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Expanding Access to Housing Finance

Task 1: Business and Sustainability Plan for Affordable Housing Finance Pilot Projects

FINAL REPORT

Prepared for:

FIRST Initiative Prepared by: Sally Merrill, Urban Institute Duncan Kayiira, UMACIS William Kalema, UMACIS

Submitted by:

The Urban Institute UMACIS Consulting

2100 M Street, NW 29, Luthuli Avenue, Bugolobi Washington, DC 20037 P.O. Box 9113 (202) 833-7200

www.urban.org Kampala UGANDA

JULY 2009

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Table of Contents

1.0 Summary and Overview ............................................................................................ 1

2.0 Features of the Pilot Projects .................................................................................. 6

3.0 Loan Product Development for the Pilot Projects. ................................................... 11

4.0 Recommendations for Pilot Implementation and Long-term Sustainability ............. 14

Annexes

Annex Annex I: Cost Detail for the Illustraitve PIlot Projects…………………………………………………………………………………………19

Annex II Illustriative Housign Design for the Pilot Projects……………………………….25

Annex III: Ilustrative Loan Development Forms for the Pilot Projects ............................ 28

Annex IV: Profiles of Potential Developers for the PIlots ............................................... 30

Annex V: Profiles of Potential Lenders for the Pilot Projects ......................................... 31

List of Tables and Boxes

Box 1.1: Inter-related Goals ............................................................................................ 3

Table 2.1: Overall Summary of Pilot Designs .................................................................. 6

Box 2.1: Demonstrating the Incremental Building Approach ........................................... 7

Table 2.2: Potential Pilot Partners: Financial Institutions and Developers ...................... 8

Table 2.3: Design and Materials Specifications ............................................................... 8

Table 2.4: Cost of a 500m2 Plot in selected urban areas near Kampala City ................. 9

Table 3.1: Illustrative Features of Potential Housing Pilot Loan Products ..................... 12

Table 3.2 Loan Design Features for Microfinance for Housing (MFH) .......................... 12

Table 3.3 Loan Design Features for Mini-mortgages .................................................... 13

Table 4.1 Advantages and Disadvantages of the Pilot Projects .................................... 17

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1.0 Summary and Overview

1.1 Overview of the FIRST Project in Uganda The objective of the FIRST Initiative project in Uganda is to expand the access of households to housing finance, especially modest and lower income households, by introducing new and innovative housing loan products, by introducing innovative loan products combined with affordable housing designs. The project has delivered two studies to the Bank of Uganda:

i) A study addressing the financial and banking sector context for housing finance, liquidity and liquidity management, and the resultant potential for use of retail funds for mortgage lending; and

ii) A feasibility study for housing finance pilots targeted at modest and lower income households, seeking to introduce innovative loan products combined with lower cost house design in a planned urban setting.

These companion studies, designed to be read together, provide (i) policy advice on liquidity and the regulatory framework for mortgage banking, and (ii) preliminary recommendations for pilot housing finance projects.

A summary of the two reports is provided below.

(i) Examining the Use of Retail Funds in Mortgage Lending. Assessing the ability of the banking sector to enable more long and medium term funds to be devoted to housing finance is addressed in the ―Study to Examine the Use of Retail Funds in Mortgage Lending‖.1 The paper provides an overview of the conditions facing mortgage lending, including macroeconomic constraints and the liquidity profile of mortgage lenders. A series of recommendations on regulatory structure for bank and MDI have been provided for BOU. The banks, MDIs, and MFIs most likely to lend to the modest and lower income groups are currently those with least liquidity. Thus, among other findings, the results support the need to provide enhanced liquidity for low and modest income housing, and a housing finance liquidity facility is recommended as a long-term goal. In the short-term, relaxation of the two-year lending cap imposed on MDIs will be necessary for the pilots. (ii) Design of Pilot Projects for Modest and Lower Income Households.2 Expanding housing and housing finance in Uganda faces numerous barriers from both the demand and supply sides. Drawing on findings from the first paper, as well as examples of low income housing development worldwide, the paper addresses the design of pilot projects to provide housing finance and low cost housing to modest and lower income groups. The paper provides an overview of constraints to low income housing development and housing finance, and suggests pilot projects for assisting two groups that lack access to housing finance in Uganda: (1) the modest income group, or the ―missing middle‖, which is under the radar screen of banks providing mortgage loans, and (2) low-modest income households who do not have access to either mortgage loans or microfinance for housing.

