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Diversifying Affordable       Encouraging         Housing Financing     Development of      Public Private      Partnershi...
Presentation IndexMENA Social / Affordable HousingGlobal Affordable Housing SourcesConcepts In Affordable HousingSOCIAL RE...
MENA Affordable Housing Market                                                   Lebanon       JLL 2011 Report            ...
Affordable Housing Demand Forecasts,….          JLL did not split the demographics, so there are Questions on the final nu...
Media Opportunities in MENA Social Housing•   ? Iraq - The Iraqi government in June 2011 approved plans to build 3.5 milli...
Top Trends for GCC Real Estate in 2012 - 2020 An increased focus on realism is likely to be the trend influencing the GCC...
Examples of the New GCC Real Estate Trends• Diyar Al Muharraq, one of Bahrains biggest mixed-use residential urban  develo...
Jeddah Low-Cost Housing , One Million Units• Jeddah needs almost one million housing units over the next 20  years, accord...
Bahrain Affordable Housing ProgramBahrain Ministry of Housing Sources - 2011                                             9
The Housing Sector      in Saudi Arabia–   Population growth and lower family sizes push greater demand for housing.–   40...
Potential Solutions on Housing MENA    Housing   Solutions                                               Construction     ...
Housing Delivery – Supply Demand Factors      Demand                  Supply Side                     Barriers to         ...
The Affordable Housing Perfect Supply Inputs                                                Policy , Regal &              ...
MENA SUPPLY GAP                                     DEMAND GAPS                  Public sector funding is predominantly ...
Investors , Borrowers & Financial Institutions Perspectives  Investors              Borrowers                Financial  • ...
MENA Affordable Housing – Owners - Developers              Owners                               Developers  •High mortgage...
Government / Private Sector RolesGovernment : Legislation on foreclosure / mortgage & securitization is key to jump start ...
MENA Affordable Housing PESTEL Analysis    • Politicians – controlled by office tenure; short term Public policy / strateg...
HOUSING & FINANCE POLICIES / PROGRAMSIn setting policies & programs Governments target the stimulation for personalconstru...
Do List to Boost the Affordable Housing Sector – Government!   • Recognize housing finance as an economic empowerment/acti...
Affordable Housing Government policies ,….Government long term policies optimal goal is to provideaffordable and comfortab...
Stages In Housing Delivery1                2Statesponsored                      3                Loweringhousing         s...
Global Affordable Housing SourcesWIDESPREAD PROPERTY OWNERSHIP IS A  DESIRABLE GOAL OF EVERY SOCIETY
US ResourcesAffordable Housing Institute (AHI)African ResourcesThe African Union for Housing Finance (AUHF)An association ...
Example , The African Union for Housing Finance (AUHF) - Statement by themembers of the AUHF at their annual general meeti...
Good Book to ReadHousing Finance Policy in Emerging Marketsby Loic Chiquier and Michael Lea(Paperback - Jun 19, 2009)"$42F...
Other Sources                       National Association of Housing Redevelopment                       Officials - US    ...
World Bank - WHY HOUSING FINANCEThe World Bank is a vital source of financial and technical assistance todeveloping countr...
WORLD BANK’S                                                            MORTGAGE LIQUIDITY               WB MORTGAGE   HOU...
Concepts In Affordable Housing                                Ownership FormsThe gap from pure rental to homeownership is ...
Target            Housing Issue                     Program Goal                              MENA      Increase     The m...
HOUSING EDUCATIONWHY IS IT IMPORTANT?                         EDUCATION PROGRAMS•   Facilitates consumer protection       ...
EXAMPLES ON HOME LOAN EDUCATION NEEDSHousing tends to be a long-term financial commitment withassociated advantages and di...
ADVANTAGES OF OWNING                                   DISADVANTAGES OF OWNING                                            ...
Affordable Housing Communities – Eco Cities Concept Housing is like an evolving ecosystem - healthy and self-sustaining, o...
36
SOCIAL RENTAL HOUSING IN EUROPEFACTORS INFLUENCING GOVERNMENT CHOICE IN SOCIAL RENTAL HOUSINGMany countries in Europe and ...
SOCIAL RENTAL HOUSING POLICY ISSUES• Social rental housing may be regarded as housing stock whose access is not based on  ...
MARKET RENT AND A RENT AFFORDABLE GAPRent setting is a key element, as choices in this field heavily influenced bythe fina...
INVESTMENT & OPERATION ACCOUNTS EFFECT ON RENT Heavy allocation of funds from the state budget, with very low rents resul...
AFFORDABLE RENT AND SUBSIDIESMarket Rent                                                      ProfitCross Cost Rent       ...
INVESTMENT & OPERATION ACCOUNTS EFFECT ON RENT The subsidies sometimes will increase the housing affordability beyond nee...
SOCIAL RENTAL HOUSING FUNDING POLICES SHIFTS Many Countries developed off-market finance for social housing thru direct s...
MORTAGE LOANS ISSUES IN SOCIAL RENTAL HOUSING These loans are long-term, often more than 30 years, which makes it difficu...
FUNDING SOURCES IN SOCIAL RENTAL HOUSINGDue to the nature of the financial needs of the social sector (large volumesand lo...
NOTES ON FUNDING SOURCES IN RENTAL HOUSING Countries in transition moved towards introducing wholesale funding In underd...
MENA Housing Mortgages , Securitization                     The Classical Problem• The structure of Bank Deposit Liabiliti...
OTHER ISSUES WITH MORTGAGE & NATIONAL FUNDS The usual low interest rate level stipulated by law on investment on NHF make...
Asset Liability ManagementDeep long term pool of funds both domesticand foreign that are cheaper & stable funds Borrower  ...
SUB PRIME EFFECTS ON MENA                 HOUSING FINANCE IN MENA REGIONProperty is a bubble commodity it has and        •...
SPVS AND SECURITIZATION – BANKERS OPTIONS• In SPV - Bank sets up a SPV and sells loans to the SPV (off balance sheet)• In ...
In the past 20 years there has been the unbundling of the 4 major aspects ofmortgage lending: origination, servicing, fund...
Home Loan Bank Model/Mortgage Liquidity FacilitiesLong term fixed rate liabilities often not available in deposit markets;...
Housing Fund is a public setup with juridical rights, administrative, financial and controlledautonomy to execute governme...
Housing Micro-Finance – Non Existing in Most MENA Region        FEATURE                         MICRO FINANCE DETAILS  Bor...
Securitization Examples in Housing Microfinance  One of the 1st Microfinance Securitizations     Issuer : BRAC Microfinanc...
KSA Mortgage Law – In the Pipeline  Expected to boost house sales by 50%Saudi GDP growth in 2011 reached 6.8% , GDP expect...
Bahrain Affordable Housing Support SystemBahrain - Ministry of Housing & Economic Development Board Sources - 2011        ...
Bahrain Mortgage Guarantee System (MGS)                                          59
Entities & Benefits                                      Government                          Borrowers of the Mortgage    ...
Multi Mortgage Agencies Cooperation                                  61
PPP’s As Sustainable Housing SolutionThe scale and nature of housing ecosystems are such that the public and private secto...
PPP Program Integrated Approach No perfect design for regulation and  institutions      Changing market condition needs ...
PPP POLICY AND LEGAL FRAMEWORKS & SUPPORT               Comprehensive PPP Law – Investment , Funding , Subsidies & Techni...
Guidelines for Social PPP ProjectsPPP Test           Affordability for the Public Sector & desired gains           Finan...
Typical PPP ModelRisk Transfer                               Host Government / Public Authority                           ...
Steps in PPPs Procurement - PPP Project Life Cycle  What are the steps?Project Preparation –            Service Provider S...
Adpoted PPP Model for Housing – BOOT (or BOT) & BTO (or BT)                  The Limitations of the PPP Model             ...
Tranches of Structured Finance & Subsidies for PPP Housing                           • Capital market mortgage at affordab...
PPP Recommended Model for Social Housing                                                                                  ...
Reducing Transaction Costs & Securing Competitive Bids  Planning Process    -   Planning requires time and money - worth ...
•   Managing the capacity and supply chains of the local and regional house building                  market to develop su...
loayg@works.gov.bh; loay.ghz@gmail.com 00973-36711547 , Skype: loay.ghazalehhttp://bh.linkedin.com/in/loayghazaleh        ...
