Affordable Housing: Capturing Bangladesh’s “Missing Market”

Urbanization in Bangladesh witnessed a faster pace between 2000 and 2010 in all other South Asian countries. During this timeframe, the share of its population living in officially classified urban settlements soared by 1.69% a year, according to World Bank (2015). Acceleration of housing demand mainly ascribes to this faster pace of urbanization. In Bangladesh, real estate emerged as a crucial sector of economy after the liberation war, having a multiplier effect on economic activities, being the source of massive employment generation after agriculture and garments and stimulating demand for allied industries, steel, cement, tiles and sanitary ware, cable and electric wire, paint, glass and aluminum, brick, building materials, and consumer durables. Contribution from this sector has been very significant and over the last two decades it contributed on an average 8.24% on the overall GDP of the country.

After a prolonged downturn of real estate sector for the last few years, the market rebounded in 2017. The housing market went on a downturn in 2012 for intermittent political instability, a bearish stock market and the halting of gas connections to new buildings. Also, property price corrections in the past few years have lured in many prospective home buyers. Realtors are expecting the property market to flourish in 2018 as sales of 2017 finally picked up upon banks’ slashing of interest rates to single digits. According to Real Estate & Housing Association of Bangladesh (REHAB), the sector grew 5%-7% in 2017, bucking the downturn of the last several years. However, the sector is still struggling with high rod prices and cement prices, which makes the overall construction price high and exceeds homebuyers’ budget.

Every year more than 120,000 household units are required to house the added population in Dhaka. In this situation, the supply of housing in the city is only around 25,000 units in private sector. The private sector contributors include formal private sector (Real Estate Development Companies) and informal private sector (Individual Initiatives). Among these 25,000 units, 15,000 units (appx.) are developed by real estate developers per year and the rest are developed by individual developers.

Home loan in the banking industry of Bangladesh remained on a steady growth over the last 10 years, with having a CAGR of 20% in 2016. Notwithstanding the high growth rate, the mortgage debt to GDP ratio is alarming for Bangladesh (a meagre 3.5%), whereas other Southeast Asian countries  demonstrates high level of housing loan- Thailand (19%), Malaysia and Japan (37%) and Singapore (54%). The low penetration of housing loan ascribes to lack of improvement in housing condition for lower and middle-income households. According to a survey report by BIBM, 85% of all rural and 70% of all urban-dwellers units fall under inadequate/deficient categories, which indicates they are out of the bank/FIs financing reach.

Should the real-estate stakeholders stretch the target group to capture potential market?

Traditionally, the demand-side of housing sector comprise the upper/upper-middle income class, who are believed to possess the credit-worthiness required to avail a home loan. The “below middle-class income group” or most familiarly known as “the down-market” in real estate realm go unnoticed when house finance is in question. Given the fact that, most of the apartments are constructed on an area of more than 1,000 sq.ft., the heavy Equal Monthly Installment (EMI) of housing loans reaches beyond the financial capacity of this income group, therefore, rentals remain the only option to them. However, it is worth to note that in this way, realtors are missing out a chunk of their potential market, which is 20% of the total population. According to Boston Consultancy Group (BCG), middle and affluent class of Bangladesh tantamount to 12 million, which is anticipated to grow triple to 35 million by 2025.

Change of the target group from upper/ upper-middle class to low-income class, developing more small- sized flats to purchase and coming up with customized financial products can ameliorate the demand of housing sector.

Defining Affordable Housing

Affordable housing refers to housing units that are affordable by that section of society whose income is below the median household income. It enables house finance companies/banks/financial institutions to provide long-term loans to the people belonging to the economically weaker section- low and middle income groups in peripherals of urban and semi-urban areas. Affordable housing has become a key issue especially in developing nations where a “majority of the population isn’t able to buy houses at high market price”- or vividly they are termed as “the missing market”. In most of the developing countries, especially in South Asian countries, owning a house is seen as a luxury that not many can afford. Only the upper-middle income class of the income rung are eligible to avail housing finance due to their credit worthiness. Faced with a large unmet demand, the supply of good credit risk borrowers crowds out the lower end of the market. Also, developers dedicate supply to the higher end of the value pyramid, with an eye on greater margins.

