The Beauty of Bricks and Mortar: Low-cost Housing as a Foundation for Impact
Editor’s Note: The following post is part of NextBillion’s month-long series in partnership with Ashoka focused on affordable housing issues. Please follow the entire series HERE and join the discussion with your thoughts and insights.
You’ve heard all the figures by now-we are living in a world where the majority of people live in cities and 1 billion live in slums, a figure that will triple by 2030. Urban areas are growing at a rate much faster than can be absorbed and managed, causing demands on services and infrastructure that massively outstrip supply. In many developing world cities, this leaves the majority of residents with little option but to live in slums.
It is clear to everyone that increasing access to high-quality, low-cost housing has a profound impact, both for the individual and society at large. Yet, housing rarely comes up in conversation amongst social enterprise circles. We hold panel after panel and write blog after blog about the new innovations in healthcare, energy, and agriculture, but we seldom hear about housing. At Acumen Fund, we feel it is high time for this dynamic to change and for the social enterprise sector to recognize the need to catalyze and support affordable housing across emerging markets. But we know there are forces working against us that cause housing to be treated like the forgotten stepchild of the social enterprise sector.
Housing rarely fits neatly into the social enterprise box. As an impact investor, we look for investments with strong entrepreneurs, attractive financials, and clear and scaling social impact. Housing projects require many different partners, may not have one clear entrepreneur at the helm, often rely on subsidy to be truly affordable, and don’t see a finished product on the ground until many months and sometimes even years later. Yet does this mean housing isn’t worth supporting, or does it mean that perhaps we should evaluate housing deals a little differently than we do our energy or water investments?
Housing is not sexy, which unfortunately makes it easier to ignore. It’s a sector characterized by loud construction sites, massive delays, and legal and regulatory messes. In fact, we often have to make housing less sexy in order for it to be affordable, taking out the frills and extra design finishings to bring down the price. And unlike new medical devices or agricultural inputs, when someone purchases a home, regardless of their income, they want to put their savings into good old-fashioned bricks and mortar rather than a shiny new technology that is unfamiliar and unlike the homes of their middle class counterparts. Yet this should not mask the need for true innovation in business models, end-user financing, and creative methods of reducing costs while maintaining quality.
Housing is slow. We have a tendency to be seduced by rapid growth-we want to see large numbers of people reached in little amounts of time, and understandably so given the scale of poverty and the challenges we are working to address. Housing is often out of line with this emphasis on scaling and scaling quickly. Scale looks different in housing, and so does impact. Using our preconceived notions of how scale should happen as a benchmark for success can mask real impact over the long run. The impact of providing a home is deep and profound, but it takes time and each individual project is unlikely to reach the sort of numbers we see in energy, healthcare, or agriculture, sectors that typically require much lower touch models to deliver their services.
Finally, truly low cost housing can rarely succeed alone. It usually requires support, often in the form of partnership with government, subsidies, or soft loans. These are things the social enterprise sector tends to shy away from because we may not consider this a truly financially sustainable model. But in reality very few social enterprises work in isolation from public sector support or without some form of subsidized capital. This reliance may be more explicit in low cost housing because it is so capital intensive and because without some extra incentive there is a strong pull for both developers and financiers to move up-market and make a quicker, easier buck. However, this doesn’t weaken the need for business models that make financial sense. Entirely government-led housing projects do not benefit from the market as a listening tool to develop more appropriately designed programs. Instead, we too often see governments allocating free housing to slum dwellers, which they promptly rent or resell and move back into the slums. Therefore, increasing the supply of housing in a manner that is in line with the preferences of the poor and their ability to pay requires a foundation in market-based approaches.
But it is for precisely these reasons that low cost housing needs patient capital. In many of the markets where we work there is recognition of a huge unmet demand for affordable housing, but little willingness to be the first mover. Creating new categories of housing takes guts and creativity, and few are jumping in without examples at which to look. But once those models are there and working, we are confident that the sector will be catalyzed and many, even traditional real estate developers, will begin moving down-market. This is starting to happen in India, especially following the work by Monitor Inclusive Markets to demonstrate the attractiveness of low-cost housing to developers. Now we are getting to a place where we can actually call affordable housing a sector in India. We have yet to get to this point in most of the other geographies where we work.
(Above: Outside of Nairobi, former slum dwellers are creating a new town called Kaputei that will provide safe, affordable and legal housing, as well as opportunities they did not have in their previous communities. Led by Acumen Fund investee Jamii Bora, the fastest-growing microfinance institution in Kenya, this pioneering new eco-town is expected to house 10,000 people).
In Kenya for example, where I am currently working to build Acumen’s housing portfolio, there is a housing deficit of 40 percent, and 60 percent of urban residents live in slums. There is no home on the formal market below $20,000, a level completely unaffordable to low income populations. Only 8 percent of urban Kenyans have access to housing finance and there are currently only 22,000 active mortgages in all of Kenya. This is not because Kenyans lack the desire to own a home-homeownership is a central part of the culture here. And it is not because it is impossible to build cheaper homes. Developers and financiers are watching this market carefully because they recognize the huge potential that has yet to be unlocked. But little is happening on the ground because there is nothing to point to as an example of success, to help reduce the perception of risk and allow those waiting and watching in the wings to jump into the market.
Therefore, it is imperative that social investors such as Acumen Fund share some of the risk with those few and far between individuals who are working to develop new solutions. In doing so, we are likely to catalyze the supply of a new category of housing. Making game changing investments such as this is the ultimate success for investors like us, perhaps even more so than scaling one individual enterprise.
It is for these reasons that Acumen Fund invests in housing enterprises. We believe that the impact of providing a home is undisputed and the need for patient capital clear. If we are trying to improve the lives of the poor, we cannot ignore housing, especially as the cities where we work expand so rapidly. If we ignore housing, we are mistaking the forest for the trees. Looking closely, we find that housing is at the root of many of the other issues we are working to address-the lack of quality housing options leads people to live in areas with reduced access to clean water, sanitation, reliable and healthy energy sources, and with increased exposure to disease.
Acumen Fund has made seven investments in housing in three geographies. Our focus is two-pronged-investing in the supply side (directly increasing the supply of affordable homes) and the demand side (increasing access to affordable end-user finance). We are also closely watching what is happening with affordable building materials and slum upgradation, as these are important parts of the low-cost housing ecosystem as well.
(Above: Saiban is a non-profit housing organization providing urban squatters and low-income groups in Pakistan access to affordable home ownership. Its newest project, Khuda-Ki-Basti-4 (KKB-4), is expected to house 450 families, or 2,000 people.).
We have invested in three low-cost housing developments, three housing microfinance products, and one enterprise that is increasing land rights and titling for the urban poor. Saiban, one of our investments in Pakistan, provides poor urban squatters with access to legal housing and home ownership. One of their developments is now a thriving community of 30,000 people. Saiban’s model was also the catalyst for Ansaar Management Company, another low-cost housing developer in Pakistan and an Acumen investee, and it sparked the Punjab government’s interest in affordable housing.
We need more impact investors to join us in the fight for affordable homes. It may not be as sexy as some of the other sectors where we put our money, but if we call ourselves risk takers who support work that will result in significant impact, yet may not have a proven track record, we need to give low cost housing a serious look. The housing sector is in desperate need of more entrepreneurs and investors with the patience, creativity, and risk appetite needed to increase access to quality, affordable homes.