Affordable and Countercyclical: Low Cost Housing Picks Up Slack

Published: Sunday, August 30th, 2015 by Lenora

As emerging markets roil, China’s real estate markets have floundered, Brazil’s is flailing, South Africa is still in the slumps and India is struggling. It’s a common story of major emerging markets’ facing economic strains that have likewise put pressure on real estate. Yet, in all these places, affordable housing is looking like an antidote to slowing markets, even where there is limited government support.

In India, Jones Lang LaSalle notes that average apartment sizes have fallen by approximately 25% to accommodate the price sensitivity of the market (see more here). Policymakers are elbowing the market to correct on a price basis as well as with this assertion from RBI Governor Raghuram Rajan that prices per square foot need to drop as well.

Knight Frank estimates unsold residential inventory of more than 700,000 units, which it expects to take more than 3 years to sell. Check out @Knight_Frank_IN #REOutlook for more of their insights and p. 11 of their real estate outlook for a great map.

This is what happens when developers overextend to build for premium segments and fail to build for entry-level and workforce housing and other lower cost segments.

Yet, there’s clearly enough demand in India for affordable housing, both middle and lower income, that ArthVeda Fund Management launched yet another fund of $250 million to bring Gulf investors to India to meet demand in this segment. Why? According to Bikram Sen, CEO of ArthVeda, there is “huge demand,” “low cyclicality” and “low average investment ticket size, exactly the opposite of premium residential real estate.” See more here.

In Brazil, the economic crisis has spilled over into housing markets, but major developers with exposure to the affordable housing market, are still seeing robust sales, according to this Reuters article.

These include MRV Engenharia and Gafisa‘s Tenda division. Again, pent-up demand from a massive underserved housing market – about 4 million homes in Brazil – has buoyed these developers in otherwise hard times.

This resilience depends on the government programs that support this demand. So, for instance, if Brazil’s current government shakeup leads to cuts in spending on Minha Casa Minha Vida, the main incentive program for affordable housing, this could affect these companies’ bottom lines.

Of course, affordable housing should be a staple of real estate development not just a buffer in times of weakness in premium market segments. As government incentives develop, there should be more opportunities to make innovative affordable housing models a staple in most of these emerging markets.