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Building Viable and Sustainable
Housing Finance Operations in Africa
Day 2
Subrata Dutta Gupta
Dr. Friedemann Roy
Thierno Habib Hann
IFC – Financial Institutions Group
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Learn how design, implement and manage affordable
housing finance products in given market in Africa
Products
Operations Funding
Risks
Recall - course objective
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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
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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
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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
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Income title matrix
Matrix illustrates potential
correlation between type
of income and title
reliability
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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)
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Module V. Alternative Housing Finance Schemes and
Introduction to Site Visit
88
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Learning objectives
• Discuss feasibility of rental housing projects to
deliver alternative housing form to low income
groups
• Discuss financing arrangement for rental housing
projects
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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
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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
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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
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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)
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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)
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Credit line to developer building rental properties
Developer
Source: HD Wallpaper
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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
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Developer Lender Customer
Sells property Rent-to own contract
How could concept be applied in your market? (I)
1. Lender buys property from developer
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DeveloperProperty manager
Customer
Lender
Rent-to own contract
Loan agreement
Sells property
Loan
Option 2- property manager manages rent-to-own
contracts
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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
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Module VI. Funding and risk management in
housing finance
2020
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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
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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
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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
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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
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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
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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
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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
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Session VIII. Closing remarks
2828
Source: sitrion.com
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• 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
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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
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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
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Dr. Friedemann Roy
Global Product Lead Housing Finance
Financial Institutions Group
International Finance Corporation
Tel. +1 202 473 9838
E-mail: [email protected]
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: [email protected]
Thierno Habib Hann
Senior Housing Finance Specialist
Financial Institutions Group
Tel. + 254 20 293 7729
E-mail: [email protected]