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Diversifying MENA Affordable Housing Financing & PPP Options - Affordable Housing Development Summit - Oman, 2012

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Only a few markets in the MENA region are addressing their housing issues. A mix of delivery models from traditional design and build to the development of Public Private Partnerships are being used while the definition of Affordable / Social Housing varies significantly among markets within the MENA region.

This paper establishes that widespread home ownership & development cannot be achieved without a robust financial system achieved by effective link between residential mortgages and the long term financial markets. The paper also addresses Governments long term and short to medium term policies optimal goals to provide affordable and comfortable housing for all that needs it.

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Transcript of "Diversifying MENA Affordable Housing Financing & PPP Options - Affordable Housing Development Summit - Oman, 2012"

  1. 1. Diversifying Affordable Encouraging Housing Financing Development of Public Private Partnerships in Affordable HousingLoay Ghazaleh – Advisor - B. Sc. Civil Eng. , MBA 1
  2. 2. Presentation IndexMENA Social / Affordable HousingGlobal Affordable Housing SourcesConcepts In Affordable HousingSOCIAL RENTAL HOUSING IN EUROPEHousing Mortgages , SecuritizationPPP’s As Sustainable Housing SolutionAdpoted PPP Model for Housing 2
  3. 3. MENA Affordable Housing Market Lebanon JLL 2011 Report Syria West Bank & Gaza Iraq Jordan Only a few markets in the MENA Kuwait region are addressing their housing issues. A mix of delivery models from Egypt Bahrain traditional design and build to the Qatar development of Public Private UAE Partnerships are being used. Saudi Arabia OmanRoughly 50% of the population in MENA region can fit in Yemenone form or another of the social / Affordable Housing Unmet Housing Additional Housing Households - 4-6 / Country Population Units Demand Units Demand Family Assumed 2011 Per AnnumEgypt 84,000,000 20,220,499 1,500,000 370,000Morocco 32,000,000 6,229,348 600,000 60,000Iraq 32,000,000 4,754,505 1,000,000 63,000KSA 26,000,000 4,723,683 400,000 100,000Oman 3,000,000 472,531 15,000 9,000UAE 6,000,000 1,097,880 20,000 14,000Bahrain 1,200,000 274,959 40,000 16,000 Total 184,200,000 37,773,405 3,575,000 632,000
  4. 4. Affordable Housing Demand Forecasts,…. JLL did not split the demographics, so there are Questions on the final numbers,… % of % of urban Urban households x In low Population Country income Population bracket No. of ------------------ x = potential Average % of Homes household rural needed size % of households rural x In low population income bracketJLL noted that there is no commonly agreed definition of what comprises Affordable or Social housing within theMENA region. Definition varying significantly between markets ● Affordable is generally associated with Households with less than 60% of the median income… ● Social is generally associated with bottom 40% of the households on the income distribution… ● Defined cost wise based on income bracket, Housing that generally consumes 30% of net income 4
  5. 5. Media Opportunities in MENA Social Housing• ? Iraq - The Iraqi government in June 2011 approved plans to build 3.5 million new homes within the next ten years to meet the housing crisis that it is facing. A $70 billion reconstruction package announced included the allocation of $25bn investment for housing.• ?? Libya - The Libyan government was in the process of launching its first development program to invest across the infrastructure of the Country including Housing. The housing program was to develop over 300,000 new houses at a value of $35 billion.• Kuwait-The Government is pushing ahead with a number of affordable housing schemes using the Build Operate Transfer (PPP) procurement models.• Bahrain - Bahrain Government signed in early 2012 a record BD208m ($550m) with a local Developer to build more than 4,000 affordable homes. Bahrain forecasts the need for about 350,000 new residential units to be added to existing stock by 2030 with $1.1bn to be spent every year up to 2020, and then $242m annually up to 2030, (EDB report).• Saudi Arabia needs 1.65 million new homes by 2015 .Total commitment is $130bn on social projects with $67bn allocated for 500,000 new homes and $400 billion for infrastructure projects. KSA Construction Housing Pipeline Projects valued at US$ 29 billion for 2012.• Saudi Arabia nationwide accommodation needs have been estimated at more than five million new housing units by 2020. The plan says Saudi Arabia will require SR 2.4 trillion (US $640 billion) of investment in real estate over the next 20 years. 5
  6. 6. Top Trends for GCC Real Estate in 2012 - 2020 An increased focus on realism is likely to be the trend influencing the GCC real estate sector in 2012 and years ahead, resulting in more attention to the needs of the consumer or customer, more emphasis on financial returns and bottom line performance and a reduced future supply pipeline as more projects are cancelled or delayed. Also the affordable housing can be an enabler of social stability in the Middle East, and green building can help give money back to communities, according to an executive of a leading ecological project investor. Developers are turning to government-led housing initiatives in order to compensate for a decline in public spending and a decrease in demand for new projects.Other key trends are expected to be: An increase in sales activity at the lower end of the market, although there will remain limited interest from international institutional investors. More emphasis on estate management of the public realm within master planned projects. More awareness of the commercial advantages associated with green buildings and sustainable practices. More choice for tenants, particularly in the office markets. Greater variation in performance between winners and losers within each asset class. 6
  7. 7. Examples of the New GCC Real Estate Trends• Diyar Al Muharraq, one of Bahrains biggest mixed-use residential urban developments, is launching what it terms a ‘crafted affordable housing program’ to address the Kingdom’s growing need for social housing.• Jeddah is scouring the world seeking most advanced technologies to implement the need for affordable. The specifications call for service life span of 100 years, concrete based products offering ductile properties (seismic zones), 4 hour fire rating at 1200 degrees Celsius and highest thermal properties• Jeddah, KSA awarded an International real estate firm a SR1.1bn contract to building affordable housing over 1million m2.• Kuwait is to develop an expansion plan for Kuwait City in line with the country’s Kuwait 2030 initiative. Also More than 350 housing plots will be made available for new projects in Kuwait’s Al Qairawan with Kuwait Oil Company• Al Falah is a $2.5bn, 1,200ha housing development for UAE nationals near Abu Dhabi, with 4,857 villas and an expected population of 60,000. 7
  8. 8. Jeddah Low-Cost Housing , One Million Units• Jeddah needs almost one million housing units over the next 20 years, according to a strategic plan prepared by the Jeddah municipality released at the Jeddah International Real Estate, Finance and Housing Exhibition 2010 (JIREX 2010).• The Jeddah municipality’s plan is based on present shortages and future requirements. Currently there is a shortage of 283,000 housing units, including 80,000 in the low-income group.• The plan calls for immediately building 151,600 units for accommodating people living in underdeveloped areas, and 51,500 units to meet the demand of population growth.• With regard to future requirement, the strategic plan foresees a need for 570,000 units in the next 20 years, adding that demand for housing was increasing due to the presence of a large number of expatriate workers and inflow of people from villages and cities, apart from population growth. 8
  9. 9. Bahrain Affordable Housing ProgramBahrain Ministry of Housing Sources - 2011 9
  10. 10. The Housing Sector in Saudi Arabia– Population growth and lower family sizes push greater demand for housing.– 40% of population is younger than 15.– Only one third of Saudi nationals live in apartments,– The preference for most Saudi’s is villa living rather than apartment living, however apartment living is more affordable. The cost of villas in Urban major cities is out of reach for the common Saudi.– Housing is considered a basic right to be provided by government to those citizens who cannot afford it.– 80% of households cannot afford to own units of greater than 200 sqm. 60% of Saudi Families may require assistance to own housing units up to 125 sqm.– Affordability improves if traditional subsidies are available (zero interest loans, land grants, government rent to buy, free infrastructure).– REDF has provided 80% plus of home finance with loans being increased from SR 300,000 to SR 500,000 and SR 40 billion of additional capital injected.– Estimated waiting time for Saudis who apply for REDF has been nearly 15 years with the aim to reduce to 5 - 8 years.– The government needs to take an active role in delivering affordable housing, the private sector cannot be relied upon to perform this function as largest developers deliver roughly 1000 new units each year.– Private sector see the mid to low housing sector as low margins business and as such some developers show little interest in this sector with major costs to develop the primary infrastructure requirements (waste water, water, electricity and district cooling) to enable the development of new communities.
