www.ifc.org/thoughtleadership NOTE 106 • OCT 2021 Creating Housing Markets in Emerging Market Economies By Cleo Rose Innes and Brian Casabianca At the beginning of the 20th century less than 15 percent of people across the globe lived in cities. This figure has risen to 50 percent (4.4 billion people) today and will exceed 66 percent (7.7 billion) by 2050.1 There is a significant shortfall of housing to meet the needs of people moving to cities, most of whom have limited resources but strong hopes for better educational and employment opportunities. Direct public provision of housing is not affordable for most national governments, so more than 1.6 billion people will struggle to secure housing by 2025. Addressing this under-provision of housing will require connecting capital with low-income urbanizing populations, including solutions to make the private sector more responsive to the investment opportunities that urbanization presents. The large proportion of the global population that lacks Residential construction is a significant contributor to growth adequate housing has a poorer quality of life as well as and job creation and supports additional employment through lower prospects for work, education, good health, and linkages to related sectors. personal safety. Housing owners can use their assets to create their own Not only does the housing sector play a key role in progress employment or additional income when their homes serve as toward multiple Sustainable Development Goals (Figure 1), shops, workshops, or rental accommodation. Homes are more it plays a vital economic role through its impact on incomes, than places of safety, wellbeing, and wealth accumulation (as productivity, and savings. property values increase); they can also serve as productive assets. Homes that serve as collateral enable access to credit. Lessons from Experience The housing sector is a complex system of many interdependent elements across multiple sectors (Figure 2). Creating housing markets requires undoing constraints on multiple markets and institutional structures that compose well-functioning housing markets. These include regulations, FIGURE 1 Housing Supports Multiple Sustainable infrastructure, construction goods, labor, and housing credit. Development Goals Creating housing markets also necessitates addressing the Source: IFC. bottlenecks that inhibit supply and/or demand along this value chain of linked elements, as illustrated in Figure 3. About the Authors Cleo Rose Innes, Senior Operations Officer, Corporate Strategy, Economics and Private Sector Development, IFC. Brian Casabianca, Senior Strategy Officer, Corporate Strategy, Economics and Private Sector Development, IFC. 1 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Demand How to improve access to Adequate income levels affordable housing Strong financial Effective and Efficient capital institutions affordable markets Affordable and (mortgage origination mortgage (long-term local structured capacity and risk appetite) products currency financing) rental market Supply Professional and quality developers How to improve efficient Affordable building materials and efficient markets delivery of affordable housing Efficient land Adequate basic Flexible planning and administration system infrastructure and services sustainable building codes Enabling Enabling Environment (Upstream) Environment Stable macroeconomic environment, housing data/analytics Regulation and government support (smart subsidies, guarantees, etc.) FIGURE 2 Elements of Housing Markets Source: IFC. CITY PLANNING DEVELOPMENT ACCESS TO INFRASTRUCTURE SMART DEVELOPER END-USER AND BUILDING AND BUILDING LAND AND SERVICES SUBSIDIES FINANCE FINANCE REGULATIONS MATERIALS FIGURE 3 Chain of Interdependent Elements Necessary to Housing Market Development Source: IFC. *IFC’s Cities initiative develops long-term relationships with mayors, working with them to develop and implement solutions for key urban infrastructure challenges. Client relationship managers coordinate across IFC’s investment and advisory services teams, public-private partnerships, and World Bank colleagues to deliver holistic solutions for infrastructure development. **IFC Upstream can also develop MAS/FIG projects in these highlighted areas of the value chain as long as they are initiatives that will lead to an IFC investment in the next five years. Addressing these bottlenecks and constraints requires Housing development projects will fail to get off the reconciling the needs and interests of the stakeholders in drawing board where there is contested land tenure or housing market development: governments, investors, and lack of clear title and lien registration. As such, clear local communities. Furthermore, the interlinkages between ownership rights are critical for housing asset creation and these elements make the sequencing and timing of activities financing. Ongoing engagement between developers and particularly important. public authorities with respect to planning and building regulations and their implications for zoning and land use Strengthening Supply is also necessary. Planning is especially important given The four primary constraints on the supply of housing are: the necessary linkages of housing to key infrastructure 1. Access to land, urban planning, and building codes such as roads, water and sanitation, electricity, and solid waste management. 