1 See Richard Ketley, Jessica Kramer, Michael Hanouch, and Christo Wiese, ―Expanding Housing

Finance in Uganda: Task 2, Study to Examine the Use of Retail Funds for Mortgage Lending‖, Genesis-Analytics for the FIRST Initiative, June 2009. 2 See Sally Merrill, William Kalema, and Duncan Kayiira, ―Design of Pilot Projects for Modest and Lower

Income Households‖, The Urban Institute and UMACIS for the FIRST Initiative, June 2009

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This paper – Business and Sustainability Plan for Affordable Housing Finance Pilot Projects - provides supporting technical detail for the feasibility study for Design of Pilot Projects for Modest and Lower Income Households, including the need for more liquidity for lenders involved in lending to lower income households. Two types of pilot projects have been developed: one for starter homes for modest income households and one for an incrementally built home for low-modest income households. The recommended loan products include a downmarket or ―mini-mortgage‖ for the starter home and microfinance for housing for the lower income group. It is recommended that one of the two pilot schemes be developed. Both groups lack access to housing finance in Uganda: The modest income group, or the ―missing middle‖, is

just under the radar of banks providing mortgage loans, while the low-modest income households, which make up a large proportion of Uganda households, do not yet have adequate access to microfinance for housing. The paper (i) outlines technical details regarding house design and loan product specifications; (ii) recommends the technical assistance and regulatory changes deemed necessary to implement successful pilot; and (iii) provides a brief commentary on actions that would assist such pilots reach sustainability and scale. 1.2 Goals of the Pilot Projects The proposed pilots address constraints to low income housing development from both the demand and supply sides. A major focus is the development of affordable housing loan products, such as microfinance for housing and mini-mortgage. The pilots also focus on the supply side, with the goal of joining new loan products with lower cost housing, so that the overall ―package‖ is feasible and affordable. The target household groups – with monthly income in the range of UGX 0.7 million ($350) and 2.3 million ($1150) - have had limited access to affordable starter homes or incrementally built structures, as the few developers in the country have focused mainly on the higher income market. There is considerable interest in supporting one or more pilot projects in Uganda. A number of lenders have expressed interest in offering new loan products and participating in the pilots. Similarly, several developers have expressed their willingness to provide affordable housing, and both the developers and Ugandan architects have helped the team provide a number of options for house size, building materials and finishes, thereby providing a good range of affordability. Importantly, the recommended pilots will be entirely market-based: they will not depend on finance subsidies, or on funds for land or infrastructure. This will help ensure the sustainability of the model and enable it to be replicated and scaled up without the need for large budget allocations or donor funds. The key criteria for the housing pilot designs include the following:

The pilots must serve households with limited or no access to either housing finance loan products or affordable housing options;

The house designs must be affordable to the targeted groups;

The pilots will be market based, and not dependent on subsidies of any kind – financial, land, or infrastructure; and

To help support sustainability, the ―affordability‖ package‖ must represent a compatible match among four key factors:

i) the income of target households; ii) housing designs affordable to these households;

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iii) affordable loan products relevant to the targeted households and the housing costs; and

iv) be in accordance with the preferences of the target households linked to what the household can afford.

The ―affordability package‖ diagram below represents these inter-related goals.

Box 1.1: Inter-related Goals

1.3 Summary of the Design Process for the Pilot Projects Pilot House Design. The Business and Sustainability Plan seeks to provide the ground work for finalization of both house design and loan products for three representative house designs. As noted, two basic household groups will be targeted: the ―modest‖ income Ugandan households (monthly income UGX 1.3 – 2.3 million) and the ―low-modest‖ income households (monthly income of UGX 0.7 – 1.3 million).3 For the modest income pilot, two house designs were developed – starter houses of 80m2 and 95m2, while for the low modest income group an incremental self-build house of 60m2 has been detailed. The building materials and cost estimates for all three designs are provided in Annex I. Annex II provides the design layout for the 60m2, 80m2 and 95m2 designs.

3 As discussed in the Design Report, the available income distribution represents nation-wide income, and

is not broken down by urban and rural households. It would be desirable to develop an income distribution able to describe urban Ugandan households, in order to have a better idea of where in the distribution the pilot affordability falls. As noted below, it is recommended that improved income data be obtained in order to better support the affordability analysis.

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The design variables include the following, with numerous details provided in the specifications in the Annexes.

Lot size

House size

Roofing material

Building materials

Floors, windows, and doors

Exterior and interior finishes

Sanitation

Utilities and access infrastructure

Starter home or Incremental building approach The house design process has involved extensive discussions with Ugandan developers and architects. Construction would take place on the developers’ planned estates near Kampala, with house design tailored to the affordability constraints for the targeted households. Please note that the house designs are not necessarily final, but represent ―pivotal‖ or illustrative designs that can be used to determine an optimal combination of features for size, layout, and building materials. These elements can ultimately be “mixed and matched” against affordability and household preferences to find the most viable set of characteristics for successful pilots. Pilot Loan Design. The loan design suggestions for microfinance for housing and mini-mortgage loan products have been assisted via discussions with numerous lenders, including banks, MFIs, and MDIs.4 An illustrative loan design form is provided in Annex III. However, specification of exact loan terms will require additional information on both prospective buyers, particularly on their income level and sources, as well as the quality of the house designs and locations. This information will be made available by the recommended focus groups and market surveys and through assessments by the lenders of the building sites, materials, layouts, and so forth, in order to better determine collateral value. 1.4 Summary of Recommendations

Design of Pilot Projects. It is recommended that one of the above two pilot schemes be developed. As mentioned earlier, both groups—the modest income and low-modest income—lack access to housing finance in Uganda. The modest income group, or the ―missing middle‖, is just under the radar of banks providing mortgage loans, while the low-modest income households, which make up the vast majority of households, do not yet have access to microfinance for housing.