  11. 11. Potential Solutions on Housing MENA Housing Solutions Construction Technology ≠ Low Quality Social/ /Modular Systems Land and Cultural Infrastructure Increase Access to Finance / Acceptance Cost Mortgage & Enact Securitization Mass Building Systems Solutions Environmental/ Developer New PPP Arrangements w/ Subsidy Sustainability – Affordable Business and JV considerations Eco Concept Housing Model Reducing Land Cost, Land Tax Laws Reducing Infrastructure Cost ; Sharing / Cost Recovery Concepts Program Effective Blocks Near Urban centers; Multi Management, Pr Planning / Story Higher Density Solutions ice & Quality Mortgages & Budgeting Control Long Term Innovative Design Solutions for Finance Privacy, Use, Common Areas 11
  12. 12. Housing Delivery – Supply Demand Factors Demand Supply Side Barriers to Demand Enablers Opportunities Entry Inhibitors• Growing population • Large scale • Little experience • Off plan purchases not• Generally house values development sites in among local desired appreciate in MENA – a new suburban areas Developers in low • Cost / Affordability strong security for • Opportunity for margin products Issues future borrowing and securitization. • Few capable • uncertain employment advances • Mortgage laws near contractors for large • Diverse households• Declining household enactment projects • Cultural acceptance of size • Political stability, with • Scarcity of long term community• Young population the exception of a few credit developments• Growing middle class / pockets • Escrow accounts laws • Accommodation Urbanization • Abundance of primary • Unclear Developer alternatives: rentals,• Mature market raw materials default regulations parents mortgage interest rates • New Real Estate • Owners default • Fear of home finance in some countries Investment Funds foreclosure procedures covenants• Despite global • GCC developers unclear recession there is entering the affordable • Liberalization of growth in housing market financial markets economies, especially in property markets 12
  13. 13. The Affordable Housing Perfect Supply Inputs Policy , Regal & Building Regulatory Framework Material, S ystem Building Mortgage Industry Finance Affordable Housing Productive Land Labor Infra- structure
  14. 14. MENA SUPPLY GAP DEMAND GAPS  Public sector funding is predominantly  Mortgage credit culture at best is poor inadequate  Available mortgage alienates the poor & low  Available private sector funding are shallow & income people short term in nature  Microfinance Banks are still young andFINANCE  Foreign capital not available currently focusing on working capital needs of poor  Existing funding pool not adequate for mortgage  Policies that incentivize private sector  Microfinance banks to be supported to offer participation are largely absent – taxes, micro Mortgage credit. In many countries the capital markets etc. Central Bank microfinance policy does not  Public sector too predominant in the sector. cover housing microfinanceREGULATORY The public sector should rather be an enabler  Strategy to attract foreign direct investment or multi & bi-lateral support to the sector not apparent  Poor or lack of basic infrastructures to  Cost sharing infrastructure and proximity toINFRASTRUCTURE support housing development adds to cost of urban centers are considered housing 14
  15. 15. Investors , Borrowers & Financial Institutions Perspectives Investors Borrowers Financial • Require • Require fixed rates Institutions reasonable return / installments • Balance risk/profit • Aspire diversified contract • Assets recovery if portfolios • Availability of full default • Safety which amortization term • access to the bond mortgages offers • Various refinancing market options, no foreclosure 15
  16. 16. MENA Affordable Housing – Owners - Developers Owners Developers •High mortgage interest rates •Limited long term funds •Low levels of income •High Cost of building materials •Lack of affordable housing supply •Planning/green regulations / limited availability in desired •Prohibitive cost of infrastructure areas / Land Lack of effective Lack of affordable Housing demand Housing supplyWIDESPREAD HOME OWNERSHIP & DEVELOPMENT CANNOT BE ACHIEVEDWITHOUT A ROBUST FINANCIAL SYSTEM ACHIEVED BY EFFECTIVE LINK BETWEEN 16RESIDENTIAL MORTGAGES AND THE LONG TERM FINANCIAL MARKETS
  17. 17. Government / Private Sector RolesGovernment : Legislation on foreclosure / mortgage & securitization is key to jump start the marketUrban Issues: Relaxation of development green guidelines. Land designation for affordable housingTax and Fiscal policies: Reduce cost of mortgage and development borrowing, Micro financing needReal Estate Funds : Setting up funds dedicated to the affordable housing marketZoning : Increase the density of housing units in a given area along with the associated infrastructureLand banking : Access to cheap land with basic infrastructure. Land appreciation tax (Zakat) neededDelivery : New business models / JV’s between Government and Private sector, PPP’s, etc.
  18. 18. MENA Affordable Housing PESTEL Analysis • Politicians – controlled by office tenure; short term Public policy / strategy • Government institutions: can be a barrier to private sector growth and sustainability;P • Financial markets liberalization; need structural unpopular foreclosure laws • Lack of steady income › credit risk. Collaterals in question combined with lack of financial history • Underdeveloped capital markets, savings commitment lacking, volatile interest and inflation rates.E • Repeated housing demand due to labor mobility and migration at the lower strata. • Rural-to-urban migration – leads to development of slums; • A move from communal housing to the high-density housing not fully embracedS • Cultural dread of indebtedness , large families with limited income • High building green standards imposed by authorities – makes housing finance expensive and increase the premium. • Modern standardized building materials not responsive to local conditions leads to resisting the use of new technology;T • Due to advances in technology, what passed as a house not too long ago no longer qualifies to be called a house; • Changing climatic conditions leading to high risk premium; • Local and traditional housing materials challenged by unstable environmental conditions;E • Expensive imported building materials. • Security of tenure hampers development; Biased contracts drafted by financiers discourage borrowers; • Bureaucratic /absence of foreclosure laws discourage lending;L • Inefficiencies in registering mortgage and title transfers create bottlenecks. 18
  19. 19. HOUSING & FINANCE POLICIES / PROGRAMSIn setting policies & programs Governments target the stimulation for personalconstruction thru the development of effective financing / credit of housingdevelopment for individuals and companies. Among the measures;• Formation of land concession policy for housing and commercial aims to individuals and institutions while establishing an efficient housing supply chain which focuses on removing obstacles to the release of land by government; providing / funding the respective infrastructures and clearing construction bottlenecks• Enactment of sophisticated title structures to allow variations in lease arrangements• Enhancing mobilization, supply and growth of long-term funds and making loans affordable to more borrowers for the purpose of building, purchasing and improvement of residential houses. Establishment of Trust structures to allow for shared ownership• Encourage commercial and merchant banks to allocate a stipulated minimum proportion of their credit to the housing/construction sector• Establish National Housing Fund as an investment vehicle for banks or as saving facility or a contribution scheme (the number of participations / contributors need to be benched with the national work force) in order to mobilize cheap and long term funds.• Providing incentives for the capital market to invest in property development, Encouraging a multiplication of housing finance institutions 19
  20. 20. Do List to Boost the Affordable Housing Sector – Government! • Recognize housing finance as an economic empowerment/activity that contributes to economic development rather than a social engagement; • Make more budgetary allocations to housing as a springboard to other social promotions such as education, health etc.; land and housing policy essential. • Have a stratified approach to housing finance thru the use of smart and targeted subsidies for specific geographical/environmental domains to lower the credit risk to the second tier households and employ conditional grants to the lower end of the market (not linked to bailout packages); • Play facilitation role to the bankable segment and give space to private sector participation and diversify domestic funding models how to • Resolve obstacles in areas of land titles, foreclosures, appraisals. Support for rental market and other forms of ownership • Lobby housing finance private institutions to consider incremental lending to housing development; encourage housing microfinance, risk sharing through legislative institutional framework development to finance low/informal income households thus deepening banks penetration and sound lending. • Educate borrowers on the workings of a mortgage and savings schemes and information (data) access. • Embrace “securitization framework” to deepen funding base thru simple , transparent 20 models and legal/regulatory framework. ; limit/identify property bubbles
  21. 21. Affordable Housing Government policies ,….Government long term policies optimal goal is to provideaffordable and comfortable housing for all that needs it. Inthe short to medium term Governments target to improvethe housing situation through the following strategies: • National Land & Housing Development Schemes –Urban & Rural • Government Affordable / Cooperative , etc. (Housing Direct Delivery - 100% Gov. funds or PPP or mixed JV w/ private sector) • Sale of Government Low Cost Houses • Various Rental schemes of Government owned Houses • Mortgage Guarantees / Mortgage Liquidity Facilities / • National Housing Funds • Home / Land Loan Banks 21