2. Infrastructure services and standards The application of public-private partnerships (PPPs) in 3. The financial and technical capacity of developers the housing sector can be especially valuable in embedding 4. The cost and quality of building materials. best practices and governing principles in legal, regulatory, 2 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. and finance structures. A good PPP project assigns roles The availability of building materials that are both and responsibilities at key intervals along the value chain, affordable and durable is at the center of the value chain. minimizing the risk of a breakdown in the interdependent and Certified durability of building and construction materials time-sensitive decisions and actions that must occur. IFC’s is important to housing credit markets. Homes need to experiences in India provides an illustration (Box 1). be durable for the mortgages that underpin them to be a viable long-term investment asset class. Steel and concrete have predominated as building materials for much of the BOX 1 Housing PPPs twentieth century because they are especially durable. They IFC served as the PPP transaction advisor to India’s are also very energy intensive to produce. Odisha State’s extensive program to provide Some 17.5 percent of global emissions results from energy use additional housing units for low-income families. in buildings once they are completed, and the production of This project was one of the first real estate PPPs under the “Real Estate Regulatory Authority Act of 2016” iron and steel for industrial purposes, including construction, notified by the Government of India, i.e., there was no accounts for a further 7 percent. Reducing these percentages precedent within Indian law for housing PPPs in real to zero by 2050 will require a shift away from energy estate that could inform the process. sources that produce greenhouse gas emissions, as well as the intensity of energy usage within buildings once they are The project developer was required to design, finance, construct, and hand back 2,600 affordable constructed. Incentives and regulation can trigger demand for housing units on approximately 14 acres of land. increased innovation in construction and design (Box 2). This was at no cost to the regional development The cement industry currently produces around 3.5 authority. Furthermore, fixed timelines were set. The billion tons of ordinary portland cement (OPC), one of the construction phase had to be completed within three common cement types, annually and contributes 7 percent years, with the first 800 units completed and returned of all global CO2 emissions that result from human activity. 2 to the regional authority within two years. When powdered limestone is heated and combined with In return, the concessionaire would be given free hold other materials to produce clinker, 40 percent of the total rights on the balance of 6.5 acres of public land that weight of that limestone is released as CO2 . Decarbonizing constituted the project site, with the right to construct a commercial project on that land to recover the investment. The developer was required to address any BOX 2 Incentivizing Green Building structural deficiencies within five years of the hand- back, and to create a maintenance account to support IFC launched a green building design tool and ongoing maintenance of the affordable housing units. certification system in 2014, Excellence in Design for Greater Efficiencies, or EDGE. This tool is focused on The output was significant. All 2,600 affordable making new residential and commercial buildings housing units were built for families earning less more resource efficient. Using the EDGE tool, IFC has than $2,800 per year, improving the living conditions helped to develop regulations in Colombia, Costa of approximately 10,000 people. And $70 million Rica, Indonesia, Panama, Peru, the Philippines, and of private investment was invested in Odisha’s Vietnam, as well as development of green building affordable housing stock. The development outcome codes and regulations in Indonesia. of the engagement was even greater. The bid documents co-authored by IFC were standardized IFC also invests directly in green buildings and by the Bhubaneswar Development Authority and currently has a portfolio of over $4 billion in these the Government of Odisha to implement similar PPP assets. EDGE certification is available in more than projects. Their experience provided confidence that 170 countries through a global network of certifiers. the improved legislative and regulatory requirements Green buildings represent an investment opportunity had been tested by real-time project implementation. of more than $24.7 trillion in emerging markets The repeated use of PPPs as one tool in the financing by 2030. For more on how investors, developers, toolkit of Odisha State is evident in a very wide building owners, and governments can support range of other sectors, including more recently the the growth of this investment opportunity, see production of solar power in an initiative supported IFC’s recent report, Green Building: A Finance and Policy by a World Bank engagement. Blueprint for Emerging Markets (2019). 