1. Financing Multifamily Housing in Emerging Markets: Constraints and Opportunities Carol S. Rabenhorst The Urban Institute Washington, DC Presentation for Panel: Affordable Housing Goes Worldwide Institute for Professional and Executive Development Chicago, July 10-11, 2008

2. The Urban Institute2 Background: Linking Housing and Economic Development Housing starts as a leading economic indicator Housing starts as a leading economic indicator –Construction and manufacturing jobs; labor mobility –Retail sales –Predictor of overall economic health –External growth factors: Improved living conditions and infrastructure Improved living conditions and infrastructure Motivation to save Motivation to save Motivation to spend Motivation to spend Labor and social mobility Labor and social mobility The demand cycle: The demand cycle: –Housing demand housing finance financial sector development economic growth housing demand Emerging markets tend to follow the same pattern Emerging markets tend to follow the same pattern

3. The Urban Institute3 Overview of Multifamily Housing in Emerging Markets Mass privatization of apartments in transition from socialism since early 1990s Mass privatization of apartments in transition from socialism since early 1990s –High owner-occupancy rates (90%+) –Poor condition trading up and renovation Real estate and mortgage markets concentrated in large cities and resort/tourism areas Real estate and mortgage markets concentrated in large cities and resort/tourism areas –Housing values higher, for same reasons as developed markets –More people, higher incomes –Few alternatives for private investment Why apartments? Why apartments? –Mass urbanization –Cost effective land & infrastructure use, lower construction cost –Lower cost to purchaser –Security, particularly in Africa

4. The Urban Institute4 Examples of Emerging Mortgage Markets Central and Eastern Europe transition countries Central and Eastern Europe transition countries –Explosive mortgage market growth Average growth 75% p.a.; 9% of GDP Average growth 75% p.a.; 9% of GDP –Growing secondary market activity $20.7b in covered mortgage bonds outstanding in 2006 $20.7b in covered mortgage bonds outstanding in 2006 Southern Africa Southern Africa –More moderate growth Lagging legal reform – registration, enforcement Lagging legal reform – registration, enforcement Macroeconomic and political uncertainty Macroeconomic and political uncertainty –No secondary market… yet Asia Asia –Mixed growth China: $356b in mortgage debt (from $0 in 9 years) (pop. 1.3b; 11% GDP) China: $356b in mortgage debt (from $0 in 9 years) (pop. 1.3b; 11% GDP) India: $18b mortgage debt (pop. 1.1b; 9% GDP) India: $18b mortgage debt (pop. 1.1b; 9% GDP)

5. The Urban Institute5 Constraints on Financing Multifamily Construction and Sales Problems relating to registration of title and lien Problems relating to registration of title and lien Problems relating to level of development of construction finance Problems relating to level of development of construction finance Problems relating to condominium law and operations Problems relating to condominium law and operations

6. The Urban Institute6 I. Registration Problems No registration of title or mortgages on future construction No registration of title or mortgages on future construction –Usually no property identification number until built –Developers commercial loan may block mortgage for apt. purchase –Lenders priority unclear –Undisclosed liens (spousal rights, taxes) Large percentage of properties not registered at all Large percentage of properties not registered at all –Privatized apartments in CEE –Land and buildings, especially in Africa, less so in Asia –Donor-financed registration projects, but slow going No title insurance; state guarantee but only if registered No title insurance; state guarantee but only if registered Particular problems with condominium registration Particular problems with condominium registration –Ownership scheme not clear in law DEVELOPED MARKET MODELS: DEVELOPED MARKET MODELS: –Ability to register title or lien on future construction –Completion bonds –Accurate registration of apartments part of declaration of condominium recorded prior to construction or sale

7. The Urban Institute7 II. Construction Finance Problems Reasons for lack of residential construction lending Reasons for lack of residential construction lending –Inadequacy of law, mistrust of courts to enforce rights –Inability to assess/manage completion risk (no insurance) –Lack of standard multifamily loan products –Easier profits elsewhere –No regulation of developers increases risk Common method – apartment purchaser pays before construction Common method – apartment purchaser pays before construction –Takes all the risk of non-completion, poor quality –All cash, so limits market to upper income Loans are business loans, not formal construction finance Loans are business loans, not formal construction finance –No developer investment and risk sharing –No schedule of completion payments with holdback –Construction finance not coupled with permanent finance DEVELOPED MARKET MODELS: DEVELOPED MARKET MODELS: –Data for underwriting multifamily construction loans –Presale and release requirements –Evidence of permanent financing

8. The Urban Institute8 III. Condominium Law Problems Unclear developer rights and responsibilities Unclear developer rights and responsibilities –Increased risk for lenders and apartment purchasers –Particular problems with privatized apartments Unclear ownership rights and responsibilities Unclear ownership rights and responsibilities –Registration and title issues –Transfer of control to owners from developer –Obligations of owners not contractual so not enforceable Poor management of common areas Poor management of common areas –Devaluation risk for long-term lenders –Inability to borrow for common area improvements DEVELOPED MARKET MODELS: DEVELOPED MARKET MODELS: –Developers rights and responsibilities clear –Owners rights and responsibilities clear –Professional property management –Insurance requirements –Borrowing under UCC for common area improvements

9. The Urban Institute9 Applications Available from Developed Markets Legal and regulatory evolution Legal and regulatory evolution –Mortgage and secondary market framework –Enforcement of contracts –Registration of title and mortgages –Condominium development and operations Policy development Policy development –Government macroeconomic policies –Taxation, fee and subsidy structures Private sector response Private sector response –Demand driven –Multinational banking international best practices –Growth of ancillary industries – evaluation, insurance, credit reporting, rating agencies, property management

10. The Urban Institute10 Conclusions Desire for better housing is universal human nature, inevitably leads to strong demand for improved construction and financing options Desire for better housing is universal human nature, inevitably leads to strong demand for improved construction and financing options Private sector responds to strong demand Private sector responds to strong demand –Profit motive –Secure market, if risks carefully assessed –Flexibility –Growing number of multinational banks experience, skills Fast growing economies, developing capital markets Fast growing economies, developing capital markets Donor support through loans, investments and TA Donor support through loans, investments and TA Government policy slower to develop Government policy slower to develop –Entrenched interests in housing and construction sectors –Economic setbacks –Legal change is evolutionary, as in developed markets All in all, the future is bright! All in all, the future is bright!

11. The Urban Institute11 Questions? Carol S. Rabenhorst Senior Legal Advisor The Urban Institute 2100 M Street NW – Suite 500 Washington, DC 20037 202 261 5767 CRabenhorst@urban.org