_Funding Affordable Housing

Funding affordable housing

Affordable housing is increasingly developed, financed, and managed by a mix of state, social impact organisations, and private investors (supported by state grants). Various international organisations, such as UN-Habitat, World Bank, Rockefeller Foundation, Johannesburg Housing Company, Department for International Development, Habitat for Humanity, etc. are investing in the affordable housing sector across the globe, especially in developing countries. There is also an increasing trend, particularly in the US, where many major private corporations, such as Microsoft, Google, and Amazon, have taken initiatives under their CSR activities to improve the supply of housing for the poor.

Private Equity (PE) investments in affordable housing globally

Over the past decade, affordable housing has attracted increasingly more private capital aimed at building real estate that serves society and at the same time generates adequate returns. However, it is still not close to the funding requirement needed to match the demand due to various regulatory, financial, and political roadblocks.

In the year 2020, at the global level, a total of US$759 bn capital investment has been traced to the real estate sector. The transaction volume in 2020 was 29 percent lower than 2019 levels due to a COVID-19 induced slowdown. Out of the total transaction volume, US$225 bn, i.e. 27 percent, is being invested in the residential sector. The share of the residential sector in investment in the Asia Pacific is generally very low as compared to the sector share in America and EMEA, which indicates that there is huge scope for investment in the residential sector in the Asia Pacific region.

Understanding the importance of affordable housing and the demand gap, various institutional investors are increasingly entering into this segment, which can provide appealing financial returns along with a positive social impact. Apart from the dedicated funds, various global multi-asset funds are investing in affordable housing, which also enables them to meet their own environmental, social, and governance (ESG) targets. Impact investing in affordable housing and increasing the focus of PE funds on meeting the ESG goals can help bring positive social change along with stable risk-adjusted returns.

Population and urbanisation trend

Economic growth and urbanisation are linked with each other. As per the United Nations, more than 57 percent of the world’s population lives in urban areas, as of the year 2021. The discussion in recent years has been about whether to denounce urban life, which has led to the mushrooming of slums, where housing conditions are substandard, sanitation is almost non-existent, leading to an environment where infectious diseases flourish, and where exploitation and physical threats are common; or emphasise on the importance of urbanisation for economic growth.

Throughout human history, people across the world have mostly lived in rural areas or small communities. Over the past few centuries, and particularly in recent decades, there has been a dramatic shift. Globally, we have witnessed a mass migration of populations from rural to urban areas.

Urbanisation’s biggest problem is that it has not kept pace with the housing demand of those living in towns and others migrating to cities in search of employment. With most megacities and medium sized cities witnessing a high concentration of urban population, there has been rising pressure on housing as well as basic urban infrastructure and services.

Policy interventions and impact

Countries over the years have responded to the shortage through various policy level interventions on both the demand and supply sides. In India, the recent initiative of Housing for All (HFA) by 2022 policy marked a major shift in focus towards the delivery of houses. Under HFA, Pradhan Mantri Awas Yojna (PMAY) is the umbrella scheme at the national level. In 2020, the central government took one significant step towards introducing an affordable rental housing scheme in India via the Affordable Rental Housing Complexes Scheme (ARHC) under PMAY (U). Further, The Model Tenancy Act introduced in 2021 aims to balance the scales for both landlords and tenants, so that perceptions about rent control laws favouring tenants can go away and a transparent and speedy regulatory environment can be created for the resolution of disputes between both parties.

The development of a Housing Finance mechanism from the demand perspective has been one of the focus areas of Indian policies. There have also been efforts at expanding affordable housing supply while improving the housing and neighborhood quality. The policy interventions like In-situ slum redevelopment and Affordable Housing in partnership with private players have been encouraged.  The PMAY scheme has been a success and is on road to achieving its targeted construction of almost 11 mn houses by 2022.