Affordable housing and the capital markets: Lessons learnt from the debut naira bond

The Affordable Housing Conundrum

The mere mention of affordable housing and capital markets in the same sentence is a seeming contradiction, reflecting misconceptions about affordable housing. On the one hand, there is a deep appetite for affordable housing and, on the other, a lack of understanding of how best to achieve it.

One of the answers is apparent and is a simple one – the capital markets. Investors have shown an appetite for affordable housing worldwide and in African countries with more developed capital markets.

The recent naira bond raised by Shelter Afrique highlights just how both industries could exist in symbiosis and how capital markets can be leveraged to address affordable housing across Africa.

Understanding the capital markets

When the conversation over buying a home begins with “What is affordable?” the perfect response is, “it depends”. Affordability must be viewed in the context of the country, the household characteristics, and the supply and demand factors at play.

It is clear that like most real estate projects, even affordable housing projects must be viable primarily to their respective developers, which translates to all stakeholders including financiers.

The key drivers to viability are (i) the ability for households (or buyers) to afford the housing opportunities and (ii) the ability to achieve development costs, including market-related returns that deliver the housing opportunities at a set price.

The housing deficit across Africa can be debated ad nauseam, with governments scarcely wanting to admit the yawning gap.

However, where there is a consensus is there is a deficit, it is material and continues to grow with the rapid urbanisation rates recorded and projected.

When one draws a parallel to capital markets, Africa has continued to see a growth in the depth of the capital markets, none more so than in Nigeria. Nigeria has a solid investor base compared to most other African countries.

Capital markets are composed of stock exchanges and bond markets. Governments have dominated bond issuances, with fewer big corporations listed on the domestic stock exchanges. Corporate bonds constitute a tiny part of the capital markets in most African countries.

Capital markets offer access to an investor base of institutional investors with substantial financial resources and such investors more choices to diversify their portfolio. In South Africa, Real Estate Investment Trusts (REITs) make up close to 3% (US$40 billion) of the total market capitalisation of just over US$1.3 trillion.

Some of these REITs are residential/housing specific REITs, such as Transcend Residential Property Fund Limited (TPF). Others have a mixed portfolio that includes Residential/housing assets.

Other opportunities to raise capital for affordable housing in Africa that will develop over time will be in the private/ non-traded space. In countries like the USA, affordable housing is becoming a focus for large private REITs such as the Blackstone Group’s private REIT (BREIT), which has over $120 billion of Assets under Management.

BREIT recently announced that it was dedicating $1 billion to address the growing need for affordable housing for America’s lower-earning households, especially single-family rental housing.

Africa still has some ways to go as the capital markets are not as deep. However, we can draw on some parallels and lessons on leveraging it for affordable housing.

The Shelter-Afrique Experience

In considering the above, there were vital lessons learnt before, during and immediately after the issuance of the naira bond. To begin with is capacity. It may seem obvious, but to successfully raise a Bond, the depth of the respective capital market on its own is not enough.

With this should be a required parallel number of housing developers with a proven track record of delivery at scale combined with a pipeline of bankable projects. Nigeria has several such developers (most already known to Shelter Afrique and the investors), providing further comfort to all stakeholders.

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Secondly, you must consider and match timelines to the development cycle. The funding provided must support developers to deliver on their projects which require longer tenors as development cycles range from 12 to 36 months, with complete cashflow sales cycles ranging from 12 to 60 months post-construction.

Thirdly, the messaging is important. Affordable housing is an asset class that is appealing to investors based on the social impact of the housing units, jobs created, and environmental improvements.

This should be the pitch to investors and stakeholders.
Additionally, continued use of the markets only serves to deepen them. The bond issuance will enhance data on affordable housing, which is required to further unlock other capital market and non-traded market opportunities.

These could be products like affordable housing REITs to support housing supply and enhance housing demand.

Also, smart partnerships are still required over and above the actual issuance, an example in point being SHAF being in the final stages of considering a direct equity investment (not from naira bond proceeds) in the Housing Solutions Fund of Nigeria, in partnership with FundCo Capital Managers, to address bulk off-take of affordable housing across projects in Nigeria.

Another key takeaway is price. The pricing and tenor of the funds mean it broadly supports the supply of affordable housing, either via future issuances or a combination of raising funds through Multilateral Development Finance Institutions (MDFIs).

These institutions will seek to also support the demand-side of affordable housing through mortgages, rental solutions, and rent-to-buy solutions.

Lastly, the momentum from series one will give rise to a broader range of developers across Nigeria to access follow-on funds in subsequent series. You can only deepen the market by continuing to use it.

The Journey Continues

In the end, capital markets are certainly not the only source of funding for affordable housing; the two industries are an appropriate and sustainable fit. Closing the housing gap will require a lot of patient and affordable capital coupled with strategic partnerships; Shelter Afrique and the capital markets alone cannot address the deficit, but it is a beginning. Let’s see how the journey continues.

Yankho Chitsime is a seasoned Investment and Private Equity expert who currently heads Business Development for Shelter Afrique, a Pan-African Development Finance Institution.

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