DevelopingSmartCities.org, a leadership and knowledge platform, was started several years ago in response to the critical challenge of delivering housing to a rapidly urbanizing and developing world. One big block is inadequate business and investment innovation. In emerging and developing international markets, where over 1 billion people are in need of housing, desperately needed innovation in processes, materials, partnerships, financial innovation and sustainability is all but absent.
The business and investment opportunity is enormous. According to the McKinsey Global Institute:
To replace today’s inadequate housing and build the additional units needed by 2025 would require $9 trillion to $11 trillion in construction spending alone. With land, the total cost could be $16 trillion. Of this, we estimate that $1 trillion to $3 trillion may have to come from public funding. (Tackling the World's Affordable Housing Challenge, 2014)
Yet, the capital going to affordable housing is paltry compared to the need in places like India, Nigeria, South Africa, Brazil and other rapidly growing markets. As just one indicator of the dramatic capital shortfall, publicly listed housing developers, homebuilders, and real estate investment trusts (REITS) in emerging markets with exposure to affordable housing earned approximately $200 billion in revenues last year (Source: Bloomberg). Although many capital providers are not included in these estimates, it's clear that capital markets provide a tiny fraction of the capital needed for affordable housing.
Housing practitioners point to the complexity and fragmentation of whole housing value chain as the cause for this disconnect between capital and opportunity. The same McKinsey Global Institute report referenced above suggests that unlocking land, development, maintenance, and finance would break open the jam in global affordable housing.
Yet, unlocking markets may not spur housing innovation. Residential real estate, especially in low cost and affordable segments, is inherently conservative. Real estate overall has by far the lowest levels of R&D of any industrial or infrastructure sector. So making markets work may only yield more of the same.
This won't suit in a fundamentally changed and challenging world. Housing construction and development now must minimize carbon, energy, water and waste while producing a durable, climate resilient generational asset for lower income buyers. Homeowners and renters want vibrant mixed use and income communities in proximity to mass transit, jobs, services and social infrastructure, like health care, schools and places of worship, with open green space. Sustainable community building goes beyond infrastructure.
"Hacking" the housing value chain (as Uber has hacked taxis) is tough. The chain is a non-linear ecosystem of multiple value chains, most of which don't connect well in developing economies. A tangle of policy, capital, permits, codes, production, outsourcing, infrastructure, logistics and often corruption means critical links are often missing. Execution risk is greater than mainstream capital providers' appetite to underwrite it.
It may sound bleak, but glimmers of business and investment innovation in the global affordable housing suggest some incipient product innovation. The table below highlights areas where innovators are emerging. These new efforts often involve multidisciplinary approaches, social business models, and high-impact investments. They go beyond infrastructure and aim at more resilient, vibrant and connected communities. Despite early successes, this opportunity set has a long way to go.
Where are real estate developers, the critical actors in formal housing? Beyond a few publicly listed giants already in lower and moderate income housing, the vast majority of real estate development is built by small and mid-sized developers, a thinly capitalized and often inefficiently managed segment, generally not investable by institutions and below what is bankable. Leaving these actors out drags on the potential for new formal, sustainable, affordable housing.
So how can we unlock strategic housing innovation among those organizations developing the majority of housing in places with the most urgent and complex needs?
Leadership platforms highlight enterprises that are beacons to peers, investors, customers, suppliers and their broader communities. Elevating leaders helps to build coherent industry identity and to develop shared values and aspirations for industry.
Networks help professionals connect with "kindred spirits" in housing. Given fragmented housing markets, purpose-driven housing professionals and investors want networks to learn, collaborate and find opportunities.
Learning opportunities can help shift risk- and innovation-averse behavior. Housing developers and investors want to observe others and gain insights from knowledge made accessible.
Mission-driven capital has to be structured for investor access and outcomes. New investable funds and PPP platforms would help mobilize the high quantum of capital needed for land, capital investments and the development process, as would low cost or philanthropic capital to underwrite initial investments in delivering public goods, like energy and water efficiency, as part of a housing product.
Strategic partnerships are needed to fill gaps and address new challenges. The organizations that will build most of the affordable housing in the developing world, whether we like it or not, need to build capacity to develop the new competencies the world requires of them, whether that means collaborating with housing microfinance institutions or integrating sustainability.
To be sure, governments have a critical role to play, one not addressed here. However, by nurturing more housing innovation, we should see more dynamic institutional ecosystems, including non-profit housing developers or non-profit partnerships with for-profit housing developers, more efficiency, lower cost and sustainable inputs and supply chains, increasing engagement among banks and investors and, one hopes, more sustainable, livable communities.