Housing Finance in Africa
How can Africa expand access to affordable housing? The Centre for Affordable Housing in Africa (CAHF) chronicles the experiences of the continent’s residential markets in its annual yearbook. Despite the challenges these housing markets face, there have been several successful approaches African governments, financial institutions and developers have pursued in expanding financial access to affordable housing. The FOGARIM programme in the Kingdom of Morocco has helped over half a million citizens with irregular and modest incomes obtain home loans.[i] Savings and Credit Cooperatives (SACCOs) in the Republic of Kenya have channelled the equivalent of several billion U.S. dollars from collected savings into loans that are some of the only forms of housing credit moderate and lower-income households can access.[ii] Here we focus on the cross-subsidization mechanism in the Republic of Sudan, which was highlighted in the 2019 yearbook country profile for Sudan authored by Kalamu Consulting in CAHF’s latest yearbook.[iii] Although, the cross-subsidization technique for housing has not been prominent in Africa’s housing finance dialogue, this blog elaborates on the approach, building upon the Sudan case and assessing the technique’s potential to strengthen investment in affordable housing.
What is cross-subsidization?
Financial resources are finite for any government. The lack of funds can make housing programmes unworkable for politicians and policymakers. Cross-subsidization is an alternative financing technique that can reduce the funding shortfall for affordable housing initiatives. Generally, cross-subsidization refers to a system of transactions where upper-income customers pay higher prices for certain goods or services so lower-income customers can afford the same items at a discounted rate. For housing, cross-subsidies can direct revenues from more high-end developments or loans to make other residential properties or credit more affordable at below market rates. As a result, cross-subsidization can—to a certain degree—overcome financial constraints on government, while also helping encourage the participation of the private sector in delivering affordable housing. This mechanism is not exclusive to Sudan. Other countries use cross-subsidies to expand access to housing for low-income and vulnerable households.
There are numerous examples of cross-subsidization for housing around the world. Some cross-subsidies are designed to target housing finance borrowers. The secondary mortgage market in the United States, for example, uses cross-subsidies to reduce lending rates for underserved borrowers.[iv] In countries such as China and Mexico, Housing Provident Funds (HPFs) accumulate savings deposits to provide less costly home loans for certain borrower profiles, including middle and low-income workers.[v] Other countries use cross-subsidies to make housing supply more financially attainable for certain segments of the market. In India, developers can receive incentives to build mixed-use communities and cross-subsidize units for low-income households.[vi] Sudan also focuses its cross-subsidization approach on housing supply.
The Case of Sudan
Confronted with limited funds and overwhelming housing demand from accelerating urbanization, the government of Sudan reassessed its approach to low-cost housing in the 1990s confronted with limited funds and overwhelming housing demand from accelerating urbanization. The government had already tempered its ambitions delivering 1,500 public housing units in the 1960s, far fewer than the 25,000 families on the waiting lists.[vii] The government subsequently favoured a sites-and-services approach that shifted housing and infrastructure costs onto households. Still the provision of over 300,000 plots, beginning in 1956, on peripheral land with varying levels of subsidies for basic infrastructure—mainly roads, electricity and water supply with drainage—made housing construction and urban development either unattainable or undesirable, leaving the majority of plots underdeveloped or vacant many years later.[viii]
In the early 1990s, the government, accordingly, altered its housing policy from sites-and-services and instead focused on serviced “core units” of 30 m2 for moderate and low-income households with the support of state housing funds starting in the early 1990s. In 2001, the Ministry of Planning and Urban Development spun off the housing fund for Sudan’s most populous state with over 10 million people including the two largest cities in the country.[ix] The Housing and Development Fund in Khartoum State, abbreviated KSHDF, or صندوق الاسكان لولاية الخرطوم has subsequently built over 80,000 core units for moderate and low-income families in collaboration with the private sector.[x] The KSHDF became the model for affordable core housing supply in Sudan; the central government subsequently launched the National Fund for Housing and Reconstruction (NFHR) in 2008 as a presidential initiative to help other states achieve similar results.[xi]
Design and Development of Khartoum State Housing Units, 2018[xii]
The KSHDF finances the construction of housing for high, middle and low-income segments. The three housing categories have the following general characteristics:
- Popular Housing: Core units for working andlow-income households with eligibility requirements, ~90 000 units built
- Economic Housing: Core units for middle-income households without eligibility requirements, ~41 000 units built
- Investment Housing: Villas and flats with two rooms or more for upper-income households without eligibility requirements, ~5 000 units built
Aerial View of Economic Housing in Khartoum State, 2018[xiii]
Popular housing units comprise what is popularly referred to as public or social housing in Sudan. The KSHDF uses cross-subsidization to help finance the provision of the low-cost housing with the expectation that homeowners will further develop their core units and incrementally build. Investment units, described as ‘luxury’ homes, are sold at a premium.[xiv] Profits from the sale of these villas and apartments are then applied to minimize costs for popular housing. Homeowners can finance their purchase over a period of instalments from three to twelve years. The use of housing cross-subsidies has several strengths and weaknesses in promoting access to affordable housing.
Lessons from cross-subsidization
The use of housing cross-subsidies has several strengths and weaknesses in promoting access to affordable housing. The cross-subsidization technique helps boost funding for core housing units in Sudan. The financial mechanism relies upon KSHDF’s provision of a small subset of investment housing units, shown in the figure below. As such, the government assumes substantial risk in channelling investment into the construction of these villas and apartments with expectations that upper-income customers will buy them. These projects also depend on government’s ability to partner with contractors to deliver residences on or under budget while also appealing to market dynamics. The latter may be easier with limited supply in Khartoum State, where home prices have been reported as high as US$1 500 per square metre in prime urban neighbourhoods.[xv] However, the private sector may also become averse to working on cross-subsidized projects given their potential association with overpriced housing stock in a market that is already expensive. Public-private partnerships may help both sides collaborate to overcome conflicting interests, such as concerns of unfair competition and home prices. In addition, cost sensitive upper-income customers may be apathetic to helping lower-income families obtain core units and dismiss the opportunity to partake in cross-subsidization. Homebuyers may therefore choose market-rate stock instead of KSHDF units, undermining the cross-subsidy for low-cost housing.