  22. 22. Stages In Housing Delivery1 2Statesponsored 3 Loweringhousing standards to 4production Involving reach lower future 5& delivery income Intervention beneficiaries in housing segments in housing Enabling input to policies, less production facilitate Government housing intervention production Gov. Market Supply Supply
  23. 23. Global Affordable Housing SourcesWIDESPREAD PROPERTY OWNERSHIP IS A DESIRABLE GOAL OF EVERY SOCIETY
  24. 24. US ResourcesAffordable Housing Institute (AHI)African ResourcesThe African Union for Housing Finance (AUHF)An association of mortgage banks, building societies, housing corporations and otherorganizations involved in the mobilization of funds for shelter and housing, on thecontinent of Africa. Based in South Africa.The Southern African Housing Foundation (SAHF)A catalyst for networking, conferencing and workshops for Africa. Based in South Africa.Centre for Affordable Housing Finance in Africa (CAHF), which is a division of the FinMark Trust (a non-profit independent trust, funded by the UKs DFIDAsian ResourcesHousing finance agencies in AsiaPaper by BIS, January 2008European ResourcesInternational Union for Housing Finance (IUHF)Based in the UKThe European Liaison Committee for Social Housing (CECODHAS)Brussels-based European Union network for the promotion of the right to decenthousing for allConstructing Understanding of the Homeless Population (CUHP)European Commission funded research network 24
  25. 25. Example , The African Union for Housing Finance (AUHF) - Statement by themembers of the AUHF at their annual general meeting in SA, on 8 September 2011.We, the members of AUHF confirm our commitment to the development ofsustainable housing finance markets that address the broad spectrum of needsthroughout Africa, we are committed to:• The development of appropriate housing and housing finance products, which are affordable to our populations, and contribute effectively towards adequate housing across our nations• Promoting consumer education and financial literacy so that households can participate effectively in their housing processes and training across the spectrum of the housing value chain• An integrated delivery approach in which the development of housing occurs within a sound planning framework that includes the delivery of infrastructure services, and social and economic amenities• Professional development Working in collaboration with each other, and other stakeholders, whether in the public or private sectors, to promote the realization of sustainable human settlements across Africa. 25
  26. 26. Good Book to ReadHousing Finance Policy in Emerging Marketsby Loic Chiquier and Michael Lea(Paperback - Jun 19, 2009)"$42Fixing the Housing Market: Financial Innovations for the Futureby Franklin Allen, James R. Barth and Glenn Yago(Hardcover - Feb 24, 2012)$35 26
  27. 27. Other Sources National Association of Housing Redevelopment Officials - US Chartered Institute of Housing - UK Provincial Government of the Western Cape Department of Human Settlements - SAHOFINET- HOUSING FINANCE INFORMATION NETWORK• A portal website for sharing information on housing finance, started a data collection exercise• Hosted and run by Wharton School, University of Pennsylvania with support from World Bank, IFC, FMO• Aim to have contributors/editors to the site from all over the world sharing knowledge and best practice 27
  28. 28. World Bank - WHY HOUSING FINANCEThe World Bank is a vital source of financial and technical assistance todeveloping countries. Its mission is to fight poverty for lasting resultsand to help people help themselves and their environment byproviding resources, sharing knowledge, building capacity and forgingpartnerships in the public and private sectors.• Urban development strategy: cities are also built the way they are financed (avoid slum proliferation)•• Poverty reduction & social stability: empowerment, retirement, asset building, community strengthening•• Integral part of the global financial sector liberalization (banks, non - banks, bond markets, pension funds, etc.)•• Housing is a sizeable and durable investment: needed market debt leverage 28
  29. 29. WORLD BANK’S MORTGAGE LIQUIDITY WB MORTGAGE HOUSING FINANCE WB TARGET COUNTRIES FACILITY - CHALLENGES LIQUIDITY FACILITIES PROGRAM• Growing scope 30+ • Has had stability in its • Further Urbanization to • Operating already in countries & ambitious banking sector and adapt to city living, Egypt and Jordan reforms macro economy smaller houses/multi- family • Provides a solution to• Broad range of policy • Undertaken legal maturity mismatch issue reforms, new reforms with new • Offering solutions across and shortage of long legislation, pilot mortgage the income spectrum term funds programs, studies law, condominium • Developing rental law, program to finance, housing • First step onto• Financed using IBRD formalize land microfinance, developer secondary mortgage loans, IDA credit or ownership finance market without the risks grants and trust funds associated with • World Bank providing • Integrating urban policy securitization• Global, regional, country support thru: with financial sector conferences & training reform programs • Creation of a liquidity facility, mortgage • Creating capital markets• HF flagship book market development and a source of long published • Housing Microfinance term funds Fund , capacity building • Making Progress on• Collaboration with Urban/Slum • Several steps to Land issues upgrading/Land projects expand supply of housing 29
  30. 30. Concepts In Affordable Housing Ownership FormsThe gap from pure rental to homeownership is large: down payment, financial literacy, mortgageability, and family situation/ stability all can represent obstacles to households seeking to move upthe ladder. Intermediate forms frequently involving government incentives, regulatory schemes, orsubsidies. The following ownership forms have been successfully used throughout the worldarranged in descending order by capacity required of the householder; No. Householder Capacity to Own Suitability – MENA Region 1 Home Ownership – Villa Type High end MENA market and GCC in particular 2 Condominium/ Sectional Title First home - urban professionals Independent organized professions – Eng. Doctors, 3 Co-Operative Lawyers Housing Associations. 4 Limited-Equity Co-Operative Gov. Employees like Teachers , Public Servants Housing. 5 Rent to Own Became popular in GCC to dispose Hi end Housing stock Shared Ownership Trusts Similar to Islamic Musharaka, like 50% equity ( mortgage 6 (stair-casing) payments) & 50% lease with options to buy more equity 7 Rental Conventional open market. Resident Controlled Non- Charity organizations housings offerings for followers 8 Profit Rental including Islamic endowment and Churches. Delivery by either Gov. or Private. Rent is controlled by 9 Affordable Rental Gov. or pre-agreements with private. Minimum quality 10 Informal Rental More like bed space rents. Undersized, undesired units. 30
  31. 31. Target Housing Issue Program Goal MENA Increase The market lacks enough Create more new houses and1 Phenomena across MENA region. Supply affordable housing. consider regeneration projects. Regeneration / Housing exists but is Renovate existing housing stock Jordan , Egypt, Yemen, Iraq ,2 Improve uninhabitable, or located in and revitalize neighborhoods. Jeddah (KSA) Communities declining neighborhoods. Migrate people permanently, Job / Housing Jobs and housing exist in increase commutability, or3 GCC in general, UAE in particular Disconnection separate places. produce new homes in job growth centers. Lock in rent levels or subsidy UAE - in the context of strong Ample housing exists but at Non streams to assure that target economies, continuing4 prices far above the target Affordability population residents have access immigration or population populations ability to pay. to quality housing. attraction. Housing exists with intangible Improve market fluidity and break Barriers / barriers like unawareness, lack down intangible barriers through5 Jordan – Weak mortgage markets Limited Access of creditworthiness, or landlord education, and equitable prejudice. remedies. Poverty Target households cannot Raise the segment rent-paying Egypt , Morocco and in high6 Alleviation afford a reasonable rent ability. density countries Target households have Use housing within an arrays of Social Welfare Homeless, Palestinian & Other7 personal / imposed issues that social services to work with target / UN Refugees Refugee camps in MENA. 31 impair their ability to rent. households.
  32. 32. HOUSING EDUCATIONWHY IS IT IMPORTANT? EDUCATION PROGRAMS• Facilitates consumer protection • Borrower education for :• Promotes the benefit of home ownership - First time buyers• Fosters responsibility - Mortgage and non-mortgage• Minimizes default risk • Home ownership education :• Provides understanding of the housing - Current and potential home owners finance options - New and potential tenantsEDUCATION AREAS OWNING HOUSING EDUCATION• Tenure options ( Owning - building or • Deed of Sale, Title Deed buying - , Renting, Social housing) • Purchase price , transfer costs• Affordability and Savings • Bond registration costs• Housing Finance ( Mortgage, Non- • Service connection fees, water, electricity mortgage, Micro loans) • Monthly municipal chargesWHO SHOULD BE EDUCATED? • Home loan installments • Maintenance and repairs• Aspiring home owners • Monthly insurance premium (home owner• First time home owners cover)• Tenants • Learn the Advantages of owning 32• Train-the-trainers programs (appreciation, business from house, etc.)