Regulatory Change. It will be crucial that a regulatory change be made regarding the two year cap on MDI lending. While the two year limit on MDI loans may be relevant for SME lending to very low income households, it will severely curtail development of microfinance for housing (MFH) loan products, which, worldwide, tend to have longer terms than SME loans. MFH loans often range between 3 and 7 years; they may be provided as a series of loans, for example, a number of sequential 3 to 5 year loans to finance an

4 Please see the interview list in Annex I of the Design Report.

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incrementally built structure. It is recommended that the cap be lifted or relaxed, at least for MFH. The loan designs will ensure that the loan terms and underwriting follow very prudent standards.

Technical Assistance to the Pilots. Numerous types of technical assistance--including additional loan product design, affordable housing design, and market surveys to determine affordability and test acceptance of lower cost housing units--will be important to the success of the pilots.

Land Use Planning and Infrastructure Provision. Intensified GOU efforts in land use planning and delivery of infrastructure are highlighted for expanding low income urban housing as a means to both address the current informality in the housing sector as well as curtail future formation of slums and informal settlements.

Increased Liquidity in the Longer-Term. In the long run, it is expected that in order to achieve any degree of sustainability and scale, a greater volume of funds will be needed to provide loans to modest and low-modest income households. However, as noted, there appears to be a mismatch between the liquidity profiles of Uganda’s banks and the banks’ willingness to develop down-market lending. Several international banks are not growing their mortgage books. However, these banks are relatively more liquid than the smaller local and regional banks, and it is from this latter group that there is a willingness to undertake housing lending and explore new avenues. Thus, developing a liquidity facility for Uganda, although not immediately on the agenda, may be an important consideration for the future. In addition, MFH products should be included in such an effort (a liquidity facility along similar lines is to be tested by the World Bank in Tanzania in 2009-2011).

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2.0 Features of the Pilot Projects

As noted, three illustrative housing designs are presented in this report. The original designs presented in the Design Report5 have been modified, and the pilots now focus on smaller dwellings and smaller lot sizes -- in order to increase affordability and to set a pattern for more cost-effective long-term use of land in Uganda.

For the modest Income group pilot, two size and design choices are tentatively proposed: 80m2 and 95m2 starter homes;

For the low-modest income group, one design has been detailed: a 60m2 incrementally built home.

As currently designed, the pilots would be undertaken in planned estates in urban areas near to Kampala. Table 2.1 summarizes the key features of the pilots. The cost of the land, which is owned by developers who have offered to participate in the pilots, is included in the total. Box 2.1 illustrates a possible approach to the incremental building approach suggested for the 60m2 house.

Table 2.1: Overall Summary of Pilot Designs

Housing Pilot Features Modest Income Group Low-modest Income

House Size Options 80m2, 95m2 60m2

House Type Starter or modest home Incremental Construction

All-in Cost 80m2: UGX 44.6 million ($22.3k) 95m2: UGX 53.6 million ($26.8k)

60 m2: UGX 20.8 million ($10.4k)

Construction Cost 80m2: UGX 34.9 million ($17.5k) 95m2: UGX 42.4 million ($21.2k)

60m2: UGX 15.9 million ($7.95k)

Construction Cost per m2

80m2: UGX 436k ($218 per m2) 95m2: UGX 446k ($223 per m2)

60m2: UGX 265k ($ 132.5 per m2)

Lot size 200M2 150M2

Land cost per m2 UGX 10,000 ($ 5) UGX 8,000 ($ 4)

Loan Type Down-market/mini mortgage: 7-12 years

Microfinance for Housing: repeat loans of 3-5 years

Loan Terms 7-12 yrs., mortgage rate + 1 - 2% 3, 5, or 7 years, maybe same as microfinance rate

Household Income UGX 1.3 – 2.3 million monthly ($650 – 1150)

UGX 0.7 – 1.3 million monthly ($350 – 650)

Technical Assistance House design, underwriting informal income, market surveys

House design, MFH loans, underwriting, market surveys

Other Subsidies None None

This report also provides considerably more detail on design and building materials, providing illustrative variations on costs, given alternative layouts, finishes, sanitation, and other features. The pilots seek to provide a completed house – either a starter home or via incremental or

5 The Design Report discussed a larger number of potential pilot designs to address the needs of two

household target groups. However, this report details only 3 designs and has made a number of modifications - decreasing the lot size and house size and using more modest building materials for the 60m2 house – all in order to enhance affordability.

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modular design. All are to be built without subsidy. As a result, Uganda’s lowest income households are not targeted in this particular effort: households with income significantly lower than the current target groups generally require subsidies to achieve a complete house - at a minimum to obtain the necessary urban land and infrastructure.

