Promoting Access and Affordability in Housing Finance IFC‘s experience in supporting better and safer housing opportunities in Emerging Markets Friedemann Roy April 11, 2013

The conundrum: how to improve access to housing finance for low income groups? 2 Source: World Bank Database Evidence that economic growth support housing finance market penetration (r = 0.82) In which direction are markets in Asia heading? Do low income groups benefit from increased access to housing | finance with rising GDP? Mortgage debt to GDP and GDP per capita (2009)

Higher incomes typically mean improved access to financial services 3 Middle income groups High income groups Low income groups Mortgage Small housing loans Informal financial sources

A triangle diagram to depict perspectives of housing finance markets 4 Housing (= demand) Supply - Funding - Housing units Finance - Microfinance institutions - Banks - Non-Bank financial institutions

What determines demand for housing? (I) Economic climate and quality of enabling environment: 5 - Asian countries are an important growth driver of World GDP - Continued reforms of enabling environment but pace differs by country Source: World Bank Database

What determines the demand for housing (II) Rising population and increasing urbanization ▫ World Population is estimated to grow from 6.9 billion (2010) to 9.3 billion (2050)* ▫ In 2050, 6.2 billion will live in cities (today 3.5 billion)** ▫ Asian countries will experience a rise of their urban population by 1.4 billion and will have the highest number of megacities (> 10m)**** Rising incomes ▫ Increasing disposable income and purchasing power ▫ (e.g. it took India 15 years to double its income per head – compare: Britain 150 years after industrial revolution began)*** 6 * Le Monde ** This is Africa *** The Economist **** United Nations

Responses to increasing demand for housing Global housing demand is projected to double over the next two decades to about USD 5 trillion yearly (McKinsey Institute) Supply of funds ▫ Capital markets in most emerging Asian economies are dominated by government bond issues ▫ Deposits remain most important funding instruments for housing loans Supply of dwellings ▫ Not sufficient to cover demand, especially in affordable segment 7 Supply Funds Dwellings Deposits Capital market funds Developers Self-construction

Prospects of housing finance markets in emerging Asia: benefitting from improving regulatory environment and continued economic growth 8 1.Markets are advancing, but overall market penetration is still low 2.Markets are benefitting from high demand and rising interest of investors 3.Can house price inflation and/or rising number of defaulting borrowers be contained?

Who offers finance to low income groups? NGOsNBFIsBanksCoopsRural banks 9 NGOsNBFIsBanks Average loan size (USD) ,202 Share of institutions targeting low income borrowers 76%61%49% Share of loan portfolio in urban areas 49%51%61% Structural Indicators of MFIs, 2010 Source: MIX Market, DB Research Many suppliers, but different target markets

Microfinance – a panacea to offer housing finance to low income groups? Over the last decade, Microfinance Institutions (MFIs) throughout the world and Asia have experienced considerable growth of their portfolios Ventured into new product offerings beyond traditional group lending schemes But portfolio quality has deteriorated due to: ▫ Reaching out to riskier borrowers without lenders having adequate risk management capacities ▫ Lack of adequate lending standards ▫ MFIs have become more commercial and subject to competition. However, the instruments to monitor moral hazard/adverse selection have not been updated 10

11 Source: numbeo Ratio of median house price to median disposal family income (per year) Ratio of actual monthly mortgage rate in relation to monthly income IFC’s experience to support access of low income groups to housing finance: understanding affordability - two measures

Understanding affordability and preferences: depending on income, it may differ Upper: (Formal income, legal title) Moderate to lower: (Formal/informal income Legal title/no legal title) Low income group: (informal income, no legal title) Mortgage-able Small-scale housing loans, micro mortgages Community based shelter funds, savings 12

Haiti: Why? ▫ Country is prone to natural disasters ▫ High degree of informality and weak enabling environment What is IFC doing there? ▫ Redesign of lender’s existing housing micro finance product line and incorporation of partnership(s) with building material provider(s) combined with offering of technical assistance to borrower 13 Project examples where IFC been involved to support access to housing finance for low income groups

14 Customer Haiti: partnership between lender and construction technical provider and building material supplier Sign-off on construction progress and quality Loan Agreement Provides construction material

Afghanistan: housing microfinance capacity building Why? ▫ No housing finance products for low income groups ▫ Significant demand for renovation and new construction What is IFC doing there? ▫ Development of appropriate housing microfinance products ▫ Support to establish required infrastructure within lender’s organization (underwriting, servicing, risk management etc.) 15

Afghanistan: IFC’s Housing Microfinance (HMF) Toolkit Toolkit = guide for product development and operations Describes recommended HMF products and parameters, operational procedures, and set of tools and techniques for market surveys Includes guidance on shariah-compliant HMF products Based on international best practices and on-the-ground feedback Two parts: 1.Product development 2.Loan processing (from loan application to delinquency management) 16

Kyrgyzstan: Lending for home improvements Why? ▫ Housing stock in need of improvement, temporary housing (“novostroika” = marginal housing rings) What is IFC doing there? ▫ Support lenders to develop specific HMF product adapted to Kyrgyz market ▫ Lenders offer to borrowers loans and technical construction support ▫ Technical construction support comprises instructional videos, brochures and software modules 17

Summary and conclusions Two main trends: ▫ Rising population and increasing urbanization ▫ Not discussed today: green housing opportunities Outlook for investments in residential real estate markets in emerging Asia is promising But risks need to be carefully managed (i.e. credit risk, interest rate risk, liquidity risk, etc.) Design of right market entry strategy is key: ▫ With the right product and the right strategy, sustainable growth can be achieved 18

Dr. Friedemann Roy Global Product Lead IFC Housing Finance Advisory Services IFC A2F Tel