NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Ghost towns built by well-meaning developers and governments can be found in many corners of the world. These failed projects, however, only tell part of the story about affordable housing. Across the world innovative companies and partners are learning from the past and building houses people want to live in and business models that make investors listen.

The Base of the Pyramid (BoP) sector dialogue on affordable housing puts a spotlight on these pioneers, but also on the challenges and future perspectives of affordable housing. The vantage point is the newly published: “My Home, Your Business – A Guide to Affordable Housing Solutions for Low-Income Communities.”

The business guide highlights developments and dynamics in the sector and summarizes best practices in a “business model generator” that addresses key issues companies face. For example, how do we enable people at the BoP to make the biggest investment of their lifetime? Or how can businesses effectively cope with land rights, access to utilities and other vital public services? Or how can we build homes that balance costs with quality, safety and sustainability? The tool is based on an evaluation of almost 100 cases and 25 interviews with companies and experts. It provides lessons learned and hands-on guidance by practitioners for practitioners.

These practitioners represent different corners of the world and a variety of approaches. In Chile, the architects at Elemental not only design houses in collaboration with BoP clients, but also include them in the building process. This ensures that houses are desirable while bringing down the construction costs. In Pakistan Ansaar Management Company (AMC) is rethinking the role and business model of a developer. Instead of only constructing, AMC also invests in community development for several years. The first homeowners pay little, but share the task of creating a vibrant community, while the last homeowners pay a premium to move into a functioning community, making the overall project a viable business case.

For other companies affordable housing is not about shiny new buildings, but about selling building materials or building services to the BoP. Companies like Cemex or Lafarge are developing innovative solutions that often link construction materials with knowledge and financing. These business models reflect the fact that BoP housing already constitutes a large global market. Families in low-income communities are already building, repairing and improving their homes. They are buying cement and tiles as well as renting and selling. In total, BoP customers spend an estimated USD $700 billion annually on housing, [1] but often lack access to appropriate housing solutions. A housing solution can be a house design, a construction method, a special type of building material, or a range of other products or services. Usually the available solutions are prohibitively expensive, forcing BoP customers to spend large amounts on inferior materials.

(Above: At the 6th BoP Sector Dialogue in December in Berlin. Image courtesy of GIZ.)

These cases demonstrate that it is possible to address the BoP market profitably. There is still a long way to go before the almost 1 billion people living in slums have access to adequate housing solutions. Looking ahead the challenge will only grow. McKinsey´s Global Institute recently projected that the investment gap related to housing, in construction alone, will be as high as USD $9-11 trillion by 2025.

To address the affordable housing gap, practitioners and experts from around the globe came together for the 6^th BoP Sector Dialogue in December in Berlin. Twenty participants from across the value chain from Africa, Asia, Latin America and Europe shared experiences and best practices, discussing how to improve collaboration and move the sector forward. The public was also invited to participate in the discussion at an accompanying evening event hosted by Mr Hans-Joachim Fuchtel, Parliamentary State Secretary, and Susanne Dorasil, Head of Division Sustainable Economic Development at the Federal Ministry for Economic Cooperation and Development (BMZ). Mr Fuchtel underlined the crucial role the private sector has to play in closing the affordable housing gap and invited discussion on how to build and scale related inclusive business models and partnerships.

Among many interesting inputs, El-Hadj Bah, Principle Research Economist at the African Development Bank stressed that change will not only require new partnerships and business models, but also a change in perception of what a good home is. François Perrot, Director Affordable Housing Programme at Lafarge added that the affordable housing sector is not business as usual. Companies often need to build their own enabling ecosystem to make their business models work for low-income homeowners and renters.

?Download the report

This requires strategic partnerships and a culture of learning by doing. Authors of the practitioner guide Sara Ballan of the BoP Learning Lab, and Hans Uldall-Poulsen of Dalberg Research explained that the BoP is not a uniform group, and that it requires different solutions. The poorest tiers often require public partnership, while innovative financing mechanisms such as cross subsidizing, “rent-to-own,” DYI solutions and micro mortgages are increasingly enabling commercial models for mid-tier BoP segments.