Box 2.1: Demonstrating the Incremental Building Approach

2.1 The Pilot Design Process Successful implementation of the pilots will need local champions. Table 2.2 indicates the Ugandan partners who have not only expressed willingness to participate in the pilots, but have been generous in providing time and effort for specification and re-specification of pilot options. In sum:

Ugandan developers are engaged: The project has succeeded in finding champions for both types of pilots, including both lenders and developers as noted in table 2.2.6

o Modest income pilot: Akright Project,

o Low-modest income pilot: Jomayi Property Consultants,

Ugandan lenders are engaged –both banks and MFIs

o Modest income pilot: DFCU Bank, and Housing Finance Bank (HFB)

o Low-modest income pilot: Centenary Bank, FINCA Uganda Ltd and PRIDE Uganda Microfinance Ltd.

Ugandan architects are engaged: Skil-plan Architects and Eco-Shelter assisted UMACIS in both design and costing.

6 Refer to Annex IV for a brief sketch of the developers who have expressed an interest in participating.

The 60m2 House

1. Stage One: At this stage, prospective homeowners would buy land at UGX 1.7 million ($ 850), including the cost of infrastructure and titling fees, pay for the house design at UGX 0.2 million ($ 100), and undertake the initial stages of construction; laying the foundation and building the concrete slab, priced at UGX 2.1 million ($ 400) and building part of the wall, priced at UGX 2 ($ 1,000).

2. Stage Two: This stage will involve completing the wall, at UGX 1.3 ($ 650), roofing the house, priced at UGX 2.4 million ($ 1,200), cementing the floor, priced at UGX 0.23 ($ 115), fitting windows and doors, priced at UGX 1.2 ($ 600), plastering inside and outside the house, priced at UGX 1.2 ($ 600), constructing the ceiling, priced at UGX 0.46 ($ 230), painting the cost, at UGX 1 million ($ 500), installing water pipes, a shower basin and electricity, priced at 1.2 and fitting the kitchen, priced at UGX 200,000 ($ 100).

3. Stage Three: This stage will involve, among other finishes, constructing a 2,000 litre septic tank, priced at UGX 400,000 ($ 200) and paving the road to the house, priced at UGX 0.9. ($ 450).

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Table 2.2: Potential Pilot Partners: Financial Institutions and Developers

Components

Modest Income Pilots Low-Modest Income Pilot

Potential Financial Institution Partners

DFCU and HFB, Centenary Bank, PRIDE, FINCA

Potential Development partners

Developer: Akright Architect: Eco-Shelter

Developer: Jomayi Architect: Eco-Shelter, Construction Firms

Land and Infrastructure

Urban estate development, existing, surveyed land parcels owned by the developer

Urban estate development, existing, surveyed land parcels owned by the developer

Architecture and Cost Consultants

Skil- Plan Architects; Eco-Shelter

Skil- Plan Architects

Illustrative House Designs and Alternative Materials. The houses are designed to accommodate the affordability constraints for the targeted households, but represent to the extent possible the revealed preferences of typical Ugandans in the respective target groups. As has been discussed, no subsidies would be involved in lending or construction. As a result, Uganda’s lowest income households are not targeted in this particular effort: households with income significantly lower than our target groups generally require subsidies to achieve a complete house - at a minimum to obtain the necessary urban land and infrastructure.

Table 2.3: Design and Materials Specifications

Design & Materials Features

Low-Modest Income Pilot

Modest Income Pilot

House Design Prototype

60m2 House 80m2 House 95m2 House

Design Incremental Starter home Starter home

Lot size 150m2 200m2 200m2

Walls Clay bricks Concrete bricks Concrete bricks

Floor Cement screed Ceramic tile Ceramic tile

Windows Casement Casement Casement

Doors Hardwood Hardwood, steel Hardwood, steel

Plastering Internal & external Internal & external Internal & external

Paint 3-coat 3-coat High finish

Roof Pre-coated iron sheet Kajansi tiles Kajansi tiles

Ceiling Timber, mesh Timber, mesh Timber, mesh

Water Piped, indoor Piped, indoor Piped, indoor

Plumbing Flush toilet complete facilities

Flush toilet complete facilities

Flush toilet complete facilities, high finish

Sanitation Septic tank Lagoon Lagoon

Kitchen Basic, indoor Sink, cabinets, tiled Sink, cabinets, tiled, high finish

Electricity Installed Installed Installed

Access Road Access to paved road Access to paved road Access to paved road

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Table 2.3 summarizes the main design features and construction materials of the three prototype pilots (again, details are found in Annexes I and II). As is evident, there are some major differences in materials and approach, particularly in the following inputs which have a major impact on costs:

Roofing material (iron sheet vs. tile)

Building materials (clay bricks vs. concrete bricks)

Flooring( cement vs. tiled)

Kitchen (basic vs. complete and tiled)