  33. 33. EXAMPLES ON HOME LOAN EDUCATION NEEDSHousing tends to be a long-term financial commitment withassociated advantages and disadvantages e.g. : • Some employers in an attempt to assist employees to acquire housing, will encourage the use of Pension/Provident Funds as collateral, but when the employees default on the loans, they could lose both property and pension • Some people, in desperation to acquire housing will do so through micro- loans, which could be costly and short-term to finance a long-term commitment • Others, still will purchase property when all they need is accommodation and in most cases they are not yet ready to own propertyIn order to mitigate against all the above issues, people needto be educated, even before they consider anyhousing/accommodation option. 33
  34. 34. ADVANTAGES OF OWNING DISADVANTAGES OF OWNING Long-term financial commitment Asset grows in value Monthly installment, services and taxes Can run business from your house Costly to maintain the property Can rent out room and get extra income Insurance costs Can sell the house at a profit May take long to sell ADVANTAGES OF RENTING DISADVANTAGES OF RENTING Easier to exit the rented property No financial benefit from monthly lease Not responsible for major maintenance No accumulation of wealth in the form of asset value May run a business from rented premises (subject to appreciationprior approval from landlord) Rent will usually escalate (10%?) Not responsible for services and taxes Bound by the terms of the lease, i.e. cannot vacate the No insurance costs on the rented property property before expiry of the lease ADVANTAGES OF SOCIAL HOUSING DISADVANTAGES OF SOCIAL HOUSING Living in affordable, good quality housing Be part of a close community Have to live according to the House Rules Have security of tenure, subject to adhering to terms Monthly lease rental/use fee will increase each yearof agreement No title to the property, except in rent-to-buy, where In a co-operative, contribute towards the financial title is only registered after full payment of propertygrowth of the co-operative value May be entitled to financial growth in value ofproperty in a co-operative 34
  35. 35. Affordable Housing Communities – Eco Cities Concept Housing is like an evolving ecosystem - healthy and self-sustaining, or diseased and inherently unstable – AHI first core principle Creating a sense of well-being, comfort and quietHealthy Community enjoyment for adults, children, and the elderly. The property must provide a safe, clean,Physical Appearance habitable, defensible physical environment. It must be well cared for and look well cared for. Failure to comply must inevitably triggerCompliance Mechanisms appropriate enforcement. The propertys ongoing income sources mustFinancing & Funded exceed its ongoing recurring operating costs,Operations including intermittent costs like capitalDownstream The property must be owned and regulated byResponsiveness / Flexibility people capable of adopting to change. 35
  36. 36. 36
  37. 37. SOCIAL RENTAL HOUSING IN EUROPEFACTORS INFLUENCING GOVERNMENT CHOICE IN SOCIAL RENTAL HOUSINGMany countries in Europe and North America have experienced a wide range ofsolutions, at different times in their history. The main factors influencing their choiceare:Importance of Housing Needs: State involvement and emphasis on object or subjectsubsidies are not the same when the volume of new construction is large or smallcompared to the stock.Availability of Long-Term Private Finance to The Housing Sector: This depends greatlyon the degree of development of national financial markets. A fundamental issue iswhether social housing finance should separate system by itself or be a part of thefinancial system. Most West European countries have been striving to integratehousing finance more and more into their financial markets; social housing issometimes the only sector remaining off-market.Availability of Public Funds for Social Housing: This is both a technical (tightening ofbudgets) and a political problem, at national and local levels. The political aspectsinclude national trends such as emphasis on home ownership and local issues such asnot in my backyard syndrome. 37
  38. 38. SOCIAL RENTAL HOUSING POLICY ISSUES• Social rental housing may be regarded as housing stock whose access is not based on market rules whereas most often, a maximum rent is in use and but is defined by a number of criteria like income, target groups and allocation procedures.• There are a large variety of social landlords they may be public (state, local authority, public company) or private (non-profit organizations; property companies).• As with any long-term investment with public support, social housing finance is a mix of loans or bonds, subsidies and own funds. Many combinations are possible to achieve the best possible combination between private and public funds;• Subsidies can be granted through tax relief or direct support from a national or local budget in the forms of object subsidies (housing allowances) and subject subsidies (construction materials & operations / investment)• Those in charge of housing policy have to see that investment and operation costs are under control, which refers to various aspects such as quality standards and rent collection and management and also make the best choices concerning: - Rent setting in the social housing sector; - The most efficient ways of financing investment in this sector; - The balance between housing allowances and object subsidies. 38
  39. 39. MARKET RENT AND A RENT AFFORDABLE GAPRent setting is a key element, as choices in this field heavily influenced bythe financial balance of the investment and operation accounts as follows; Investment account Investment costs Investment financeDevelopers’ profit Direct subsidiesLoan takeout costs LoansConstruction costs Own fundsLand improvement costsLand costs Operation account Expenses RevenueMaintenance costs Chargeable rentsManagement costs Billable chargesUtility costs Operating subsidiesProperty taxLoan repaymentLosses due to vacancyLosses due to unpaid rents and chargesEquity rebuilding 39
  40. 40. INVESTMENT & OPERATION ACCOUNTS EFFECT ON RENT Heavy allocation of funds from the state budget, with very low rents resulted in a draw back in East European countries before transition while fully private rental housing, with rent controls eventually discourages investors. The balance of the operation account implies that lower rents should be associated either with higher operating subsidies or with lower loan repayments (or both). Lower repayments mean a smaller loan The balance of the investment account then requires that either investment subsidies or own funds (or both) to be increased. Setting rents at the lowest possible level is a way to avoid paying housing allowances, but investment and operation must then be highly subsidized. Generation of resources for investment and operation used by socialist economies was very inefficient from an economic viewpoint as households are not encouraged to adapt their housing consumption to their needs. Also, some households that do not need subsidies will receive them. 40
  41. 41. AFFORDABLE RENT AND SUBSIDIESMarket Rent ProfitCross Cost Rent Object Subsidy ( production + Investor)Net Gross Rent Residual GapRent Affordable with Housing allowance Subject subsidy (Housing Allowance)Rent Affordable without Housing allowance • Are a housing allowance or payment designed to increase the rent that a given household is able to pay. “Rent affordable with a housing allowance” is the Subject rent that target groups benefiting from this subsidy can afford.Subsidies • Aim at lowering the cost of supply on the rental market. They can intervene through construction costs (production) or operating costs (investor subsidies) that enable eligible landlords to offer a lower rent for a given housing unit. Object Object subsidies are sometimes called “bricks-and-mortar subsidies” orSubsidies supply-side subsidies 41
