The Reall Deal: Housing The Urban Poor and Investable?

Published: Wednesday, November 16th, 2016 by Lenora

Reall’s Habitat III session stood out gloriously from the scrum of urban aspiration in Quito. Short for Real Equity for All, Reall invests in the urban poor through community housing. Reall’s model revolves around a network of Housing Development Enterprises (HDEs) in Asia and Africa. Reall essentially “fosters” these organizations to build viable mission-driven housing businesses. Although it’s early innings, Reall is already making its mark as a direct investor at the lower end of the housing ladder.

Reall map

Reall’s Global Network of HDEs. Source: Reall

Reall put its network’s HDEs front and center at their networking session in Quito. The Nepali partner, Sama Vajra Upreti from Sewa, talked about mixed income projects in urban Nepal, which suffers from both deep poverty and a glacial recovery from the devastating April 2015 earthquake. To the credit of the organization and Reall’s partnership, Sewa delivers like a professional developer but with conviction and purpose.

What makes the project financially viable would be well known to any real estate developer. Building and selling higher value homes cross-subsidizes lower cost homes. Making it happen is a different story. The project’s economics plus the organization’s track record and Reall’s involvement brought a bank in with financing(mortgages?). This sort of project is all but unheard of in most developing economies.

Ariel Ticharwa Kagu, an entrepreneur from ShelterSol in Zimbabwe evangelizes about Reall’s HDE network. “HDEs can earn a return that’s good for investors and good for people,” he asserts. As proof of wider economic and human impact, he shows off the construction materials business that grew out of demand driven by Reall’s projects. The new company creates jobs and businesses while addressing gaps in the supply chain. Doors, windows, basic construction equipment? Now it’s a new enterprise and another Reall HDE.

In the Philippines, a far more advanced market, the Reall partner LinkBuild speaks to how Reall’s financing helped mobilize communities and civil society to deliver housing projects, community based lending programs and post-occupancy community initiatives.

Reall’s innovations in international housing. These are three different examples, business models and geographic markets. No matter. CEO Larry English stresses that “Reall is building reputation, integrity, quality and consistency across the network.” He also highlights the big picture: housing lies at the center of so many human development needs from sanitation and basic services to health and security to wealth-building and citizenship. (Reall’s video below makes the case effectively.)

English would know. He has been engaged in building this movement for more than 20 years and joined Homeless International in 2007. Homeless International implemented CLIFF, the Community-Led Infrastructure Funding Facility, starting in 2002 following on research by the United Kingdom Department for International Development (UK DFID) on gaps in slum finance.

The CLIFF program showed that low income households can borrow and repay loans for investments in incremental housing and infrastructure like toilets and water. They’re as creditworthy as the microfinance borrowers driving the massive global movement of capital to microenterprise development.

Reall enterprise funding infographic

Reall Invests Across Housing Opportunities. Source: Reall

That Reall’s growing network of HDEs, all fledgling community housing developers, aim explicitly to earn returns for investors is ground-breaking. Reall HDEs make a statement by even making returns part of their language inside Habitat III’s mostly capital-agnostic bubble.

Why cities and housing enterprises need HDEs. Demand for low cost housing is vast. The capacity to repay loans is proven. The positive human and economic impacts are unquestioned. Most of what remains the big, hairy challenge – housing supply – the point that is the mission of this site.

Nor can aid agencies do this heavy lifting. Reall is a critical intermediary between DFI funding and housing companies who might otherwise struggle or fail completely.

In addition, Reall’s financing and operational and technical support should have positive knock-on effects. Companies develop, as do institutions, sector leadership, maybe even competition. In fact, competition is starting to pop up in  more mature markets like Kenya.

Getting organizations to investability may take time; still, impact investments with the right incentives and policy can kick-start the social housing value chain. We’ve seen it in developed markets.

It’s also notable that Reall is rolling out a shared financial and data infrastructure. As Joe de Swardt, Reall’s Head of Operations, insisted when we spoke in May at the World Bank’s Housing Finance Conference, “It’s not only going to be more efficient. It’s also going to give us operating transparency. Investors need that.”

Ambition breeds challenge. DFI funding should mean Reall can aim big and tolerate speed bumps, like corruption and unpredictable project execution in underdeveloped markets. Larry English agrees it’s difficult work: “Getting from 0 to 1 is the hardest part, and we’re under pressure to do that throughout the network.”

The breadth of Reall’s international network and “product,” as well as the multispeed world of its HDEs, highlights the big challenges. The network embraces a wide range of market and financial conditions and both for profit and non-profit organizations in housing, finance, manufacturing and services. Then, the organization intends to derive returns from land, housing, rentals and financing.

Reall starts to sound more like an investment holdco. Given this, it’s only realistic to expect that governance of network HDEs (and maybe the lack of it) carries thornier challenges. Many a social housing business drifts up market, for a start. Chris Richardson-Wright, who manages monitoring and evaluation, recognizes that “we’re actively thinking about tools and structures to keep HDEs in line with the mission.”

The big current challenge according to English: “Our funders want to see us bring in investors.” Does that mean an impact investment fund is coming? “I don’t like a fund structure is right for Reall. Capital always goes its own way. We need patient capital and flexibility.”

Even patient investors need milestones and increasingly want impact reporting. Chris Richardson-Wright points to “a scoring system we’re developing so we can track how HDEs are progressing. We will still have to figure out what happens to the HDEs that don’t graduate to the next level. Some will succeed. Others won’t.” As long as that migration is explicit, this could be managed as venture capitalists would.

About meeting the desire for impact reporting, he says “Measuring our impact has certain challenges as well. Reall’s investments do advance gender equity and climate resilience, but how do we account for impacts that haven’t been intentional outputs of the program in the past?”

Reall's Impact

Reall’s Impact. Source: Reall

The Reall deal: housing with purpose. Reall has truly become a pioneer in international housing. In adapting commercial real estate practice to social purpose in places where it’s been deemed impossible, their leadership is undeniable.

Yet, to head towards some degree of financial sustainability, Reall will have to get a lot right: the housing solution, the structure, leadership, governance, financing, execution, pipeline and replicability. As the pieces come together, the organization currently looks most like a dedicated housing development bank. That’s a good thing given the wax and wane of DFIs interest in housing innovation and investment.

Indeed, it’s high time to elevate Goal 11 of the Sustainable Development Goals for inclusive, safe, resilient and sustainable cities and human settlements. Impact investments for empowering the poor through housing have not achieved anything like the scale of microfinance. Successes so far are impressive but relatively small and reach no deeper than low middle income workers.

Reall is onto something big. When Reall scales and achieves some degree of investability, that will be the Reall-est deal of all.