Incremental building approach vs. starter home

Sanitation (septic tank, common lagoon) Lot Size and Land Costs: The proposed lot size in the pilots deserves some discussion. The plot sizes recommended for the pilots – 150m2 for the 60m2 house and 200 m2 for the 80m2 and 95mr homes, are considerably smaller than the 500m2 plots now offered in the Akright and Jomayi developments. Ultimately, in the longer-term, from both affordability and developmental standpoint, it is desirable for most housing to utilize relatively small amounts of land. Clearly, smaller plot sizes will impact the overall affordability of housing. More importantly, however, in the long-run, it would be desirable for Ugandans to focus on smaller plots, most especially in urban areas, to make cost-effective use of land. Together with land use planning, titling, and high-rise and row house construction, more intense and organized use of urban land can help forestall expansion of slums. Thus, if one or more of the current pilot plans are implemented, further discussion as to lot size will need to take place.

Table 2.4: Cost of a 500m2 Plot in selected urban areas near Kampala City

Location Distance from Kampala City Centre (km)

Cost of a 500m

2 (UGX,

millions)

Cost per m2 (UGX, 000)

Luzira 7 50 100

Bweyogerere, along Jinja Road 9 16 32

Namugongo, along Jinja Road 12 13 26

Nansana, along Hoima Road 13 8.5 17

Seeta, along Jinja Road 13 10 20

Mukono, along Jinja Road (Jomayi) 15 4 8

Kasangati, along Gayaza Road 15 4.5 9

Bulenga, along Mityana Road 17 3.5 7

Bwebajje, along Entebbe Road (near Akright’s Kakungulu Estate)

18 5 10

Abaita Ababiri, along Entebbe Road 30 7.5 15

During the last decade, developers, including Akright and Jomayi, bought large tracts of land and typically subdivided them into 500m2 plots. In their opinion, this size is cost effective in the delivery of infrastructure (roads, water and electricity), and allows for orderliness within the housing estates. In addition, this plot size has been readily mortgaged by various banks. A 500m2 plot in Jomayi’s Mukono estate, 15km from Kampala City, where the low-modest income pilot would be undertaken costs UGX 4 million ($ 2,000). At Akright’s Entebbe road estate, 18km from Kampala City, where the modest income pilot would be undertaken, the same plot size costs UGX 5 million ($ 2,500). With other developers like Hossana Real Estates Ltd and CANAANSITES Ltd, who sell land in the same area, the cost of a 500m2-plot is higher by about 30 percent. The difference in the costs is attributable in part to economies of scale achieved by

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the Jomayi and Akright developments; also. both developers purchased these very large tracts of land some years ago. More generally, the cost of land depends, of course, on the desirability of an area, its level of development, and the distance from a major city. As seen in table 2.4, the cost per m2 is generally less as the distance from Kampala increases. However, the cost of 500m2 plots along Entebbe Road (Bwebaije and Abaita Ababiri, 18km and 30km from Kampala) is relatively more, given the desirable location on the main Kampala/Entebbe access road.

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3.0 Loan Product Development for the Pilot Projects.

As discussed, the households targeted for the pilot currently lack adequate access to both housing finance and affordable dwellings. However, the income levels of the target groups suggest that they will be able to afford modest homes. Two distinct types of loans are being proposed for the pilots:

Mini-mortgage. The mini-mortgage is a collateralized mortgage loan product expected to be reasonably similar to the conventional mortgages now being offered by a number of banks in Uganda. Mortgage lending is a mainstay of the proposed pilot partners DFCU and HFB. The risk profile of the customers for mini-mortgages is likely to differ somewhat from that of current customers, however, especially with regard to the level of income, the availability of a credit history, and the likelihood of having to underwrite some amount of informal income in addition to salary income. This risk profile may suggest a somewhat shorter term and slightly higher rate than conventional mortgage loans. The participating lenders have initially suggested a mark-up over the going mortgage rate of 100 to 200 basis points.

Microfinance for housing (MFH). Worldwide, MFH loans are most frequently used for home improvement, as they are generally much smaller and shorter-term than mortgages. Since the proposed low-modest income pilot is geared toward completion of a complete home built in three incremental stages, it is proposed that a MFH loan product be developed to support this approach. The MFH loans would be geared to the 3 proposed stages of development, with clear quality control milestones for each stage that the lender would monitor.

More work with the participating lenders will be needed to establish a fair but affordable rate. One MFI lender has initially suggested the current microfinance business loan rate as a reference point. This tends to be quite high - e.g. 2% per month - which would certainly reduce affordability in the pilot. This interest rate is not at all unusual for SME loans, particularly those with fairly short terms – i.e. 6 to 24 months - and servicing businesses from the informal sector. However, the MFH loans proposed for the pilots are expected to be somewhat longer term and provided to borrowers with higher income than may be the case for current SME loans. It is expected that the target households will have some measure of salary income and could service larger loans than the micro business loans. The MFIs/MDIs must also be helped to become ―comfortable‖ with the approach: an incremental building methodology resulting in a complete house, which ultimately provides collateral value. In addition, a savings plan approach may be suggested for some would-be borrowers to show ability and willingness to pay and/or to provide a substantial downpayment. Thus, it is expected that a rate somewhere between the micro-business loan and the mini-mortgage could prevail for the pilot.