  42. 42. INVESTMENT & OPERATION ACCOUNTS EFFECT ON RENT The subsidies sometimes will increase the housing affordability beyond needed, by lack of initial targeting or because target group income rising over time . In Western Europe, “equilibrium rent” are calculated according to cost rent principles, the rent which balances the investors’ account over time. Drawback is the subsidization may increase the estimated construction & administration costs. “Object subsidies” are used to reduce investment and operation costs, cost rent before object subsidies is here called “gross cost rent”; cost rent including the impact of object subsidies is called “net cost rent”. Rent levels depend on the program finance and rents can be disconnected from local market levels. Almost all of the important subsidy policy aspects of social rental housing revolve around balancing the gap between “affordable rent” (frequently set at 30 per cent of net income) and the “gross cost rent”. - Austria, Denmark, Finland, France, the Netherlands and Sweden use cost rent - Germany sets initial rents according to tenants’ income - Belgium, Luxembourg and Portugal calculate a cost rent then adjust to income. - UK and Ireland ; Rent setting is decided by local authorities - Italy sets rents according to local market rent levels. 42
  43. 43. SOCIAL RENTAL HOUSING FUNDING POLICES SHIFTS Many Countries developed off-market finance for social housing thru direct state loans In economies in transition, the state provided housing loans by establishing public funds to promote housing construction and purchase. Examples; - Housing Fund of Slovenia (1991), - State Fund for Housing Development of Slovakia (1996) - National Housing Fund in Poland (1995). - Slovakia State guarantees on construction loans (1999) The shift from state or off-market loans towards market lending was possible by the liberalization of the financial sector and the stability needed to enter the Eurozone. - France and Austria are the two in the Eurozone that use state subsidiary to finance the social rental sector. - Austria has developed a mixed system of grants and low-interest state loans to non-profit developers which results in revolving funds at the provincial level. - Germany also uses public banks, but only partly and as secondary lenders. - Outside the Eurozone, the Norwegian State Housing Bank provides loans, grants and housing allowances funded by the treasury. - Still specific intermediaries are needed in Finland, the Netherlands and the United Kingdom to help smaller investors access capital markets. 43
  44. 44. MORTAGE LOANS ISSUES IN SOCIAL RENTAL HOUSING These loans are long-term, often more than 30 years, which makes it difficult to raise matching funds in countries with high LTV (loan-to-value) ratio, thus increasing the risk premium, On the other hand, As part of the rent is usually paid by the state through housing allowances, the risk to the lender is reduced while Social landlords, face increasing regional imbalances resulting in higher funding costs in the poorer regions. Unlike for individual investor, Banks risk is spread over a number of properties. Hence the risk of such loans is often overestimated; whereas the loss given default (LGD) is high, the probability of default (PD) is low. Mortgage guarantees are often provided by public entities, often local authorities, or by funds (when the landlord is public, repossession of a public property is often impossible). Future rents can also be used as collateral. Recent loans to housing associations in UK were secured by legal mortgages over social housing properties and cash reserves in favor of the issuer and bond trustee; in the event of non-payment, the bond trustee will have the right to collect the rents and manage the secured property. 44
  45. 45. FUNDING SOURCES IN SOCIAL RENTAL HOUSINGDue to the nature of the financial needs of the social sector (large volumesand long-term Finance), institutional savings are favored as sources likepension funds and insurance companies. In other words, “wholesale funding”is preferred to “retail funding.” Three different wholesale funding models:The Mortgage or • The interest rate risk is shifted to investors by the directBank Bond issuance of bonds by the lenderModel. • Danish or German mortgage banks.The SecondaryMortgage • A separate agency provides liquidity for mortgage lendersFacility, Or against collateral and issues uncollateralized bondsLiquidity • CRH in France, FHL in the United States.Facility, Model. • The agency provides liquidity & buys the assets; the assetThe Secondary will be “securitized.” Used in USA by two Government-Mortgage sponsored agencies (Fannie Mae and Freddy Mac).Market Model. • In Western Europe it has been unevenly successful 45
  46. 46. NOTES ON FUNDING SOURCES IN RENTAL HOUSING Countries in transition moved towards introducing wholesale funding In underdeveloped capital markets or regionally segregated banking system, a central liquidity facility could serve as an interim wholesale funding source. Institutional investors, pension funds and insurance companies, usually finance housing through lending, buying mortgage bonds, and mortgage-backed securities. Social landlords may also issue their own bonds on the capital market; however, specific needs of social housing (low interest, equal access, specific guarantee) impose constraints that may not easily match the demand of investors.France’s funding system of Caisse des dépôts provides a rareexample of private savings being used to finance social housing.Short-term deposits are used to fund loans of up to 50 years. Theinterest rate of the loans fluctuates with the interest paid to thesavers (indexed on the average of the Euribor-1 year and annualvariation of consumer price index), which eliminates the interestrate risk. Moreover, the deposits are guaranteed by the state. 46
  47. 47. MENA Housing Mortgages , Securitization The Classical Problem• The structure of Bank Deposit Liabilities as Deposit money banks tend to avoid fund mismatch i.e. borrowings short but lending long, which is required in mortgage financing.• How to ensure adequate long term lending by financial institutions rather than the current short term lending practice. This requires significant intermediation efforts, especially, since housing finance is very sensitive to inflationary environment.• Absence of National Credit Data Base to discriminate on risk as the inadequate data on credit history of households presents a challenge to mortgage. This results in limited mortgage finance accessibility as it is usually computed as annual minimum wage multiplied by a factor (usually four)• Absence of ineffective foreclosure laws. A solution would be to; - Remove the mortgagee obligation to take court proceedings and allow taking possession peaceably. - Where a mortgagee is unable to enforce a right of possession in a peaceable manner the mortgagee may use the services of the police to evict the mortgagor or other person in possession pursuant to a warrant issued by a court. 47
  48. 48. OTHER ISSUES WITH MORTGAGE & NATIONAL FUNDS The usual low interest rate level stipulated by law on investment on NHF makes the banks and Insurance companies reluctant to invest in the Fund especially, as there are some more profitable investment at the same time this law rate discourages the development of a commercial mortgage sector. The high inflation rate negatively affected the macroeconomic environment especially with low interest mortgage financing. There is need to continue to keep the rate of inflation moderate to promote confidence in the value of a country’s currency thus lowering interest rates The existence of a cumbersome process of title documentation of land ownership which is reinforced by inadequate cadastral system makes mortgage financing difficult. This has been seen as one of the factors responsible for slow disbursement of NHF. A solution would be to develop a legal framework for property rights to include;  The need for a clearly defined title, right to sell land / property to increase the reliability of title deeds;  developing property laws (e.g. condominium law) and developer finance; and  developing efficient judicial processes to resolve disputes 48
  49. 49. Asset Liability ManagementDeep long term pool of funds both domesticand foreign that are cheaper & stable funds Borrower Mortgage Credit Institution Bond Loan Purchase Real Estate Assets Liabilities Investor / Developer Mortgage Mortgage HolderHome Owner Installments Loans Bonds Dividends Traditional Model Balancing Principle Subprime Model- Bank grants mortgage - Interest Rate Matching - Bank sells mortgage bond- Home buyer pays bank - Duration / Liquidity Matching - Bank grants mortgage- Loans are on Banks - Currency Matching (FX risk) - Home buyer pays bank balance sheets - Bank pays bondholderBanks originate loans, hold them on their books and fund them through general liabilitiesof a bank or by issuing long term deposits or bonds (Risk assessment of underlyingindividual assets, bond rating , pricing & tenor are key issues). Government support forbonds can be in the form of a guarantee on the bonds e.g. liquidity facility.