Khartoum State Housing and Development Fund (KSHDF) Project Units Implemented[xvi]
Despite these risks, housing cross-subsidies merit greater attention in Africa. The KSHDF has achieved remarkable results in delivering close to a 100 000 popular housing core units.[xvii] The outcome is noteworthy in the context of being almost 100 times the units delivered in Sudan’s public housing programme in the 1960s and about one-third of the plots allocated from sites-and-services since Sudan’s 1956 independence. The cross-subsidization approach demonstrates how channelling funds to the private sector can forge partnerships with developers in promoting affordable housing. The experience of Sudan further shows how strong demand for market-rate stock can be directed to help lower-income and vulnerable households access adequate housing. Residential markets throughout Africa can similarly assess their public and private sector efforts to develop new and innovative approaches to promote investment in affordable housing. Nevertheless, more work remains to optimize funding and expand delivery to fully serviced, well-located, and low-cost housing in mass beyond core units.
Strengthening tools for affordable housing finance in Africa
Housing cross-subsidization is a tool that can help strengthen access to affordable housing in Africa. The case of Sudan illustrates the government’s reformulated policies and programmes using cross-subsidies to mobilize greater financing for affordable housing. The Sudan example is another relatively successful approach, which could be an example to African governments looking to devise innovative strategies to amplify investment towards the delivery of low-cost incremental housing. While housing cross-subsidies are neither abundant nor comprehensive, the case underscores the importance of exchanging affordable housing experiences throughout the continent. Comparisons can help African markets identify best practices to overcome housing finance challenges and make affordable housing a reality for all.
[i] Lam, A., & Feather, C. (2016). Promoting Access to Affordable Housing Finance: Morocco’s FOGARIM Guarantee Fund and US Housing Finance. Cityscape, 18(2), 189-200. Available at: https://www.huduser.gov/portal/periodicals/cityscpe/vol18num2/ch11.pdf. (Accessed 22 December 2019).
[ii] Feather, C., & Meme, C. K. (2018). Consolidating inclusive housing finance development in Africa: Lessons from Kenyan savings and credit cooperatives. African Review of Economics and Finance, 10(1), 82-107. Available at: https://www.ajol.info/index.php/aref/article/viewFile/174623/164016. (Accessed 26 December 2019).
[iii] Feather, C., Meme, C. K. & Pitya, P. (2019). Sudan. In Housing Finance in Africa: A Review of Africa’s Housing Finance Markets. Alison Tshangana, Susan Carey and Olivier Vidal (Eds.). Centre for Affordable Housing Finance in Africa (CAHF). Available at: https://housingfinanceafrica.org/app/uploads/V15-SUDAN-1810.pdf. (Accessed 10 February 2020).
[iv] Parrott, J., Stegman, M., Swagel, P., & Zandi, M. (2018). Access and Affordability in the New Housing Finance System. Urban Institute. Available at: https://www.urban.org/sites/default/files/publication/96461/access_and_affordability_in_the_new_housing_finance_system.pdf. (Accessed 10 January 2020).
[v] Chiquier, L. (2009). Chapter 11: Housing Provident Funds. In Housing Finance Policy in Emerging Markets. Loïc Chiquier and Michael Lea (Eds.). The World Bank.
[vi] Mukherjee, M., Roy, U. K., Biswas, A., Arora, K., De, B., & Srivastava, A. (2016). Changing paradigms of Affordable Housing in Independent India. In 3rd Residential Building Design & Construction Conference-March (pp. 2-3).
[vii] Pasha, A. H. S. (1984). The provision of affordable housing in Central Sudan (Doctoral dissertation, University of Bristol).
[viii] Osman, A. & Abdalla, A. (2010). Social Rental Housing: The South African Experience and Its Relevance in the Sudanese Context.
[ix] Awad, Z. E., & Gaafer, Z. O. (2016). Sustainability Evaluation for Low-Cost Housing Projects With special reference to Khartoum State Fund for Housing and Development projects. Journal of Engineering, 4(2), 133-147.
[x] Ishaiger, M. A. A. (2019). Social and Economic Effects of the Public Housing on the Sudan Inhabitants (A case Study: Housing and Construction Fund projects-Karary Locality-Khartoum State) (Doctoral dissertation, Sudan University of Science & Technology).
[xi] United Nations Human Settlements Programme (UN-Habitat), the Ministry of Environment, Forestry, and Urban Development (MEFUD). (2014). Sudan’s Report for United Nations’ Third Conference on Housing and Sustainable Urban Development (Habitat III), 2016.
[xii] Khartoum State Housing and Development Fund (KSHDF). (2020). Projects Implemented.
[xiii] Khartoum State Housing and Development Fund (KSHDF). (2020). Projects Implemented.
[xiv] United Nations Human Settlements Programme (UN-Habitat), the Ministry of Environment, Forestry, and Urban Development (MEFUD). (2014). Sudan’s Report for United Nations’ Third Conference on Housing and Sustainable Urban Development (Habitat III), 2016. Pg. 19.
[xv] Dongla, M. A. M. (2019). State of the Housing Industry-Sudan. Sudanese Contractors Association.
[xvi] Khartoum State Housing and Development Fund (KSHDF). (2020). Projects Implemented.
[xvii] Khartoum State Housing and Development Fund (KSHDF). (2020). Projects Implemented.