Limited housing development is starkly evident in Asia pacific region, where income disparity only widens with the course of time. A low housing loan as a share of total credit ratio is an indicator that housing development throughout the region is constrained. Where Indonesia and Bhutan show comparatively bright performance in disbursing housing loans, the most densely populated Bangladesh gives a gloomy picture, indicating there is a severe gap between demand and supply.

Housing development is about integrating the various components that make up the demand and supply factors underlying this ecosystem and their respective links.

From the supply side and taking into account rapid urbanization across the region, three key factors drive up housing cost:

  • Land (in particular, trunk land earmarked for development)
  • Finance (including availability of mortgage finance within a sustainable share of household income, usually in the range of 20-30%)
  • Construction to a lesser extent (both materials and the building process)

On the demand side, it is important that apex national housing development institutions, support other elements in the ecosystem. National Housing Development Corporation in Bhutan is a prime example of how housing finance companies address the chronic housing crunch in urban centers.

Financing models of affordable housing varies on certain factor, e.g., demography of the country, income distribution, geography of the country and the like. However, two models are widely accepted in countries like India, where affordable housing is having a higher growth spectrum in housing sector.

     

                                                            

Housing made affordable in India

Affordable housing is a problem that many countries are taking stock of, world-over. Over the last 5 years, India demonstrated remarkable growth in this sector of housing, once termed as “down market”, pushed by immense end-user demand and government’s thrust to ensure “Housing for All by 2022”. Houses in the affordable category – those costing less than Rs 25 lakh – now account for a fifth of all residential sales in India. Affordable housing refers to housing units that are affordable by that section of society whose income is below the Median Household Income.

Why affordable housing took time to take off in India?

There was a raft of reasons for affordable housing getting off the ground in India despite having enormous demand from low-income consumers. Acquisition of land in urban areas at affordable price, inadequate infrastructure and a lengthy approval process – all combined to make the progress very tardy. Since, it is the low-income group affordable housing sector deals with, not having enough money to give the margin for taking a housing loan and lack of access to home finance for low-income groups are constraints on the demand side.

What are the reasons affordable housing picked up in India?

The demand for housing in the affordable segment has increased in cities due to a large migrant population. Affordable housing became a compelling story for India with a young population that is moving from villages with few jobs to the outskirts of cities in the hope of finding better work. This is the only segment in housing sector to get 100% tax exemption for developers. Also, the government is giving a subsidy of the 6.5% at the lowest rung of the ladder and crediting the entire subsidy of a 20-year loan to the loan account of an applicant, which reduces EMI, which further makes it more affordable to the applicant. For instance, Households with annual incomes of less than Rs. 18 lakh are eligible for a subsidy of Rs. 2.3 lakh, which is paid out upfront on a home loan.

 

Estimated shortage of around 4 crore houses (urban and rural), population growth of 1.3% per cent per annum, favourable demographics, ‘nuclearisation’ of families, migration to urban areas, fiscal benefits, rising income/aspirations all could lead to another one crore per annum demand for houses.

Supply side diversifying portfolio

While 1% of the low housing supply comes from large and branded developers, around 9% of the supply are built by mid-size and formal developers. The rest 90% of the supply came from small and informal developers who typically construct small projects on the outskirts of cities, like in the jurisdiction of Gram Panchayats. The large and mid-sized formal developers have largely been “unsuccessful in supplying affordable housing to low-income customers” as projects tend to be more expensive and located further away from the city in less desirable locations. These distant locations also may lack infrastructure and require large investments, which further shrink the already low margins of such projects.

Having said that, developers are also diversifying their portfolio to cover the affordable housing segment. For instance, real estate firms launched projects spanning a cumulative Rs. 1 crore sq. ft in low cost housing. As per the real estate developers, the demand for budget homes will only increase and its share of the market will rise to 40% in the next two years.

 

Tectonic changes for affordable housing from policy level

The government is also offering all the sops possible to realize the aim of ‘Housing for All by 2022’ like various concessions, the most important of them being a lower Goods and Services (GST) rate. Besides, two other major reforms – demonetization and the enactment of the Real Estate (Regulation & Development) Act (RERA) have impacted the industry in a positive manner. Under RERA, the developer will not be able to divert funds received from flat buyers to outside the project, with 70% of receipts earmarked towards the project. Similarly, delivery timelines are monitored by the regulator with penal provisions for failure to deliver within committed timelines. Prospective buyers will have access to this information and violations by the builder will have adverse impact on sales offtake. Developers will thus have to launch projects where they are sure of completion and have good visibility of sales. The government has also granted infrastructure status to affordable housing, which has enabled the projects to avail benefits such as lower borrowing rates, tax concessions and increased flow of foreign and private capital.

