KfW Kickstarts Innovative and Sustainable Housing Markets

Published: Friday, July 31st, 2015 by Lenora

What is it like to live in an uninsulated home in Mexico’s scorching sun? How about coping with power shortages and blackouts in South Africa? It’s an expensive or uncomfortable life at the least and poses health and security threats at worst. These challenges don’t fall on the population evenly either. Poorly built and planned housing extracts the highest costs from lower and moderate income households, those least able to pay high energy costs, most vulnerable to climate change and most insecure in blackouts.

Unfortunately, high performance housing hasn’t gone mainstream. But that’s changing, in part thanks to the German development bank KfW’s initiatives for sustainable housing development and investment. In Mexico and South Africa, KfW is helping to shift standard models of development assistance. The organization isn’t solely handing over grants to governments to hire contractors to build housing and offer wholesale mortgage facilities on-lending by major banks. Beyond that traditional assistance, which does continue, KfW is taking a less conventional route by catalyzing new markets and developer capacity.

Source: Ingrid Hahn / KfW Office, Mexico City

Source: Ingrid Hahn / KfW, Mexico City

Where are the DFIs on housing? With recent financial and housing crises, most development finance institutions (DFIs) took a multi-year hiatus from housing sector projects and investments.

They’ve recently returned. Essentially, development banks realized they have to be in housing. The sector is too important not to have a project footprint in housing. In fact, DFIs are helping promote the institutionalization of housing sector participants via their investment programs. Shelter Afrique is an example of a KfW investee that is gaining traction.

KfW is making its mark amid this revitalized interest in housing. One hallmark effort is EcoCasa. KfW has been financing and supporting this prize-winning Mexican initiative since 2011. So effective has EcoCasa been that KfW is about to increase that commitment.

The EcoCasa program is an example of KfW’s focus on energy-, water- and location-efficient housing, one that responds directly to recent mistakes in the housing sector. KfW’s co-investment with other partners is financing mortgages, construction and improved rental housing opportunities for lower income households, as well as rehabilitation projects to improve the social and physical circumstances of lowest income communities.

Reviving housing innovation in Mexico. KfW can act as a catalyst to build new markets with financial products, technical resources and partnerships. It’s critical, then, that KfW’s mandate allows it to accept a lower hurdle rate on its investments. As a result, it can deploy resources to address market failures, like developers not bringing sustainable building practices into their affordable housing models.

In Mexico, KfW is one among many partners that include the Inter American Development Bank, Mexico’s Sociedad Hipotecaria Federal (SHF), which has a range of products intended to promote housing for lower and moderate income families, and the GIZ, the German international technical cooperation institution. The whole package of financing across the partners, a total of approximately USD 225 million, covers technical assistance and subsidies for passive houses, technical assistance and financing for developers, financing for construction loans linked to green mortgages, and technical assistance and loan guarantees for climate resilient housing.

EcoCasa is already about halfway to its transformational goal – 27,600 green homes, 600 passive houses and 1 million tons of CO2 equivalent saved with normal thermal comfort by 2019. The program’s work with private developers got the program to this point. Technical capacity-building for developers to help them integrate sustainability into their business models, from top to bottom, has driven this success.

Check out our feature on EcoCasa

Kickstarting green housing in energy-starved South Africa. KfW’s most recent investment in the International Housing Solutions Fund II also aims to stimulate development of green, inclusive housing. Working with the IFC as an investor and technical assistance provider (deploying the EDGE platform), KfW made a EUR 15mn investment in the fund through a fund side pocket dedicated to the development of 5,000 units of affordable and energy and water efficient homes out of a total expected fund output of 25,000 homes.

KfW is underwriting the public social and environmental benefits, acknowledging that such markets initially need lower cost financing to at least partially absorb developers’ higher risk and resource outlay. At the same time, other mainstream investors, such as South African pension funds, who invest in both the sustainable and conventional houses, receive private equity returns and risk. By making this investment, KfW aims at the sustainably built units being sold at similar prices to those of conventional homes to stimulate homebuyer and renter interest and to promote energy- and water-saving features.

Source: Ingrid Hahn / KfW Office, Mexico City

Source: Ingrid Hahn / KfW, Mexico City

Impact beyond outputs. These investments in both South Africa and Mexico target far more than just physical infrastructure. Developers will have the opportunity to expand their products and refine their business practices to adapt to evolving social needs, more urgent environmental risks and increasing investor demands to address multiple dimensions of return. Residents likewise should get healthier, safer living conditions and lower energy bills at a minimum.

Environmental benefits include a smaller carbon footprint – a 33,000 ton saving vs conventional housing – and more efficient water use with projected savings of 182 million liters of water per year. New housing may improve social peace incrementally by relieving strain on impoverished urban and peri-urban zones, although both the Mexican and South African experience point very clearly to the fact that urban isolation and dislocation can still harbor insecure neighborhoods regardless of the infrastructure investment.

What’s in it for developers? These sustainable housing projects have to do more than inspire one-off pilots. After all, innovation doesn’t come easy in conservative real estate. On top of the high risks and thin margins of entry-level and lower income residential projects, developers and contractors are now being incentivized to transform their models from end to end.

KfW’s financing enables developers to access not just financing but also a full program of technical assistance to integrate green design principles and inclusive business concepts, such as:

  • bringing inclusion and sustainability into concept, design and business model
  • helping contractors learn new construction techniques and source materials
  • planning for climate resilience and recognizing full carbon impact, for instance, from commuting
  • carrying out longer term impact and performance studies.

Generating long-term impact. The success of ambitious and complex projects has to be judged over time. Land availability closer to urban centers may not be addressed as easily as process inputs, for instance. One major challenge is that these housing projects are not going to reach the poor. For example, South Africa’s subsidies for low-income housing limit the potential for commercial solution. Community rehabilitation projects, also part of KfW’s portfolio, are the best way to fill this gap.

Other questions simply can’t be answered: Will developers continue to design and build for sustainability? Will residents value the cost savings enough to make it economically feasible without external support? Will DFIs and governments expand these initial efforts? Most importantly, are residents going to be better off?

To achieve more than a physical impact, much work is yet undone. Communities and housing units have to be maintained to make sure that energy and water savings persist and for houses to hold their value. Ideally, residents will be mobilized, organized and educated to participate in that process. Land administration and policy for workforce and low income housing has to line up as well.

Some units in South Africa will be maintained and managed by IHS as rental housing. However, it’s unclear whether nonprofits or social enterprises will support homeowners’ or residents’ associations, the benefits of which have been increasingly recognized in Colombia.

However tough these challenges, KfW’s support and its experience so far in Mexico sound promising. Thousands of future homeowners are looking for an equally impressive outcome.