I share below some thoughts on a proposed model for affordable housing in economies such as Africa, embedding financial inclusion.
This builds on a typical rent to own model but recognises some of the issues in African economies such as low incomes, poor information and credit profile histories, limited supply side financing, no clear assessment of effective demand and behavioral tendencies.
I see a solution around an optimized housing model working backwards from available incomes on the demand side.
1. Option premium vs mortgage deposit: tenant enters an agreement and agrees to pay a % of the house purchase price now (similar to an option premium, but an amount less than a typical mortgage deposit) — what is a reasonable %, say 5%? This should open up housing to a wider section of the population.
2. Option term vs mortgage term: the tenant earns a right to buy/own a house. The right can be exercised in the next 1–5 yrs. This would behave like a call option on the house.
During the option term, the tenant may exercise and enter a longer mortgage term (> 5 years).
3. Incorporating savings: in the five (5) year option period, the tenant may pay a premium to market rent which includes ‘rent credits’ or ‘savings’ which would go to a typical mortgage deposit and in the process help to build a credit profile for one to be able to raise financing including bank financing to buy the house in the option period.
4. Ensuring price stability: at the end of the option period, the tenant may exercise the option and buy the house. This may be at market price or a price set when entering the option, this will depend on the views on house pricing and return required versus risk perceptions.
If the option expires, the tenant may lose a portion of the ‘credits’ or ‘savings’ to compensate the property owner for the opportunity cost.
5. Investment returns: the credits in meantime can also be invested with net returns split between the tenant and the property owner, at the end of the option period, if the option is exercised.
6. Other financial products: to encourage financial inclusion and de-risk the venture, within the periodic ‘rent’ payments can tag or pay for financial products to say life insurance, disability insurance, health insurance, etc. which can be priced cheaper when done at scale.
7. Determining effective demand vs house prices: see a target market structured around low to middle income public servants and workers in line with a steady salary structure and or linked to pension contributions, need to determine what house type or unit build cost can be supported.
For example, what house type would a turnkey unit build cost of $25,000 achieve, what technology solutions and project delivery approaches exist and at what scale does one achieve the lowest unit cost? Can the build cost be driven lower? Can the supply chain be optimized at appropriate scale to bring down price?
8. De-risking the model: besides de-risking through other financial products, can a project be de-risked further for example through guarantee schemes, anchor investor, grant/concession funding and making affordable land banks available?
Would welcome thoughts and considerations on how to improve this and or test this especially with key players in the sector such as government/public sector, financial services players (banks, insurers), development partners, technology partners.
This article was originally published on medium by Kenneth Legesi on March 6 2018.