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Table 3.1: Illustrative Features of Potential Housing Pilot Loan Products

Components

Modest Income Group Low-Modest Income Group

Pilot Lenders DFCU, HFB Centenary, PRIDE, FINCA

Target Groups Monthly income: UGX millions ($)

1.3 – 2.3 ($ 650 - $1250)

0.7 – 1.3 ($350 - $650)

House Type Starter Home Incremental/Modular

House Size Options 80m2, 95m2 60m2

Lot Size 200m2 150m2

Type of Loan Product Mortgage Loan Housing Microfinance Loan

Use of funds Purchase of a lower priced home from a developer, with 20% to 30% down payment.

Incremental construction of a modest home using a series short-term loans of 3 to 5 yrs

Loan to Value Options 70% or 80% LTV 70% or 80% LTV

Loan Term (Years) 7 – 12 3 – 5

Interest rate (%) 100 – 200 BP over mortgage rate, or TBD

Microfinance lending rate for proven customers, or TBD

Discussions with the participating lenders are ongoing. These lenders have either already initiated loan products with some of the relevant characteristics or are in the process of designing and testing them. DFCU staff have indicated that they are already going more ―downmarket‖. HFB has a ―house that grows‖ loan product, although management notes that it has not been as successful as expected. Centenary currently offers short-term loans for home improvement, while both PRIDE and FINCA are now in the process of introducing microfinance for housing loans.

Table 3.2 Loan Design Features for Microfinance for Housing (MFH)

Loan Parameters

Underwriting House Quality

LTV: Maximum & minimum loan amount for 3 stage, 60m2 Incremental Building

Maximum payment to income ratio as % of gross income? as % of net income?

Bank evaluation of house location, land, infrastructure

Options for term of each repeat loan: 3 to 5 years (assuming 2-year cap is removed)

Prior successful micro-loan required?

Bank evaluation of incremental design

Interest Rate: Rate relative to new 2 year MFH home improvement loans now being developed? Rate relative to mini-mortgage rate?

Savings required? If yes, what period and amount? If yes, is savings balance kept for life of loan?

Bank evaluation of quality of materials

Will the interest rate vary by?

Term? LTV?

Credit history, underwriting score?

Previous micro-business loan?

Process to determine informal income? Documents required?

Repeat Loans: Quality control procedures for achievement of stages in design prior to granting the next loan in the sequence

Will term vary by income, credit history, loan-to-value, payment to –income, previous loan history?

Co-signors required? Other collateral required? Title required?

13

Illustrative loan product design parameters are summarized in table 3.2 for a MFH loan and in table 3.3 for a mini-mortgage. The share of informal income in total income is one key parameter, for example, that might distinguish clients of conventional mortgages from those of mini-mortgages. MFH loans, expected to be on a repeat basis for an incremental building approach, are for relatively longer terms than most micro business loans. This distinguishes them from the existing portfolio for lenders such as PRIDE and FINCA. And as discussed above, the MFH loan product proposed for the pilot also differ from the shorter-term home improvement MFH product now being introduced by these lenders. In sum, the participating lenders have indicated that the final loan terms will depend on the results of further knowledge of the prospective borrowers, decisions regarding the underwriting process, and the location and quality of the housing. This will help establish the borrowers’ presumed risk profile (how does it differ from that of current clients); the costs of underwriting and servicing (are they greater than currently and if so, how?), and the ability to sell any foreclosed housing or land (including partially built structures). Annex III provides a chart that could be used for discussion with the lenders in developing the new loan products for the pilots.

Table 3.3 Loan Design Features for Mini-mortgages

Loan Parameters

Underwriting House Quality

LTV: maximum loan amount for 80m2 or 95m2 starter home at costs of UGX at cost of X

Maximum payment to income ratio as % of gross income


Maximum Term Prior loan required? Bank evaluation of house quality and design

Interest Rate: what mark-up over mortgage rate, if any?

Savings required? If yes, what period and amount? If yes, is savings balance kept for life of loan?

Other indicators

Will the interest rate vary? If yes, according to:

Term? Credit history,

underwriting score? LTV? Other?


Does term vary by income, credit history, loan-to-value, payment to –income, etc.

Co-signors required? Title required

14

4.0 Recommendations for Pilot Implementation and Long-term Sustainability of Lower Income Housing Development

It is recommended that either the low-modest income pilot or the modest income pilot be chosen for the demonstration pilot. The rationale for going forward with one of the pilots includes the following:

Willing lender, developer, and architect partners. Both of these pilots appear feasible, and discussions with potential partners have been positive. For the modest income, DFCU and HFB have stated that they are willing to participate in a pilot project. For the low-moderate income group, Centenary Bank. PRIDE and FINCA are willing to participate. Developer partners include Akright and Jomayi, while the architectural assistance for house design and costing was offered by Eco-Shelter and Skil-Plan.