3 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. cement production is a priority, and several concepts are must be provided from forest growth and not existing forest under research and development. These include alternative stock. If not, these valuable attributes will be lost, as will the heat generation sources for processing such as biomass, future of this industry and its economic and related benefits. fossil fuel-free electrification, and hydrogen. In addition, Subsidies can play an important role in stimulating a supply carbon capture storage and/or utilization is also being or demand response in the housing sector. Experience has explored, as are changes to clinker ratios and clinker shown that the design of housing subsidy schemes needs to alternatives. Finally, increased material efficiency and the be calibrated and targeted. The spillover effects of the use principles of ‘the circular economy’ may suggest some of subsidies highlight the systemic nature of the housing interim solution while new technologies are tested. All of market and its impact on interdependent elements across the proposed approaches will require an intensive effort, as different sectors. Even the best-designed subsidies will they suggest new challenges including the availability of new minerals (for clinker) and changes to material standards and need to factor for the variability inherent in political and construction processes (for material efficiencies). economic confidence and stability. A shift away from the use of these materials and greater Given the relatively long-term nature of investment in use of green building materials suggests opportunities for housing production, particularly where elements of market both emissions and cost reductions, while at the same time development are missing, there may be long pauses in meeting rising demand for new construction. Alternative project development. Developers working in challenging construction materials, including mass timber3 and green contexts will need affordable developer finance and technologies applied to construction materials,4 could be operational expertise to manage uncertainty or instability particularly beneficial to countries that rely heavily on that could result from macroeconomic or political shocks. imported building materials and confront acute shortages Extensive delays could cause investors to withdraw their of low-cost housing. 5 Among the many advantages of using interest in a project in favor of more attractive investment timber or cellulose-based construction materials are that they opportunities elsewhere. can be produced locally and are both labor-intensive and carbon-negative to produce. They also provide more scope Strengthening Demand for factory-based manufacturing of housing, which involves Houses are costly assets that represent several multiples of the a high level of repetition, increasing efficiency and further purchaser’s annual salary. As a result, the demand response lowering the cost of construction. for housing is largely driven by the existence of housing credit However, sound forestry management that ensures that the markets. Mortgage market development is closely linked to production of timber is sustainable must be established. overall financial sector development.6 Many emerging market While enabling carbon sequestration, forests provide a wide economies have made good progress in serving the middle range of additional value and ecosystem services including class with housing finance, but it can still be scarce and flood prevention, erosion control, and biodiversity. Timber expensive where domestic deposits are low.7 UPPER INCOME SUPPLY DEMAND Reduce formal housing costs Boost housing demand Improve city planning, building through access to finance regulations and access to land MIDDLE INCOME Enhance access to Invest in basic infrastructure and mortgages slum upgrading Enhance access to Strengthen local construction and housing microfinance building materials sectors Introduce with efficient, Collect and analyze housing LOWER INCOME well-targeted subsidies market data on a regular basis Strengthen residential to inform better decisions rental markets FIGURE 4 Pushing into the Bottom Two-Thirds of the Income Pyramid Source: IFC. 4 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Urbanization in emerging markets has been so rapid over of financing, while others rely on securitization. The reasons for the past few decades that the financial sector, and housing the failure of the financial sector to support the financing needs credit markets in particular, have not developed sufficient of the whole economy are multiple. The underdevelopment of depth and breadth to meet demand. Low-income borrowers the financial sector and the absence of long-term financing in without collateral face challenges, as they usually do not meet the local economy are predominant among them. Linking the the necessary criteria to secure housing credit. These are the domestic banking sector to international capital markets can unbanked at the bottom two-thirds of the income pyramid support expanded provision (Box 3). (Figure 4), who often lack access to almost all financial services. The secondary mortgage market provides liquidity to banks Differences between mortgage-market characteristics include and other financial institutions that supply mortgages. The interest type, time to maturity, and sources of finance for presence of a secondary