Download Financing Multifamily Housing in Emerging Markets

Financing Multifamily Housing
in Emerging Markets:
Constraints and Opportunities
Carol S. Rabenhorst
The Urban Institute
Washington, DC
Presentation for Panel: Affordable Housing Goes Worldwide
Institute for Professional and Executive Development
Chicago, July 10-11, 2008
Background: Linking Housing
and Economic Development
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“Housing starts” as a leading economic indicator
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Construction and manufacturing jobs; labor mobility
Retail sales
Predictor of overall economic health
External growth factors:
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Improved living conditions and infrastructure
Motivation to save
Motivation to spend
Labor and social mobility
The demand cycle:
– Housing demand → housing finance → financial sector
development → economic growth → housing demand
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Emerging markets tend to follow the same pattern
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Overview of Multifamily Housing
in Emerging Markets
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Mass privatization of apartments in transition from socialism
since early 1990s
– High owner-occupancy rates (90%+)
– Poor condition → trading up and renovation
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Real estate and mortgage markets concentrated in large cities
and resort/tourism areas
– Housing values higher, for same reasons as developed markets
– More people, higher incomes
– Few alternatives for private investment
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Why apartments?
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Mass urbanization
Cost effective land & infrastructure use, lower construction cost
Lower cost to purchaser
Security, particularly in Africa
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Examples of Emerging Mortgage
Markets
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Central and Eastern Europe transition countries
– Explosive mortgage market growth
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Average growth 75% p.a.; 9% of GDP
– Growing secondary market activity
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$20.7b in covered mortgage bonds outstanding in 2006
Southern Africa
– More moderate growth
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Lagging legal reform – registration, enforcement
Macroeconomic and political uncertainty
– No secondary market… yet
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Asia
– Mixed growth
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China: $356b in mortgage debt (from $0 in 9 years) (pop.
1.3b; 11% GDP)
India: $18b mortgage debt (pop. 1.1b; 9% GDP)
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Constraints on Financing
Multifamily Construction and
Sales
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Problems relating to registration of
title and lien
Problems relating to level of
development of construction finance
Problems relating to condominium law
and operations
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I. Registration Problems
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No registration of title or mortgages on future construction
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Usually no property identification number until built
Developer’s commercial loan may block mortgage for apt. purchase
Lender’s priority unclear
Undisclosed liens (spousal rights, taxes)
Large percentage of properties not registered at all
– Privatized apartments in CEE
– Land and buildings, especially in Africa, less so in Asia
– Donor-financed registration projects, but slow going
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No title insurance; state guarantee but only if registered
Particular problems with condominium registration
– Ownership scheme not clear in law
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DEVELOPED MARKET MODELS:
– Ability to register title or lien on future construction
– Completion bonds
– Accurate registration of apartments part of declaration of condominium
recorded prior to construction or sale
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II. Construction Finance Problems
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Reasons for lack of residential construction lending
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Inadequacy of law, mistrust of courts to enforce rights
Inability to assess/manage completion risk (no insurance)
Lack of standard multifamily loan products
Easier profits elsewhere
No regulation of developers → increases risk
Common method – apartment purchaser pays before construction
– Takes all the risk of non-completion, poor quality
– All cash, so limits market to upper income
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Loans are business loans, not formal construction finance
– No developer investment and risk sharing
– No schedule of completion payments with holdback
– Construction finance not coupled with permanent finance
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DEVELOPED MARKET MODELS:
– Data for underwriting multifamily construction loans
– Presale and release requirements
– Evidence of permanent financing
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III. Condominium Law Problems
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Unclear developer rights and responsibilities
– Increased risk for lenders and apartment purchasers
– Particular problems with privatized apartments
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Unclear ownership rights and responsibilities
– Registration and title issues
– Transfer of control to owners from developer
– Obligations of owners not contractual so not enforceable
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Poor management of common areas
– Devaluation risk for long-term lenders
– Inability to borrow for common area improvements
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DEVELOPED MARKET MODELS:
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Developers’ rights and responsibilities clear
Owners’ rights and responsibilities clear
Professional property management
Insurance requirements
Borrowing under UCC for common area improvements
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Applications Available from
Developed Markets
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Legal and regulatory evolution
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Mortgage and secondary market framework
Enforcement of contracts
Registration of title and mortgages
Condominium development and operations
Policy development
– Government macroeconomic policies
– Taxation, fee and subsidy structures
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Private sector response
– Demand driven
– Multinational banking → international best practices
– Growth of ancillary industries – evaluation, insurance,
credit reporting, rating agencies, property management
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Conclusions
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Desire for better housing is universal human nature,
inevitably leads to strong demand for improved construction
and financing options
Private sector responds to strong demand
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Profit motive
Secure market, if risks carefully assessed
Flexibility
Growing number of multinational banks → experience, skills
Fast growing economies, developing capital markets
Donor support through loans, investments and TA
Government policy slower to develop
– Entrenched interests in housing and construction sectors
– Economic setbacks
– Legal change is evolutionary, as in developed markets
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All in all, the future is bright!
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Questions?
Carol S. Rabenhorst
Senior Legal Advisor
The Urban Institute
2100 M Street NW – Suite 500
Washington, DC 20037
202 261 5767
[email protected]
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