Prototypes for affordable housing and appropriate loan products. The pilot projects will provide demonstrations of new approaches to affordable housing, combined with new loan products geared to the target income groups and the housing costs. Ugandan development has heretofore concentrated on the higher end of the market.

Land and infrastructure are already integral to the projects. Obtaining serviced land is often one of the most difficult aspects of lower income housing development. Fortunately, the developer partners already own large urban planned estates, which will speed up the pilot process.

Subsidies are not required. As noted above, land and infrastructure are integral to the pilots. In addition, no subsidies are required for construction finance or take-out loans. This will be an important step toward proving the sustainability of similar low and modest income lending and building schemes.

Section 4.1 provides recommendations regarding the technical assistance that would be necessary to support implementation of the pilots. Section 4.2 provides further recommendations aimed at the long-term sustainability of low and modest income lending and affordable housing development. 4.1 Recommendations for Technical Assistance to Support Pilot Implementation While substantial progress has been made in pilot housing development and loan design, more effort is needed for a number of aspects of the proposed pilots. Thus, although there are no direct subsidies involved, it is expected that technical assistance will be needed to support the further development of loan products, underwriting methodologies for households with informal income, and affordable house designs. Importantly, market surveys will be needed to bring the elements of the pilot together – that is, to match household affordability and preferences with size, design, and materials. Pilot Implementation Technical Assistance. The affordability diagram presented in section 1.0 emphasized the inter-related nature of the design features of the pilots. As noted there,

15

conformance must be reached among household income, housing cost, loan design, and household preferences in order to have both marketable and affordable homes. Clearly, this design effort cannot be done in the abstract and a number of design variables need to be considered simultaneously. Technical assistance is desirable to help refine the following:

MFH and mini-mortgage loans, at rates appropriate to risk profiles, with prudent standards regarding loan-to-value and payment-to-income ratios. Underwriting and servicing methodologies should be suited to modest and lower income borrowers The tenor is either medium-term, suitable for moderate income groups, or shorter, MFH loans, which may be repeated to accommodate incremental house design. As noted, setting the interest rate and other terms for the MFH pilot loan will need further analysis, as this product is entirely new to Uganda and not yet common practice worldwide because of the incremental build/repeat loan requirement. Stromme could also assist with housing microfinance loan products, as these efforts are to be undertaken region-wide.7

More information is needed on income – formal, informal, and variable. The willingness and ability of banks to underwrite informal income will be an important consideration;

More knowledge regarding Ugandan household preferences, important to develop trade-offs among size, alternative building materials, quality of finishing, plot size, and type of infrastructure (especially sanitation);

Review and finalize the house designs for expandable starter homes, modular designs, and designs for incremental building, and

Help Ugandan lenders analyze the demand for these housing products – i.e. that there is adequate effective demand (ability and willingness to pay) and long-term collateral value.

Focus Groups and a Market Survey to Assess Income and Preferences. Ideally, an affordability analysis should be done of income (by type and source) for Kampala, or at least for urban areas. However, the available income information in Uganda is not sufficiently detailed to provide the requisite distribution. Focus groups and market surveys would assist in determining the income levels and income sources for the relevant portion of the urban population. In addition, Akright, for example, has focused on various professionals (teachers, police, military) as candidates for modest housing, and the distribution of income for these groups could be analyzed. In addition, a ―typical‖ description of Ugandan ―housing preferences‖ has suggested a desire for large lots, numerous bedrooms, and high end materials and finishes. Clearly, only a small fraction of Ugandan households can afford this type of home. The preferences of more modest income households, however, do not seem to be well understood. Again, focus groups and market surveys can assist this process. In sum, accurate information on the inter-active process that links income and affordability with specific house designs and specific preferences -- so that the “package” works in the sense that respondent links what they can afford to pay with a loan product and a preferred house design – is notoriously difficult to collect. Respondents often tend to ―prefer‖ homes that they cannot afford; they also are reluctant to state their full income. Similarly, they are reluctant to reveal their savings. Monthly loan payments need to be linked to a specific dwelling, and income must often be estimated via questions on expenditures.

7 Stromme Foundation, ―Proposed Terms Of Reference For A Feasibility Study For A Micro Housing Facility For The Poor In East

Africa‖

16

Thus, it is recommended that one or more market surveys be done, and that they be preceded by focus group discussions in order to get the questions and the question sequence in the best order and phrasing. Based on the focus group findings, the survey would include house diagrams and affordability tables to assist the respondent in making realistic choices linking the following:

diagrams and descriptions of various house designs, including incremental;

house prices linked to these descriptions;

monthly payments by loan size and terms, again, linked to specific designs

monthly income needed to make the payments;

savings needed for downpayments;

a process for iteration with the respondent so that their preferences reflect what they can actually pay for: a realistic preference set and estimates effective demand

Regulatory Change. It will be crucial that a regulatory change be made regarding the two year cap on MDI lending. While the two year limit on MDI loans may be relevant for SME lending to very low income households, it will severely curtail development of microfinance for housing (MFH) loan products, which, worldwide, tend to have longer terms than SME loans. MFH loans often range between 3 and 7 years; they may be provided as a series of loans, for example, a number of sequential 3 to 5 year loans to finance an incrementally built structure. It is recommended that the cap be lifted or relaxed, at least for MFH, while ensuring that household loan terms and underwriting follow very prudent standards.