mortgage market enables institutional lenders. In some countries, retail deposits are the primary source investors to diversify their portfolios of fixed-income assets, BOX 3 Longer Terms in Local Currency The West Africa Economic and Monetary Union (WAEMU) lacks affordable financing for housing. Fewer than 7 percent of households in the region can afford to buy their own home. IFC was among the founding shareholders of an initiative by The Central Bank of West African States (BCEAO)8 to bring foreign institutional investors to regional financial markets in support of housing development in this region. BCEAO created the Caisse Régionale de Refinancement du Crédit Hypothécaire (CRRH) in 2010, a mortgage refinancing fund for creditors in the UEMOA/WAEMU zone. CRRH issued six bonds between 2012 and 2016, which provided funding for 33 banks in the eight WAEMU member countries. In 2017, through a 12-year local currency MAURITANIA bond issue totaling CFA francs (CFAF) 25 CAPE VERDE billion ($45 million), CRRH was able to MALI NIGER lengthen the term of its loans to financial SENEGAL CHAD THE GAMBIA institutions, which in turn enabled these GUINEA BISSAU BURKINA FASO institutions to lengthen the maturity GUINEA BENIN of mortgages and significantly improve SIERRA LEONE TOGO NIGERIA CÔTE affordability. IFC utilized a new local D’IVOIRE GHANA LIBERIA currency facility at the World Bank that Member country enables it to hedge foreign exchange risk UEMOA Commission headquarters (based in Ouagadougou) in CFAF to participate with CFAF 5 billion ($9 million). The success of the local currency bond issue by CRRH is especially FIGURE 5 Member Countries of the West African Economic important, as international sources of and Monetary Union finance would otherwise include foreign Source: Sahel and West Africa Club Secretariat, 2016. exchange risk. By January 2018, CRRH had issued seven local currency bonds of 10- or 12-year maturity in regional capital markets and refinanced approximately 8,000 bank mortgages. The World Bank Group’s investments and support toward strengthening CRRH are expected to crowd in $5 of private financing through the bond market for every $1 it invests, thus directly addressing the financial needs of the sector. Some 50,000 businesses and families are expected to obtain new mortgage loans as a result; 200,000 people will obtain better shelter; and about 250,000 housing-sector jobs will be created.9 5 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. while housing financiers both offload risk and increase the ACKNOWLEDGMENTS funds available for housing finance to new borrowers. A more This Note builds on the earlier internal document “IFC Sector liquid mortgage market keeps interest rates lower for existing Deep Dive: Housing”, conducted by the following colleagues owners and new borrowers. By working together through the within both IFC and the World Bank: Loic Chiquier (World secondary mortgage market, the interests and needs of these Bank), Eugenia Vargas (IFC), Simon Walley (World Bank), diverse stakeholders produce greater liquidity, stability, and Simon Ngigi (World Bank), Patrick Leahy (IFC), Nicholas affordability. Under the right conditions, this can serve as a St. Johnston (IFC), Jane Jenkinson (IFC), Dean Cira (World powerful incentive to improve market standards and stimulate Bank), Judy Baker (World Bank), Rohit Jain (IFC), Victor financial market development. The case of Titularizadora Mints (IFC), Yan Zhang (World Bank) , Friedemann Roy Colombiana illustrates that the appropriate legal and (IFC), Brian Casabianca (IFC), Themba Jeremiah (IFC), and Jacqueline Andrieu (IFC). regulatory conditions can be created to attract the interest of secondary investors (Box 4). The authors would like to thank the following colleagues for their review and suggestions: Sabine Durier, Principal Conclusion Operations Officer, Corporate Support, IFC; within The transformative effects of housing on quality of life and Economics and Private Sector Development: Jeannie Crist, Senior Financial Officer, Global Macro and Market Research, wellbeing, together with the realization of its economic Friedemann Roy, Advisor to the Vice President; IFC; Matt potential, places housing at the heart of the economic Benjamin, Consultant; Anselm Dannecker, Consultant; and development agenda and its goals. Thomas Rehermann, Senior Economist. BOX 4 Mortgage Securitization in Colombia 1 See for possible COVID-19-related implications to urbanization: Sharifi, Ayyoob and Amir Reza Khavarian-Garmsir. 2020. “Review: Titularizadora Colombiana (TC) was created in July The COVID-19 Pandemic: Impacts on Cities and Major Lessons for 2001 as a securitization company. The 1997-1998 Urban Planning, Design, and Management.” Science of The Total financial crisis was a shock to mortgage markets; Environment, Vol 749, December 20, 2020. specialized savings and loans institutions and 2 Fennell, Paul S., Steven J. Davis, and Aseel Mohammed. 2021. borrowers were adversely affected by interest rate “Decarbonizing cement production.” Joule, Vol 5 Issue 6. hikes, rising unemployment, and depressed housing 3 Mass timber is short for “massive timber” and involves laminating prices. As a result, the housing finance system was pieces of soft wood like pine, spruce, or fir to form larger pieces. reformed in 1999 to allow for the establishment of 4 Roopchund, Rishen, Jerome Andrew, and Bruce Sithole. 