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Opening doors to affordable housing

Updated: 2016-04-08 09:30
By Lucie Morangi (China Daily Africa)

Chinese firms are bringing construction expertise and financial resources to Africa

Chinese firms are diversifying into Africa's lower-income home sector in a bid to supply cheaper houses.

Renowned for modernizing the continent's transport sector, three firms - CITIC Construction Co, China Wuyi Ltd and Jiangxi Zhongmei Engineering Construction Co - are venturing into the largely untapped market of low-cost housing by launching large projects to meet an overwhelming need.

 Opening doors to affordable housing

CITIC Construction Co Ltd is behind Kilamba Kiaxi, a 20,000 unit satellite city in Luanda, Angola, that was completed in a record four and a half years at a cost of $3.5 billion. Zhang Guoqing / For China Daily

 Opening doors to affordable housing

A local employee of CITIC Construction Co Ltd. Zhang Guoqing / For China Daily

Demand for homes in Africa far outstrips supply. Kenya's housing shortage is estimated at 234,000 units annually, yet only 30,000 are built, with less than 20 percent targeting moderate- to low-income earners.

In Zambia, 600,000 units are needed yet less than 1 percent are built. Ghana estimates that its backlog of decent affordable houses is between 300,000 and 500,000 units, with an annual demand of 75,000 to 140,000 new units. Nigeria is in want of 17 million units.

The need for new homes has risen over time because local residential developers have neither the technical ability nor financial muscle to deliver big projects. Their projects do not have the economies of scale that would allow cheaper prices to be passed to new homeowners.

In Nairobi, more than 130,000 households are paying monthly rent equivalent to mortgage installments for a $35,000 house at 16 percent interest per annum, according to International Finance Corp, a member of the World Bank Group that focuses on the private sector in developing countries. That's equivalent to monthly payments of $476 for 25 years, the maximum term allowed in Kenya.

"That is a big market if you ask me. If only developers present the right proposition," says Britt Gwinner, head of housing finance at IFC.

To tap this market, the Chinese companies are expected to put up high-density housing, meaning more units per plot of land, which lowers the costs of land and building materials per unit, experts say. The unit costs are 30 percent less than the expenses for building a single apartment, though many people mistakenly believe the latter costs less because of individual supervision of the construction.

Last May, IFC and CITIC Construction Co Ltd launched a $300 million investment fund in Nairobi that plans to develop 30,000 houses in Kenya, Rwanda and Nigeria.

Opening doors to affordable housing

The fund, CITICC (Africa) Holding Ltd, hopes to deliver affordable housing projects across Africa, with each project ranging from 2,000 to 8,000 units. "CITIC Construction brings to the table technical and financial strength to manage large-scale housing projects within set time frames," says Gwinner.

The Chinese firm also is behind Kilamba Kiaxi, a 20,000 unit satellite city in Luanda, Angola that was completed in a record four and a half years at a cost of $3.5 billion.

"Our successful business strategy model called 'combined fleet' brought together more than 40 esteemed Chinese enterprises with different specializations in surveying, designing, constructing, logistics and so on," Liu Guigen, vice-president of CITIC Construction, says of the Luanda project.

"With complementary advantages, the team shares both interests and risks together, key in the completion of large-scale projects. As a flagship, CITIC Construction oversees the project with all partners harmonizing their strengths to deliver quality within set deadlines," adds Liu. The company was commissioned by the Angolan government to do the planning, financing and post-construction operations.

CITIC Group, the parent company, has grown to be the biggest conglomerate in China, with interests in both financial and nonfinancial businesses. It has been listed on Fortune Global 500 for seven consecutive years since 2009 ranking 186th in 2015.

Combined with IFC's ability to fund high-capital projects and private sector focus, the partnership hopes to introduce residential skyscrapers, which are rare in the continent.

"Ninety percent of urban dwellers are tenants, with the bulk paying rent for low-quality houses. We intend to mobilize private players to broaden access to affordable, decent products," Gwinner says. This would involve reducing the cost of financing and building materials.

Financing is the biggest hurdle. Local developers fund their projects through debt, which can swell with unexpected delays and high and fluctuating interest rates. This can significantly impact the total financing costs incurred by developers.