  50. 50. SUB PRIME EFFECTS ON MENA HOUSING FINANCE IN MENA REGIONProperty is a bubble commodity it has and • Steady demand (urbanization)will continue to boom and bust. The trick is • Access to finance remains a policyto get the cycles right. priority • Continuance of undevelopedLimited sub-prime direct effects on MENA mortgage marketsmarkets due to; • Easy expansion is over for many• Limited use of structured finance countries• Markets remain “prime” (smaller, more • Vulnerable countries: liquidity, high conservative) LTV ratio, variable loans, weakIntensified indirect effects; lending standards, etc.• Slowdown in growth (affects demand) • Liquidity crisis: securitization, roll-• Return of inflation , increase cost of funds over refinancing• Liquidity squeeze and market distrust • Cost of funds to increase Credit contraction • Diversity tools: covered bonds,• Additional credit risks (variable/adjustable liquidity facilities rate loans) • Non-bank lenders require secure• Bank de-capitalization , depressed capital access to bond markets markets • State support: liquidity, systemic risk,• Foreign banks withdraw/downsize. etc. 50
  51. 51. SPVS AND SECURITIZATION – BANKERS OPTIONS• In SPV - Bank sets up a SPV and sells loans to the SPV (off balance sheet)• In securitization - Bank sets up senior/subordinated structure (bank part), with bond market buying the senior part Government support could guarantee a portion of the senior part, thus capping bond holder losses. Government role is to protect against systemic risk / promoting the credibility of the SPV, However, guarantees can cause “moral hazard” (excessive risk taking, leading to taxpayer bailouts) . Added advantage of securitization is that it guarantees the investors access to the mortgages where on balance sheet collateralization might not Institution that originates and manages the loans takes on the initial credit risk and passes on the interest rate risk to bond market investors. In both structures no need to guarantee individual loans and risk is controlled by capital / stress testsWhich structure to choose, depends on regulatory and tax issues , however, banks and bondsare favored in emerging economies as it is less likely to require new laws, banks are best atmanaging credit risk and so can manage the principle/agent problem betterSecuritization improves market efficiencies, however, they require strong legal and regulatoryframework as secondary market is exposed to risks which the primary market doesn’t have 51(secondary market is merely a vehicle for allocating capital)
  52. 52. In the past 20 years there has been the unbundling of the 4 major aspects ofmortgage lending: origination, servicing, funding and credit risk Depository based systems can do the same thing as secondary markets do (connect mortgage borrowers with people with money) without having to sell mortgages, but require stable interest rates. Secondary market funding - securitization (package into pools), Debt or combination thereof. Payments are made from pools to investors. Market evolved to include private market pools, derivative securities (CMOs with up to 50 payment tranches, with a pool of 30 year callable securities being broken up into short, medium, long term bonds), futures, hedges against interest/prepayment risk, mortgage insurers etc. Unbundling takes advantage of scale economics, division of labor, promotes competition among suppliers of the various bundles BUT it comes at a cost: 1) Each player is dependent upon the other players performing 2) Principal/agent problems 3)Transparency/moral hazard 4) Understanding of risk by investors It is the function rather than institutional mechanism of connecting mortgage and capital markets that is important (several models available) The “front end” creates a good mortgage market (proper registration, foreclosure and eviction procedures) as opposed the “back end” - doing deals/getting mortgages off balance sheet etc. Controlling soundness and safety requires serious consideration of risk based capital (stress based tests, regular audits, risk based standards etc.). 52
  53. 53. Home Loan Bank Model/Mortgage Liquidity FacilitiesLong term fixed rate liabilities often not available in deposit markets; thus, Home LoanBank Model/Mortgage Liquidity Facilities pools the mortgage loan portfolios ofnumerous banks and provides large scale financing to banks. Banks get attractive ratesand mortgages are pledged as collateral with wide collateral margins.• Promotes product standardization/transparency. Can becomes more sophisticated over time as market develops and can co-exist with other market instruments. The bank issues simple, classical debentures (or bonds) with short to long term maturities at favorable interest rates (AAA/Aaa) and may contain prepayment options• Lenders adhere to best practice. Effective mortgage legislation, efficient mortgage/land registration systems, efficient judiciary, appraisers, credit bureau, including repossession upon default are a must• Increases market information systems which in turn promotes better risk management. Must adhere to market based pricing (market distortion issue)• Deepens the financial and securities market. Can be viewed as an in-between leading up to a full secondary market. Don’t need critical mass and can issue debentures• Can be effectively used to promote delivery of policy objectives e.g. affordable housing• Successful models Malaysia, France, Jordan, Algeria, and West Africa 53
  54. 54. Housing Fund is a public setup with juridical rights, administrative, financial and controlledautonomy to execute government policy for social housing promotion.The Role of the Funds for Housing usually; • To promote construction of houses for social habitation • To improve credit interest rates granted by banks for housing construction • To grant credit for housing construction, repairing and extension for citizens whose their household income is not over the minimum national salary Advantages Disadvantages SCENARIO I – CREATION OF A HOUSING CREDIT High specialization on credit for housing, for  Additional financial effort acquiring construction material and other  A Financial Society does not have the same infrastructures prestige as a Financial Bank Increasing of business volume due to other areas incorporation SCENARIO II – CREATION OF BANKING INSTITUTION High capacity to mobilize funds for credit  There are no remarkable disadvantages grants It is possible to diversify activities without harming the main housing objective 54
  55. 55. Housing Micro-Finance – Non Existing in Most MENA Region FEATURE MICRO FINANCE DETAILS Borrower Low income household Purpose Improve, expand or build or land purchase Loan Amount Ranges between $250 – $15,000, Capacity determined by income Tenor Between 2 – 5 years Repayment Regular installments (weekly/ monthly) Delivery method Individual not group Collateral Usually un-collateralized but guaranties can be obtain if available Others Savings -driven Housing Microfinance Mortgage Finance often progressive lending one time lending various housing needs buy or build not secured by property secured by the Multi purpose finance property financed cash flow lending collateral lending medium term long term 3-7 years over 10 years 55
  56. 56. Securitization Examples in Housing Microfinance One of the 1st Microfinance Securitizations Issuer : BRAC Microfinance, Issue date : July 2006 Amount raised: $180 million ; Tenor : 6 years Covered by : receivables from loans securitized Parties involved: Lead Arranger - RSA Capital Co-Arrangers and Funders - Citibank, FMO & KfW FMO & KfW cover Fx risk for foreign investment A pioneer Housing Microfinance Securitization Issuer : Hipotecaria Su Casita (a housing finance company in Mexico); Issue date: (1st) 2003, (latest) : April 2007 Amount raised (1st) : $50 million, (latest): $260 million; Tenor : 5 years Issues done so far : 9 About 40% of total funds raised committed to low income people 56
  57. 57. KSA Mortgage Law – In the Pipeline Expected to boost house sales by 50%Saudi GDP growth in 2011 reached 6.8% , GDP expected to be 3.8% in 2012 and 4.4% in2013 with inflation near 5% (World Bank predicts 2.5% average global growth rate)Current population is 27.1 million with an annual growth rate of approx. 3.2%.Ninth Development Plan announced in 2010 with spending of $385 billion in 2010-2014The mortgage law has now been in the pipeline for almost a decade. A draft of the lawwas approved in 2011, which paved the way for its approval by the government.• Measures to guard the market from levels of speculation that artificially inflated prices in other GCC states during the boom of 2004 - 2008 years• The formation of private specialized mortgage companies to increase the availability of funding. Restrictions on low loan-to-value ratio to relatively regulate the market.• Rules that define the provider of a loan as the owner of a property rather than the borrower to create a smoother foreclosure process and removes a legal ambiguity that has deterred banks from lending (Islamic Ijara financing) . Regulation on registering mortgages• Facilitation of bank ownership and repossession of properties through a number of steps including prosecuting police officers who refuse to carry out eviction orders.• Resolving disputes on mortgage securitization and approved penalties for violations of the rules. 57
  58. 58. Bahrain Affordable Housing Support SystemBahrain - Ministry of Housing & Economic Development Board Sources - 2011 58
  59. 59. Bahrain Mortgage Guarantee System (MGS) 59
  60. 60. Entities & Benefits Government Borrowers of the Mortgage • Low income families’Guarantee System • Switches roles from being benefits unchanged and a provider to a facilitator. ability to access immediate • Serving more People with liquidity the same funds • Middle income families Financial Institutions • Continues to supports its have access to funding with citizens the guarantee• Reduces inherent risk (credit & liquidity) making it more attractive for banks to lend.• Mortgage Guarantee Fund Guarantee mechanism provides a clear exit for the lender (in lieu of foreclosure)• Access to liquidity via securitization / the eventual establishment of a secondary market
  61. 61. Multi Mortgage Agencies Cooperation 61