2021. non-credit institutions to securitize housing loans. “Using Cellulose Nanocrystals to Improve the Mechanical The objective was to raise long-term funds from Properties of Fly Ash-Based Geopolymer Construction Materials.” Engineering Science and Technology, an International Journal. capital markets, manage the significant cash flow May 7, 2021. https://www.sciencedirect.com/science/article/pii/ risks of mortgages, and provide equity relief to the S2215098621000902. primary mortgage lenders. Initial capitalization came 5 Bah, El-hadj M., Issa Faye, and Zekebweliwai F. Geh. 2018. from the main mortgage lending banks and other “Housing Market Dynamics in Africa.” Palgrave Macmillan Books. private investors, including IFC. Palgrave Macmillan. IFC supported 19 mortgage-backed security (MBS) 6 Cerutti, Eugenio, Jihad Dagher, and Giovanni Dell’Ariccia. 2015. issues by TC, including three nonperforming mortgage “Housing Finance and Real-Estate Booms: A Cross-Country loan securitizations, for a total volume of securitized Perspective.” IMF Staff Discussion Note 15/12. assets exceeding $2.9 billion (equivalent). Since 2008, 7 Chiquier, Loic, and Michael Lea. 2009. “Housing Finance Policy TC has successfully launched 25 MBS issues without in Emerging Markets.” The World Bank. Washington D.C. https:// openknowledge.worldbank.org/handle/10986/2641 License: CC IFC enhancement, for an additional securitized assets BY 3.0 IGO. volume of $5.9 billion (equivalent). This effort has 8 This is an entity made up of the Banque Ouest Africaine de focused regulators on mortgage loan regulation, Développement (BOAD) and the Conseil Régional de l’Epargne defined foreclosure processes, and clear accounting Public et des Marchés Financiers rules for banks and investors. TC’s contribution has 9 The World Bank. 2018. “West African Economic & Monetary Union: included standardizing underwriting practices and Taking Care of Housing Needs.” https://www.worldbank.org/en/ the setting of clear qualification standards for the about/partners/brief/west-african-economic-monetary-union- mortgages it is willing to purchase. taking-care-of-housing-needs. 6 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Additional Selected EM Compass Notes Previously Published by IFC Thought Leadership JULY 2021 Note 90: Lessons for Electric Utilities from COVID-19 Note 105: Blended Concessional Finance—The Benefits of Responses in Emerging Markets Transparency and Access AUGUST 2020 JUNE 2021 Note 89: Social Bonds Can Help Mitigate the Economic Note 104: Enabling A Competitive Mobile Sector in and Social Effects of the COVID-19 Crisis Emerging Markets Through the Development of Tower Note 88: What African Industrial Development Can Learn Companies from East Asian Successes—The Role of Complexity and Economic Fitness MAY 2021 Note 103: Private Sector Initiatives in Forced JULY 2020 Displacement Contexts: Constraints and Opportunities for Note 87: AI Investments Allow Emerging Markets to Market-based Approaches Develop and Expand Sophisticated Manufacturing Capabilities APRIL 2021 Note 102: Enabling Private Investment in 5G Connectivity JUNE 2020 in Emerging Markets—An Assessment of Challenges and Note 86: Leveraging Big Data to Advance Gender Equality Policy Options Note 85: Artificial Intelligence Innovation in Financial Note 101: Blue Natural Capital: Enhancing Business Services Outcomes and Sustainability of Coastal Tourism Markets MAY 2020 MARCH 2021 Note 84: Leveraging Inclusive Businesses Models to Note 100: Promoting Impact by Creating Markets: Support the Base of the Pyramid during COVID-19 Management and Measurement Note 83: What COVID-19 Means for Digital Infrastructure FEBRUARY 2021 in Emerging Markets Note 99: Blended Concessional Finance and COVID-19 Note 82: Artificial Intelligence in Agribusiness is Growing in Emerging Markets JANUARY 2021 APRIL 2020 Note 98: Private Credit in Emerging Markets Note 81: Artificial Intelligence in the Power Sector Note 97: How Artificial Intelligence Can Help Advance Post-Secondary Learning in Emerging Markets MARCH 2020 DECEMBER 2020 Note 80: Developing Artificial Intelligence Sustainably: Toward a Practical Code of Conduct for Disruptive Note 96: Innovation, Investment, and Emerging Technologies Opportunities in Today’s Textile and Apparel Value Chain Note 80a: IFC Technology Code of Conduct—Progression Note 95: How the Tourism Sector in Emerging Markets is Matrix—Public Draft—Addendum to Note 80 Recovering from COVID-19 FEBRUARY 2020 NOVEMBER 2020 Note 79: Accelerating Digital Connectivity Through Note 94: Deep Tech Solutions for Emerging Markets Infrastructure Sharing Note 93: Impacts of COVID-19 on the Private Sector in Note 78: Artificial Intelligence and the Future for Smart Fragile and Conflict-Affected Situations Homes OCTOBER 2020 JANUARY 2020 Note 92: How Natural Capital Approaches Can Support Note 77: Creating Domestic Capital Markets in Developing Sustainable Investments and Markets Countries: Perspectives from Market Participants SEPTEMBER 2020 DECEMBER 2019 Note 91: Artificial Intelligence and Healthcare in Emerging Note 76: Artificial Intelligence and 5G Mobile Technology Markets Can Drive Investment Opportunities in Emerging Markets 7 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. 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