing. Alternative low-cost building materials can also provide meaningful savings.
Operating and maintaining property at reduced costs contributes meaningfully to affordable housing as well. Companies providing insulation, windows, efficient heating and air-conditioning systems benefit from this multi-year trend. Finally, providing access to affordable housing loans is the third lever of making housing affordable. In many developed and developing countries, financial intermediaries purchase loans from banks and issue debt securities to investors. By securitizing mortgage debt, investors obtain a claim on the underlying assets at a reduced risk. For borrowers, costs are lowered, as they can access broader and better funding.