  62. 62. PPP’s As Sustainable Housing SolutionThe scale and nature of housing ecosystems are such that the public and private sectorsmust act in concert if sustainable improvements are to be realized. Only solutions whichalign public and private capital can reliably achieve system-wide outcomes. Ultimately,this means that hard (market rate and terms) capital must be strategically blended withsocial needs. – AHI 3rd Core PrincipleNeeds for PPP• Weak mortgage regulation & markets in the region – What to do in case of Developers or Home Owner default? Laws are still in the making.• Developers housing over stock from previous boom – Will they take the market risk again in affordable housing ? Likely NO.• Weak Financial markets in the region – Banks thrived thus far on retail personal banking & credit cards. Will they transform to reasonable interest project finance? Likely YES with Government off take agreements / mortgage guarantees.• Weak Property Development Model in the region – With off plans sales and high margins of the market ending, Can Regional Developers survive the open market without Government back up – Likely NO.• Loan Securitizations – Still a big unknown – Government Funds needed in the absence of loan market funds. 62
  63. 63. PPP Program Integrated Approach No perfect design for regulation and institutions  Changing market condition needs to be reflected in PPP framework by modifying and updating regulatory and institutional design Vision – Strong Political Will Accepted By The Institutional Framework  Competition & transparency Public / Users – Building principles need to be kept Capacity, National Policy (Empowered Public) Government’s proactive use of vision, policy & sustainability in market creation is important. Viable / VFM PPP Taxpayers / users engagement in PPP Projects Pipeline dialogue Legal & Regulatory Supporting local financing institutions / Funding – Priority Framework – Clear & local development funds is key. Funding Strategies, Friendly Business In house skill within the government is Building Local Financial Environment To PPP’S . of crucial importance to build capacity , Supply Side – Oversight Procedures - to monitor and create PPP pipeline Infrastructure Funds Transparency, projects Competition, Monitoring 63
  64. 64. PPP POLICY AND LEGAL FRAMEWORKS & SUPPORT  Comprehensive PPP Law – Investment , Funding , Subsidies & Technical (PPP Contract Type/s)Policy  Legal Powers to contract out the services  Dispute Resolution Mechanisms – Independent Chamber  Open & Transparent Public Procurement / Tender Law  Clearly Defined Gov. / PPP Unit Role in – Budgeting Allocation / Oversight , Progress Monitoring & PPP Projects Approvals and Contract Management – performance-linked payments/penalties.  Housing Sector & Land Titles / Title Transfer LawLegal  Private / Public Land Acquisition Law  Easements / Way leaves / Permits for Infrastructure  PPP Implementation Structures – Technical Public / Private Interface Offices. Framework Integration of PPP into Public Procurement w/ Multi Stage Financial & Scio-economic Appraisal Procedures (Rationale for use of PPP’s (Business Case) , Suitability & VFM Assessment) , Guidelines for PPP’s Pre-qualification , Tender and Bidder Selection.  Standardized PPP Bidding Documents  Unsolicited Bids Procedures.  Standardized PPP Contracts / Asset (Facility) Type or PPP Model / StructureSupport  Information dissemination – data, networking, training  Guidance – model contracts, tools, case studies  Facilitating functions – political/advisory support, funding 64
  65. 65. Guidelines for Social PPP ProjectsPPP Test  Affordability for the Public Sector & desired gains  Financially viable for the Private Sector  Appropriate Risk and Reward Balance for Public and Private Sector  Public Sector - value for money (VFM – True Cost) Verses traditional PSCPublic / Government / Affordable housing (usually BOOT) Private Partner to build, lease and maintain for a set period – e.g. Malaysia, GCC ( KSA, Oman, Bahrain) Government agrees to minimum lease for a set period / off take and / or allows co- developments on siteHospitals (usually DBOF) / Prisons (usually BOT)• Government provides the doctors, nurse ,wardens etc and operates the core services – e.g. Lesotho, AustraliaSchools/ Sports Venue / Shopping Malls (usually DBOF)• Government runs core services of teaching / tutoring or agrees to use the facility for an agreed period 65
  66. 66. Typical PPP ModelRisk Transfer Host Government / Public Authority Legal /regulatory framework & support functions Advisors – Legal Contracting PPP , Technical & Authority (is) Financial Equity Investors SPV / Project Company Arranging Bank (Borrower) .Made up of Banks Syndicate Project Sponsors - Equity Investors. Hedge Providers Input Contracts Currency & Interest Guaranteed long Rate, Multilaterals, P term supply olitical Risk Insurers of inputs / feedstock Off Taker Guaranteed revenue stream to project. Can be the Public Contracting Authority or MoF Equipment Supplier Contractor(s) ,EPC O&M Contractor(s) Warranties & Supply - Risk transfer – Interface Pass down of penalties for Agents Agreements. Can Turnkey Contract , Contract availability payments , be bundled in EPC penalties , bonds. performance, etc.Risk Duration 3 – 5 Years 25 - 30 Years ( Risk by Project Company) 66
  67. 67. Steps in PPPs Procurement - PPP Project Life Cycle What are the steps?Project Preparation – Service Provider Selection Contract Management -Funding Approval – Technical RFP & Bid Financial1. Prioritise Key Project 4. Project Dev. 7. Final Negotiation Objectives2. Agree Project Concept Team, Governance, Signing contract, financial close3. Obtain Stakeholder Approval Timeline, execution plan 1. Service Need 5. Bid Preparation 8. Contract Mgmt. Output specifications EOI/ Short listing, RFP Construction, monitoring, Dispute settlement, 2. Option Appraisal Bid Doc communications and Report on EPC / PPP Approval finally commissioning options, VFM 6. Bid Evaluation 9. Renegotiations 3. Business Case Preferred bidder selection Due to changing Affordably/public interest conditions Project/ Project 10. Turn Over Funding Finalization Upon expiry of the Approval Review concession agreement 67
  68. 68. Adpoted PPP Model for Housing – BOOT (or BOT) & BTO (or BT) The Limitations of the PPP Model for the Public Housing Sector• Affordable Housing is intrinsically different from other types of PPP as mortgage laws , government guarantees to developers and land ownership issues are still evolving in the region and are subject to various considerations and are uncertain if clarity can be established once the regulations are passed.• The relatively weak financial and construction local markets to undertake such projects whereas earlier lessons from the property development boom in the region demonstrated structural problems in the approach that can not be entirely pinned on the market down turn. It is therefore, unrealistic to assume that the regional Developers / Contractors can bundle JV ‘s / long alliances in areas of financing, facility management and assume the usual risks in PPP’s.• Speedy delivery of Mega Projects are needed to accommodate the severe shortages in the region that are linked to socioeconomic stability. The luxury of a long drawn PPP bidding process simply is not there. Thus a need exists to explore other variations of PPP Models that considers the time frame, the Developers / Contractors strengths in the region and the local condition of the financial markets. 68
  69. 69. Tranches of Structured Finance & Subsidies for PPP Housing • Capital market mortgage at affordable Senior Loan terms • Low interest loans of International Loan of First Loss Financial Institutions Low Interest Loan / • Public subsidy as compensation for service Grant obligation of general economic interest • Equity from shareholders or tenants, cross Equity & Cross Subsidy subsidies. • Free of charge, in concession or at low Land / Infrastructure costs from Municipalities / Government
  70. 70. PPP Recommended Model for Social Housing Public Sector Public Sector BT (O) German Forfeit Authority Model, Contractor Released Availability Payments (Performance) Project Developer / Banks Operating / FM Construction (Loan) Finance Company CompanyMortgagePayments Home Owners Project Delivery Private SectorOne model that can explored for the region in the Affordable Housing Sector is the German ForfeitModel ( Build Transfer Model) in which the Developer / Contractor pre-agrees with the GovernmentUnit / Contracting Party to transfer / sell his rights in the Project once completed to the financinginstitution, thus the relationship becomes between the Government Unit and the Financers and theDeveloper / Contractor is released. Known also as the pre-agreed lock in period model. This modelguarantees that the Contractor performs for him to be released later on. 70
  71. 71. Reducing Transaction Costs & Securing Competitive Bids  Planning Process - Planning requires time and money - worth the investment - Fund supporting project development – needed. - Cross sector dialogue including Treasury - required - Check and balance – are key  Market Testing - Testing the interest of market is crucial - The market condition can impact risk sharing - Transparency should be kept  Procurement Method – Prioritization - Solicited or unsolicited proposal - Prequalification, 2 envelope bidding - Award criteria (VFM , PPP Versus PSC ) - Time management 71
  72. 72. • Managing the capacity and supply chains of the local and regional house building market to develop such a large scale developments. • One delivery model cannot cope with the volume of housing. Multiple procurement delivery model processes are needed to meet the supply / demand equation. • Developing the housing requirement both on time and within budget while Improving the quality of construction and in particular the professional qualifications of contractors. • Enactment & Implementation of mortgage laws to settle and an active lendingConclusions market. • Mortgage law does not necessarily solve the issue of affordability for mid to low incomes, thus alternative programs needed • Real estate / Housing sector stakeholders must realize that until housing is made available for the bottom masses housing crisis can’t abate. • Designers / developers should design creative “economy” housing models affordable and accessible to low income market. • Government to enable private sector to lead rather than play direct in that sector. • Government should encourage housing microfinance through legislative institutional framework development. • Banks, real estate players/ builders/ building materials suppliers should club/ syndicate to tackle both the Mortgage & Microfinance markets.
  73. 73. loayg@works.gov.bh; loay.ghz@gmail.com 00973-36711547 , Skype: loay.ghazalehhttp://bh.linkedin.com/in/loayghazaleh 73
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