Building Viable and Sustainable

Housing Finance Operations in Africa

Day 2

Subrata Dutta Gupta

Dr. Friedemann Roy

Thierno Habib Hann

IFC – Financial Institutions Group

Learn how design, implement and manage affordable

housing finance products in given market in Africa

Products

Operations Funding

Risks

Recall - course objective

Structure of course – Day 2

3

• Funding - Presentation by AfDB

• Underwriting and servicing of mortgage loan

portfolios – group exercise

• Session 5 – Alternative housing finance

schemes

• Session 6 – Funding strategies and risk

management

• Presentation by CRRH

• Program closure and feedback

Outcomes/results

Today:

• To understand structure and risks of various funding instruments

• Learn about funding options offered by CRRH

• Discuss rental housing finance as an alternative to homeownership

finance

• Prepare for site visits

4

Recap - definition “affordable segment” in India

Definition:

• Households with stable

incomes, but mostly

informal

• Combination of self-

employed and salaried

people and/or small

business persons

• Strong desire to

upgrade or improve

current housing

conditions

5

Income title matrix

Matrix illustrates potential

correlation between type

of income and title

reliability

6

Group exercise – role play

• Organize a role play where every group member assumes a role:

• Borrower

• Sales guy

• Underwriter

• Member of Senior Management

• Servicing/collection

• Fintech/collection

• Think about the priority of every role and then simulate a discussion with

a customer and credit committee meeting where the borrower’s request

is discussed (as well as the subsequent discussion with customer about

the committee’s vote)

7

Module V. Alternative Housing Finance Schemes and

Introduction to Site Visit

88

Learning objectives

• Discuss feasibility of rental housing projects to

deliver alternative housing form to low income

groups

• Discuss financing arrangement for rental housing

projects

9

Clarification of some important terms

(Commercial ) rental housing = property owned by

someone other than resident

Social rental housing = rent set below market rate

Public housing = governmental entity is landlord and owner

of property

Subsidies = making rents affordable

• Supply side subsidies – to owner (grants, low-interest

loans, tax abatements)

• Demand side subsidies – to tenant (vouchers, housing

allowances)r

Source: compatible poker

Focus

of this

session

Housing markets in Nairobi and Dakar: affordability may

be higher than assumed

Nairobi

11

8.50%

91.50%

Owners Tenants

74.50%

25.50%

Owners Tenants

Dakar

Median

household

income: $/month

(numbers in pie)

$87

$110

$268

$164

Source: Gulyani, Bassett, Tulukdar, 2012

Challenge for healthy and well-functioning rental sector

Source: wikipedia

Law which balances

rights of landlords

and tenants

• Regulation of rent

increases

• Maintenance of

property

• Rules of eviction

and lease

termination

Risk adjusted performance of affordable housing projects in

comparison with other investments in the Netherlands

(1999 – 2013)

Asset class Average

annual

return

Annual risk Sharpe

ratio

Performance

rank

Bonds 3.7% 1.12% 1.18 1

Property 7.49% 5.31% 0.96 2

Listed property 4.7% 4.01% 0.58 3

Affordable

housing

4.3 4.53% 0.43 4

Shares 2.1% 24.8% -0.01 5

Source: Newell et al (2015)

Product options for to invest in

affordable rental housing projects

• Credit line/term loan to developer

• Rent-to-own arrangements

• Real Estate Investments Trust (REITS)

Credit line to developer building rental properties

Developer

Source: HD Wallpaper

Rent-to-own housing finance products

Definition:

Buyer and seller sign agreement in which seller commits to transfer full

ownership of unit at future date after rental phase

16

Renter: rental contract with purchase option

Developer: asks for downpayment,

Contract: after end of rental period, transfer of ownership

Developer Lender Customer

Sells property Rent-to own contract

How could concept be applied in your market? (I)

1. Lender buys property from developer

17

DeveloperProperty manager

Customer

Lender

Rent-to own contract

Loan agreement

Sells property

Loan

Option 2- property manager manages rent-to-own

contracts

18

Takeaways

• Lenders in Africa have not yet entered rental

housing finance at a large scale

• Reasons are poor legislative framework and lack

of necessary skills at developer level to manager

rental properties

• Some countries like Mexico getting serious in

mobilising funds to be deployed for rental

housing projects

Module VI. Funding and risk management in

housing finance

2020

Learning objectives

• To analyze feasibility funding of models and in the context of Africa

• Discuss the impact of funding instruments on risk management

structures

• Group exercise and discussions

21

Investors’ risk preferences have significant impact on

funding cost

BCG

Cost of funds

• Operational cost

• Risk premiums

Investor

Base interest rate

Risk premium

Supply of funds

Price of mortgage

Market (borrower)

Bonds

MBS

Deposits

Equity profit

spread

Source: Roy

22

Goal of treasury department: alignment between low

funding cost and minimal sensitivity to interest rate

changes

Ideal situation:

• Minimal liquidity

mismatches

• Interest terms are

matched

• Risk premiums

reflect true cost of

risk

Funding Lending

Asset-Liability Management

Determination of

required return

Risk Management

Which strategy?

Levers of treasury department to align different

expectations of stakeholders within lender’s

organization

24

Levers to manage housing finance risks at lender level

• Credit risk Underwriting standards

(credit policy)

• Liquidity/return risk Access to long term funds

• Operational risk IT architecture, Appraisal

regime, credit bureau

Managed

through

25

Funding instruments - menu of options

What is your

preference?

26

Lender

Deposits

Bonds/securitization

Equity

Pension fund

CRRH/liquidity facility

IFC/AfDB

Short term money market

Takeaways

Housing finance is primarily a risk management issue

A couple of risks have impact on lending rate and product design.

Key risks

• Credit risk

• Interest rate risk

• What can be done to reduce spreads?

CRRH presented its funding model

27

Session VIII. Closing remarks

2828

Source: sitrion.com

• Banking is service industry: create loyalty and

differentiate through service quality

• Customer orientation is key: put customer first

• Treat customers honestly and fair

• Create a brand

• Use marketing material to support your sales,

but always rely on the power of your staff

The fox

represents

the clever

customer

Source: Bausparkasse

Schwaebisch Hall

Some reflections – branding and customer orientation

29

Takeaways

• You are dealing with dreams – do not underestimate emotional

aspect linked to housing

• Understand needs, preferences and capacities of your clients

(housing and financing)

• Key for successful market strategy is clear vision and value

proposition

• Financial services are interchangeable: good customer

relationship management is key for market differentiation and

sustainable/profitable operations

• Before introducing housing finance products, understand the

market and your institution’s strength and weaknesses

30

You are selling a dream –

dealing with someone’s home

is a very emotional issue.

“Thanks to the loan from Delta

Brac Housing, it has helped

me to realize the dream of my

family” Asaduzzaman, 40,

says. client (Bangladesh)

31

Source: Roy

Dr. Friedemann Roy

Global Product Lead Housing Finance

Financial Institutions Group

International Finance Corporation

Tel. +1 202 473 9838

E-mail: froy@ifc.org

Disclaimer: The views, findings, interpretations, and

conclusions expressed in this presentation are entirely

those of the author and do not necessarily represent

the views of the World Bank Group, the IFC, its Board

of Executive Directors, or the governments they

represent.

Subrata Dutta Gupta

Principal Financial Officer

Financial Institutions Group

International Finance Corporation

Tel. +91-33-4401-1000

E-mail: SDuttagupta@ifc.org

Thierno Habib Hann

Senior Housing Finance Specialist

Financial Institutions Group

Tel. + 254 20 293 7729

E-mail: Thann@ifc.org