Bryan Farris

Best Ideas of 2011: Understanding Three Affordable Housing X-Factors

There is no magic bullet to solving the affordable housing problem, especially given how large the issue is. Efforts will be needed from governments, for-profit companies, NGOs and especially from the BoP members themselves. More than anything, time is needed (and a positive economic environment).

The “housing for all” goal shall be achieved one doorway, wall and roof at a time, and millions of players will be involved. For that reason, sharing knowledge and lessons about housing is critical.

I spent the bulk of 2011 in Pakistan working at Ansaar Management Company on affordable housing projects outside Lahore and in the flood-affected areas. Reflecting back on the year, there are three distinct lessons that stand out. I call them X-Factors; lessons that, if understood broadly, could make a significant difference in the way in which housing is provided for all.

1. Houses vs. Homes

When you spend your days talking about blueprints, cash flows and regulatory approvals, it’s easy to forget that you are building so much more than just a house. You are creating a place for families to gather and celebrate life’s milestones.

This is important to keep in mind because a structure all by itself is not what a family needs. Families, especially in the developing world, thrive as communities and wither otherwise.

Affordable housing developers should build in a manner that supports community building. This means putting parks or communal areas in the center of a block of homes. It means providing the governance structure (similar to a Home-Owners Association) for neighborhood decisions and setting up partnerships with third-party organizations that can provide vital services (e.g. garbage collection, schooling, health clinics and more). AMC residents all pay a modest monthly fee (collected by the ’HOA’) to pay for these services.

Collectively, we call the services and facilities that are geared for the community “Social Infrastructure.” Just like electricity, sewerage and roads, you can’t properly build a housing community without social infrastructure in place.

2. Higher Costs, Less Capital

Wait…higher costs? This is supposed to be affordable housing right? Well, you read it right; at AMC we’ve uncovered a novel business model that may make it easier for developers to return a profit on investment, despite making less money on a home-by-home basis.

Let me back up. Typically a housing development is built all at once: First all the land is cleared, then the infrastructure is installed and ultimately homes are constructed. Once that is done, the developer sells off all the properties and takes the profit. By building everything at once, the developer can realize economies of scale and construct each home for less.

We’ve taken a different approach: rather than do everything at once, we build our communities incrementally. This means building the infrastructure and homes for one block at a time. Admittedly, this approach means that we cannot achieve the same economies of scale that we would if we built out a whole neighborhood/village at once. Therefore, if we charge the same prices, our profit per home is less than it would be in a traditional model.

The reason we are willing to accept lower profit margins is that the incremental approach allows us to recycle capital and spread out demand. The profits made off of the first block of homes can be used to fund the construction for the next block. As that block is completed, the profits are recycled again to construct the next block and so on.

Return on Investment (ROI) is defined as the net present value of all profits divided by the capital investment required. By minimizing the capital investment (which is hard to come by anyways) we are able to achieve an acceptable ROI despite higher costs.

(Cha Cha Mansur and myself in Pakistan’s flood-affected areas).

3. Government Incentives/Policy

Even with novel business models, it is still difficult to make affordable housing appeal to strictly for-profit housing developers. Given the scale of the problem, a private sector appropriate solution will be required to make a proper dent in the housing shortage at the BoP. There is a lot that governments can do to help.

Policies should be created or modified to encourage incremental housing. At the moment, developers in Pakistan must electrify the entire plot of land before they can begin constructing homes. This means that we can’t use the incremental approach with regard to electricity.

Governments can also do more to provide incentives to developers who choose to build affordable housing. For instance, a government could offer to re-zone half of a large plot of land to a commercial zone if the developer builds affordable housing on the other half. This ends up being a win-win situation for the residents, because the commercial zone is likely to provide much needed jobs.

Solving the global housing crisis will be anything but easy, but sharing knowledge and novel approaches is critical. These X-factors should help, but I am sure there are many more; what ideas do you have?

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Base of the Pyramid, housing, rural development