Back in November 2010, the JP Morgan-produced report on impact investment was widely viewed as a refreshing mainstream examination of the growing potential of an asset class that works in line with the essential principles of philanthropy (such as social and environmental good) whilst also bringing the added benefit of healthy returns on capital applied.
Perhaps unsurprisingly, considering the ever-rising global shortage, housing the base of the pyramid (BOP) was viewed by the report as being of notable importance – with a potential investment capital requirement of between US$214 and US$786 billion, which offers an anticipated profit capacity estimated at between US$77 and US$648 billion up to the year 2020.
Yet the apparent attractiveness offered via global affordable housing investment activity in relatively untouched markets remains tainted by a number of broad based risks – some of which are highlighted here.
Speculation, inflation and exchange rate risks
In the developing world, where real estate markets are hugely informal, uncontrollably evolving and often entrapped in short boom-bust cycles, it is often a difficult task to firmly establish clear-cut investment parameters and cohesive business development plans. As a result (and also taking into account artificial price pressures, value-based ambiguities on core construction inputs (particularly land) and volatile currency fluctuations) it remains the case that a significant majority of BOP housing models are simply not safe enough.
Inefficient construction models and management systems
A lack of real estate market sophistication within the developing world often means that international building standards are rarely respected. In the affordable sector, project planning is often undertaken haphazardly based on underestimated costs as well as a lack of effective and future-proofed construction development procedures. Once the development is underway, one of the issues that predominantly arises is the management of staff – India’s construction workforce, for example, are often subject to working conditions that are arguably akin to slave labour, which, in turn, compromises the moral aspects of an investor’s involvement in such projects.
Real estate development corruption and a lack of transparency
In what are often heavily bureaucratic planning systems operating in line with complicated tax laws, a significant proportion of housing projects are formed in an environment where developers invariably need to be in the pockets of the relevant government organs to make any headway. Consequently, despite the massive demand (and necessity), projects that cater to the low-income groups are largely perceived as a secondary priority due to a desire to make projects financially ‘worthwhile’ for all the parties involved. From a wider perspective, applying funds in politically instable countries and regions with the specific objective of achieving a return is likely to involve offputting transactional complexities, as well as what are often implicit barriers to FDI.
The apparent negativity expressed above is of course no excuse for indifference, particularly considering the major implications that the continued rapid growth of slum presence will have on global security, the environment, health and a myriad of other socioeconomic factors.
What remains clear is that global philanthropic efforts related to dealing with the unprecedentedly global housing deficit (rising by approximately 44 million annually, according to UN statistics) are not enough – a problem that has been exacerbated by the effects of the global economic crisis. It is therefore undoubtedly necessary for the sector to unite and move beyond half-baked ideologies which, in turn, become ubiquitously defined as the ‘only solutions’ to improve the situation.
Ruban Selvanayagam is a base of the pyramid housing developer /investment advisor based in Brazil