Affordable Housing becoming mainstay for Housing Finance Companies

The Credit-Linked Subsidy Scheme (CLSS), a part of the government’s flagship Pradhan Mantri Awas Yojana – Urban (PMAY-U) enables borrowers from economically weaker section to avail house finance with an upfront subsidy. Housing finance companies (HFCs) are leading from the front with over 70% share in disbursements. While HFCs have been able to come up with tailored products and processes aimed at tapping the segment, banks continue to focus on the large-ticket salaried customers for driving their home loan portfolio. Predominantly, two reasons are highlighted behind this phenomenon: capital constraints and fear of default. According to industry insights, the sheer size and branch network of banks might also make it difficult for them to be able to communicate the scheme and educate their customers effectively. Moreover, there is usually a certain time lag between subsidy claim and settlement, and till then the borrower will be required to service the entire EMI. This could put pressure on his repayment capacity.

Why Bangladesh is poised to take a lead in affordable housing sector by the next decade?

Affordable housing is yet a “to-be explored” realm in the house finance sector in Bangladesh. Currently, affordable housing constitutes less than 2% of the newly constructed apartments. However, a handful of socioeconomic facts, akin to that of India, lead to enable aspiring homebuyers who want to purchase budget homes.

 Population growth picks up

The robust population of 166 million with an annual 1.1% growth rate, fits the bill for Bangladesh to venture into the affordable housing sector.

 Urban migration surges

Some 90 out of every 1,000 persons moved to urban areas in 2015, up 17% year-on-year, according to Bangladesh Sample Vital Statistics (BSVS) 2015. increased number of people are moving from small towns to big towns or cities, particularly for economic factors, education and healthcare. Dhaka at present is one of the fastest growing megacities in the world with a population of about 18 million in 2016 over an area of 1528 sq.km, accounting for 11% of the total population. The population growth rate of the city is 4.65% against 1.48% of the national growth rate as per the Bangladesh Bureau of Statistics (BBS). Average dwelling size is 4.9 persons per household. With accommodating more than 600,000 people per year, Dhaka is now growing with an unprecedented growth more than ever.

 Middle income class growth burgeoning

Two million Bangladeshis are joining the rank of Middle And Affluent Class (MAC) a year, according to Boston Consulting Group (BCG) in Bangladesh, a global management consulting firm. By the year 2025, the number of MAC is expected to triple to about 34 million from around 12 million at present.

In another study conducted by the Bangladesh Institute of Development Studies (BIDS), it reflects that one-fourth, or 25% of the total population will belong to the middle-class income category by 2025, due to greater access to education, finance and IT services, and private sector employment. At present, 20% of the population belongs to the middle-income category. As the share of middle-income category in the economy increases, the demand for housing will also pick up as part of better standard of living.

 More nuclear families

Nuclear families are now on growing trend in the society, fueling by high cost of living and affordability. With passing times, this trend will continue to increase and people will in need of more small-sized flats.

 High apartment price

Pricing is a big challenge, especially within Dhaka and other major cities of Bangladesh. Real estate developers face many challenges providing affordable housing to city residents due to soaring land prices and higher construction costs. In order for developer costs to be covered in the face of higher costs, the price of property is being held at a higher rate, which in a lot of cases is actually well ahead of the market rate for a property in that area. High costs of borrowing, high transaction and registration fees are all deterrents to purchasing a property. With high property prices in cities, adding further costs through transaction fees and interest costs (if financed through bank loans), coupled with other risks and challenges, all lead the purchaser to defer the decision to enter the real estate market.

Ways to create the “missing market” 

 The refinance schemes of housing sector should be based on income of the target group, rather on size of the flat. In this way, the target market will be stretched.

 The major cities are all currently very densely populated and with increasing urbanization, there is a need to open up new residential areas on the outskirts of the cities which reduces pressure on city infrastructure, making the workings of any city more efficient. It will provide more affordable housing for Bangladeshis to purchase and live in and more providing security for themselves and their families.

 Developers need to come up with more small-sized flats in a bid to accommodate the middle-income group.