An Ecosystem Approach for Building Affordable, Climate Resilient Housing
There’s growing acceptance of the causality between climate change and the occurrence of natural disasters including floods, cyclones, coastal erosion and landslides. The most severe damage from these climate change calamities also is where the population density is highest, such as urban areas or informal settlements. The absence of climate resilient housing, especially for the urban poor, greatly increases the vulnerability to disaster-related damage.
Indonesia has seen some of the worst natural calamities in recent times, the biggest being 2004’s Indian Ocean tsunami. According to the World Bank and the Indonesian government, the damage from the tsunami was estimated at US$4.4 billion, while the death toll crossed 120,000. The country’s location in the Pacific Ring of Fire further adds to its vulnerability. The associated risks are further aggravated, considering 50 percent of Indonesia’s population lives in urban areas and the government faces many challenges in providing access to basic services such as sanitation and clean water.
Estimates show the demand for houses in Indonesia exceeds 1 million whereas the supply is between 300,000 – 400,000 annually. This enormous supply gap and Indonesia’s susceptibility to natural disasters highlight a business opportunity for private sector firms in the country’s affordable housing sector. If private sector players can strategize well, they can leverage this market opportunity (estimated at USD 424 billion globally) while simultaneously creating much-needed social impact. Apart from affordable housing, micro-housing finance and low-cost rentals are some interventions that have the potential to help build climate change resilience in urban poor communities while generating lucrative returns.
As a part of the Rockefeller Foundation Technical Assistance Facility, Intellecap worked with Lafarge in Medan and Aceh, Indonesia to create a climate-resilient housing product model that is sustainable and caters to the urban poor. Lafarge is a leader in building materials with a strong focus on innovation and sustainability. The company operates in 64 countries and its affordable housing initiative currently operates in 20 countries, mainly in Asia and Africa. As a group, it increasingly seeks to develop and market innovative affordable housing solutions for the urban poor.
Our approach towards the project
Before connecting with Intellecap, Lafarge Indonesia piloted an affordable housing initiative, called the Rumahku program, with two local microfinance institutions, Bank Rekyat Indonesia (BRI) in Medan and Dian Mandiri in Aceh. The firm was looking to extend the program to other relevant markets, including Riau and Jakarta. However, since this was a new initiative, Lafarge and the MFIs both faced challenges developing the operational model, and needed assistance in creating a strategy that supported rapid scaling. Intellecap worked with Lafarge to strengthen their efforts and establish proof of concept for an affordable housing microfinance initiative, which facilitates easier access to climate-resilient construction, housing finance, and technical assistance for low-income communities. The end-objective of the collaboration was to design and develop a scalable affordable housing solution for Indonesia’s urban poor to mitigate the risks associated with climate change.
A keystone aspect of the pilot program that helped increase efficiency was the clear and distinct division of roles between the four stakeholders: Lafarge, Intellecap, the MFI and a local partner. Intellecap was responsible for the market assessment, developing a business plan for scale, reviewing and standardizing operations, and providing strategic options on climate-resilient solutions. Specifically we focused on integrating energy, water and sanitation uses into LaFarge’s current construction building support services and capacity building. The local partner was responsible for data collection and translation of content. Lafarge was mainly responsible for connecting Intellecap with on-the-ground stakeholders, while the MFI was responsible for refining and implementing the recommendations to tailor their housing finance product.
The first step of the pilot was to conduct a market assessment, through which Intellecap identified regions that are likely to be lucrative to Lafarge. Intellecap developed an Area Lucrativeness Index (ALI) tool that considered various parameters (See Figure) and weighted each to evaluate market opportunities across Indonesia. The ALI tool helped identify Java Island, North Sumatra and Jakarta as areas with high demand for affordable housing.
To create an affordable housing solution it is obviously important to reduce costs. Intellecap identified climate-resilient solutions with respect to energy, water and sanitation products. The selected products had the potential to reduce operating costs over a longer time period, thereby reducing the financial burden on the low-income population. Further, Intellecap advised Lafarge on streamlining its marketing channels by identifying relevant value chain players across the housing sector. This move allowed Lafarge to retain only those marketing channels that had high outreach among the low- and middle-income population, reducing marketing costs significantly. In addition, Intellecap developed a strategic business plan and provided capacity building training to the firm’s affordable housing project staff.
What we learned
The affordable housing market is still unstructured, and with the growing shift in the aspirations of the low-income population, the demand for affordable housing is expected to grow. As a result, there is significant business opportunity in this sector for private sector enterprises across the Global South. However, a more detailed market assessment is essential to understand the structure, needs, competition and business potential of the market in targeted geographies.
It is critical to design appropriate finance products for the targeted customers, as they are characterized by low purchasing power and capacity to pay. Consequently, a construction company interested in delving into affordable housing should develop an ecosystem approach to ensure last-mile connectivity. The key players in this ecosystem are MFIs for delivering the housing finance product, and building materials companies to cut down on both the construction costs of housing units and maintenance costs. Building the supply chain for sourcing construction material and resources locally and relying on renewable energy solutions can also help firms gain a cost advantage, while also creating local jobs and reducing environmental impact. It is also crucial to segment the market and profile potential clients to develop a business model that incorporates price differentiation.
The specifics of the housing product and the finance being offered to low-income populations should vary from what’s offered to middle and high-income groups. When such products are designed and customized efficiently, it allows for price differentiation, enabling private sector players to reap maximum returns from each market segment. For example, value-added services such as flexibility to choose designs can be offered to middle-income consumers, while they can be neglected for poorer clients. Lastly, in the poorest countries, it will often be necessary to educate base of the pyramid customers to create a market for housing.
If private sector players can cooperate with government initiatives, affordable housing solutions will help mitigate the risks associated with climate change. Private sector enterprises should look into this sector as efficient strategizing will create a win-win situation for all stakeholders, while simultaneously reducing our environmental footprint. Starting from a pilot, Lafarge’s Rumahku housing program is now available in seven MFI branches across two cities in Indonesia: Medan and Banda Aceh. Beyond Indonesia, over the last few years, Lafarge has provided affordable housing solutions to more than 250,000 people across 20 countries.
The Asian Cities Climate Change Resilience Network (ACCCRN), supported by the Rockefeller Foundation now reaches more than 50 cities in Bangladesh, India, Indonesia, the Philippines, Thailand and Vietnam, and has helped to improve the capacity of these cities to prepare for, withstand and recover from the impacts of climate change. Intellecap is supporting these private-sector interventions and mapping pilot project results across various sectors.
This post is the third in a three-part series. Check out part one and part two.
Top image: Rebuilding in Indonesia after the Tsunami. (This image is unrelated to the LaFarge housing project in the article). Image credit: ILO in Asia and the Pacific via Flickr.
Vasu Kangovi is an Associate Vice President with Intellecap and works in the field of financial inclusion.
Shreejit Borthakur is a Senior Associate with Intellecap with specific interest in development economics and resource management.