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Real Estate Market Benefiting from Infrastructure Offensive

Governments invest in road construction and water and energy resources. Further development needs, which have to date received little attention from investors, affect public housing construction. Investments in real estate are made in many places, with a special focus on the real estate market for affordable housing. Who benefits from the infrastructure trend.

Affordable housing usually means the housing needs of lower and middle income groups. Financially, in many economies, affordability is defined as cost of housing that does not exceed 30% – 40% of household income. The World Bank and the United Nations define affordability of housing as a function of the median house price divided by the median household income. Any housing market with a median multiple of above three is defined as unaffordable, ranging in categories from moderately to severely unaffordable.

According to the Demographia International Housing Affordability Survey 2017, there are three severely unaffordable major housing markets with median multiples of 5.1 or more, including China (Hong Kong) with a multiple of 18.1, New Zealand (10.0) and Australia (6.6). Major housing markets with a seriously unaffordable rating include Japan with an average multiple of 4.1, the United Kingdom (4.5), Canada (4.7) Ireland (4.7) and Singapore (4.8).

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Most unaffordable housing markets

Source: Demographia International Housing Affordability Survey, Credit Suisse

Infrastructure Need for Affordable Housing Is Growing

Urbanization is amplifying the issue, as an estimated 54.5% of the world’s population currently live in urban areas. By 2030, this is forecast to rise to ~60%, according to the United Nations. The overcrowding of cities has driven up property prices, making housing unaffordable for the lower and middle income groups.

According to the McKinsey Global Institute (MGI), if current trends continue, the number of households that occupy unsafe and inadequate housing or are financially stretched could reach 440 million (or ~1.6 bn people) by 2025.

To fill this gap, the investment in construction alone would amount to USD 9 –11 trn. With the cost of land, the total market value estimated could be as high as USD 16 trn. The largest markets for low income housing units would be China, India, Russia, Brazil and Nigeria.

Governments Invest in Real Estate, Particularly in Affordable Housing

Governments have started to take action. The UK has announced plans for a GBP 2.3 bn housing-infrastructure fund to unlock land for housing and a further GBP 1.4 bn for the construction of affordable housing. Canada has dedicated USD 11.6 bn to affordable housing over the next decade, while Australia plans to spend close to USD 11 bn a year on affordable and social housing.

Meanwhile, the Indian government has launched the «Housing for All» scheme, which aims to build ~22 million low-cost homes across urban areas by 2022. But the affordability gap is too large to be met with government subsidies and income support alone. Market-based approaches are also needed.

Who Benefits from the Infrastructure Trend in the Real Estate Sector

The most powerful lever to create affordable housing is to reduce land and construction costs. By developing satellite cities outside the big centers but along public transportation networks, land costs can be reduced by more than 50%. Private developers developing land in partnership with government entities as well as manufacturers of rail-based local transport systems should benefit in this context.

Thorough adoption of productivity measures such as efficient procurement using building information modeling (BIM) software tools and pre-fabricated parts could result in savings of more than 30%, according to business experts. Architecture, engineering and construction (AEC) companies that pioneer the use of these new technologies are best positioned to capture the huge demand for affordable housing.

Alternative Materials and Energy Efficiency – Trends on the Real Estate Market

Alternative low-cost building materials can also provide meaningful savings. The McKinsey Global Institute 2014 report on the affordable housing challenge highlights that in India, for example, builders use bricks made of fly ash, a waste product from coal-fired power plants, to replace cement.

Moreover, operating and maintaining property at reduced costs contributes meaningfully to affordable housing. Improving energy efficiency has been shown to reduce annual housing costs materially, and a number of governments are providing subsidies to retrofit homes. In the building industry, companies providing insulation, windows as well as efficient heating and air-conditioning systems benefit from this multi-year trend.

Alternative low cost building material

Cost-effective materials make real estate more affordable. The following materials can be used for walls and roofs. Alternative materials can also be used for expansions and renovations.

Fly ash bricks

Made from fly ash/volcanic ash along with sand, lime and gypsum, used as a brick substitute for walls; created from byproducts of power plants and industrial waste; environmentally friendly and cheaper substitute

Clay fly ash burnt bricks

Made from soil, fly ash, sand and fuel coal; replacement for conventional bricks; manufactured with lower emissions and fuel consumption

Compressed earth blocks

Soil with minimum levels of clay compressed along with a small proportion of cement in walls, interlocking blocks minimize mortar and plaster, low energy consumption during production, manufacturing machines can be made mobile

Hollow concrete blocks

Cement, sand and aggregates along with industrial waste such as fly ash, blast furnace slag used to produce blocks that can substitute for bricks; energy and cost efficient, allows faster masonry completion

Cellular lightweight concrete

Cement, fly ash, sand and foaming agent; substitute for conventional bricks/blocks in multi-story buildings; reduction in deadweight can reduce costs in structure and foundation; high thermal insulation

Ferrocement wall panels

Cement, sand, aggregates, fiber and welded mesh combined to create panels of required shapes and sizes; allows for speedy construction

Micro-concrete roofing tiles

Tiles made from cement, aggregates, fiber and welded mesh combined to create panels of required shapes and sizes; allows for speedy construction

Ferrocement roofing channels

Cement, steel and welded mesh suitable for large spans; speedy installation and 30% cost saving over traditional reinforced concrete roofing; 60-75% lower deadweight

Reinforced concrete planks and joists

Cement and sand mixed with steel and binding wire; used for structural roofing, load bearing, and framed structures

Bamboo mat boards

Bamboo and polymer boards are an alternative to plywood for use in partitions, door/window shutters, infill paneling, cladding, etc.

Glass Reinforced Polymer (GRP) doors, shutters and frames

Glass fiber, natural fibers, polyurethane foam, resins and curing agents used as a substitute to wooden doors and shutters

Mosaic and checkered flooring tiles

Cement, sand, aggregates, pigments, marble chips and powder mixed to create mosaic tiles; used as cost effective flooring alternatives inside homes

Source: SHEE, UN-Habitat, McKinsey Global Institute, Credit Suisse

The Real Estate Market Depends on Lenders

Finally, providing access to affordable housing loans is the third lever of making housing affordable. This often involves the connection of mortgage lenders (typically local banks) to the secondary capital markets.

In many developed and developing countries, financial intermediaries, sometimes national mortgage corporations or separate agencies, have been created to purchase loans from banks and issue debt securities (covered bonds) to investors. By securitizing mortgage debt, investors obtain a claim on the underlying assets at a reduced risk. For borrowers, costs are lowered, as they can access broader and better funding.