James Karanja, executive director of HFDI, a subsidiary of Housing Finance Group, one of the biggest mortgage and real estate lenders in Kenya, says most of the projects they finance are houses for the wealthy, who can afford high prices. Fewer units also reduce their exposure to unbudgeted operating costs.

"We are trying to enter the lower-income bracket because there is an oversupply of houses targeting the high-income group. But prevailing market conditions limit us to the number of units we can offload into the market. Our margins are also very narrow when we consider products for the lower-income bracket," he says.

Developers say they design homes on the larger side because Kenyans prefer open spaces, even when that space is seldom used.

Another hurdle is the cost of building materials. Karanja says the price per square foot for a home has gone up in the past three years from $320 to $420, an increase of 31 percent.

Karanja says HFDI has held talks with CITIC Construction but no deals have yet been finalized. Plans call for CITICC (Africa) Holding to incorporate local developers to ensure that products are in line with customers' preferences. The CITICC fund hopes to supply houses costing $10,000 to $30,000, considerably less than the $100,000 to $150,000 cost for an average three-bedroom apartment in Nairobi.

Gwinner says large-scale development is the solution. "Although this means lower margins, the constructor can recoup through bigger volumes," he says, emphasizing that the scale of the industry needs to change to reach lower-income groups.

To make this possible, IFC is extending long-term capital to local financiers to expand their construction and mortgage financing portfolios. That will allow more people to purchase CITICC (Africa) Holding investment products while financing local developers that intend to also participate in large-scale projects.

IFC also is financing local manufacturers' capacity to meet an expected increase in demand from residential construction. In 2014, it provided $70 million to a cement factory in Kenya to boost its production capacity fivefold to 1.7 million metric tons per year.

China Wuyi Co Ltd and Jiangxi Zhongmei Engineering Construction Co are joining this transformation through building 10,000 civil servant housing units awarded to them by the Kenyan government last year.

Stanley Kamau, director of Kenya's Public Private Partnership Unit, a state agency that will oversee the project, says the firms are expected to seek funding from private investors, as the government is no longer providing sovereign guarantees.

"We, however, issue a letter of intent to developers that is acceptable to private investors. The Chinese firms have appointed a local bank as their agent to find money in the domestic market to fund this project," Kamau says, noting that there has been lots of interest from local banks in the project based on the two firms having worked on many of Kenya's major infrastructure projects. China Wuyi won $10 million worth of construction contracts last November.

The residential project will be the first of its kind in the country. Kamau says it promises to pioneer a national strategy in affordable housing that will be replicated countrywide.

IFC officials say they are pleased with the civil servants' housing project, with development taking place on publicly owned land near downtown Nairobi. Plans are underway to replace existing dilapidated structures with modern, high-density buildings to house more people.

"We know that there is a lack of local capacity to deliver projects to scale, and CITIC Construction's strategy is founded on ability to develop at scale. This provides immense opportunities for enterprising African companies to gain from technology transfers and understanding how to place themselves on the value chain," says James Mugerwa, managing director of Shelter Afrique, a pan-African mortgage financier.

He advocates national prioritization of housing to bring reforms in the subsector. That means increasing budgetary allocations for housing infrastructure such as water, energy and roads; streamlining institutions to reduce delays in approvals; and initiating public-private initiatives to include private investors with financial muscle. "Making it easier for investors to make inroads in the sector will cause a dramatic uptick in development," he says.

Large-scale housing projects and the industry to supply them will also increase employment opportunities, especially in the low-skilled bracket. IFC estimates that each housing unit will create five full-time jobs.

The initiatives, however, do not address the challenges of the mortgage market. A World Bank report released last year shows only 5 percent of adults took a mortgage loan from a formal bank in the past year in Africa.

Mary Kipkemboi, a lecturer at the School of Finance at Strathmore University in Kenya, says governments' large share of domestic borrowing has contributed to keeping interest rates high.

Despite the challenges, CITIC Construction officials are upbeat about Africa's potential. "Africa is developing fast. The great demand for infrastructure and housing in Angola, for example, poses great challenges and opportunities for foreign companies," says Liu, who is also president of CITIC Construction's Africa division.


(China Daily Africa Weekly 04/08/2016 page1)

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