Savings Products Linked to the Pilots. A recommendation to increase savings throughout the financial sector is noted below. However, in the short-term saving products may assist the pilots, as they have proved elsewhere to be crucial components of underwriting for both microfinance and microfinance for housing lending. As lenders observe steady savings habits, those with informal and/or variable income can be observed with regard to ability to pay. The savings efforts bolster ability to provide lenders with the required down payment, often the major barrier in low income housing lending. Also, for those with little other collateral, some portion of the savings can be held by the bank until the loan is paid. 4.2 Longer-term Sustainability and Scale The pilots should be designed to maximize sustainability and ultimately reach for scale. As has been discussed, the recommended pilots are market-based: they do not depend on finance subsidies, or on funds for land or infrastructure. This will help ensure the sustainability of the model as it enables the pilots to be replicated and scaled up without the need for large budget allocations or donor funds. Economies are achieved via innovative design, alternative building materials, and utilizing modest -sized starter homes and incremental building approaches. Thus, rather than depend on government, NGO, or donor funds, sustainability and scale will be within the province of the market actors – the lenders and developers – combined with effective demand by Ugandan households. The constraints to sustainability and scale, however, are also market-based:

availability of adequate liquidity for both construction and take-out finance;

the confluence of innovative house design and building materials with the affordability and the preference profile of Ugandan households;

a reasonable rate of return for developers of the modest housing estates;

17

the ability and willingness of lenders to underwrite modest and lower income households, including those with informal income;

banks’ concerns about capability of developers and cost overruns which abrogate the affordability calculations; and

banks’ concerns about the collateral value of the homes and locations. Table 4.1 provides an evaluation of the pilot projects in terms of classic criteria: sustainability, scale, efficiency, and relevance. The ―plus‖ column is fairly robust: these projects do not need subsidy and given the presumed income distribution in urban Uganda, effective demand is expected to be large. The approach is certainly a relevant way to improve the quality of housing. However, the negatives are also robust as far as scale and sustainability. Thus, the recommendations that follow address liquidity in the long-term as well as the land use planning necessary to alleviate a major supply side constraint.

Table 4.1 Advantages and Disadvantages of the Pilot Projects

Evaluation Criteria

Advantages of the Pilot Plans Constraints Against Sustainability and Scale

Scale/ Effectiveness Utilizes the market experience & expertise of existing lenders who are willing to extend down-market & use new loan products

Loan product trade-offs among banks, MFIs, & MDIs; liquidity is a long-run constraint; credit enhancement needed?

Efficiency Effective demand expected to be large; introduce affordable loan products building design

High interest & building costs & lack of affordable design will slow development

Relevance Highly relevant to substantial % of households with modest & low salaries, informal & under-reported income

Will remain relevant, but preferences need careful linking with affordability and design

Sustainability No major finance or construction subsidies required for low-modest & modest income; lenders find new market niche

Liquidity will be a major issue; Will need improved land & infrastructure policies.

Savings Products and Bank Liquidity. UN-HABITAT has assisted the FIRST project with research on savings products.8 DFCU’s Smart Plan and HFB’s Shelter Account are already in place, offering would- be mortgage borrowers the opportunity to save and provide a demonstration effect for repayment as well as a fund for the down-payment. However, as discussed in the companion paper, ―Study to Examine the Use of Retail Funds for Mortgage Lending,‖ with deposit rates consistently below the inflation rate, most savers in the banking system face negative real interest rates. In 2008, the real interest rate was approximately -11 percent. As long as negative real deposit rates persist, there is little incentive for the average Ugandan to save in the formal financial sector‖. Thus, the goal here might be to assist banks in modeling the impact on the balance sheet of combining higher savings deposit rates with increased mortgage lending. Assess development of a Liquidity Facility. The Companion paper also addresses liquidity in the Ugandan market. Notably, the larger international banks, which currently have little

8 See UN-HABITAT, Saving Products for Low-Income Groups

18

interest in either mortgage finance or down-market lending, do not appear to be liquidity constrained. However, the smaller banks – including those willing to participate in pilot projects, already face liquidity constraints, which would be exacerbated as their lending expands. Also, for several lenders that are potential pilot partners, down-market loan products are already being utilized; thus, lack of liquidity may be their main barrier to expansion. As noted, it is precisely these smaller local and regional banks, MFIs, and MDIs that are currently most interested in making mortgage loans and most willing to investigate down-market entry and new loan products. Liquidity Facility is likely to be developed in Tanzania, on that will assist MFIs as well as banks, and this could provide valuable guidance for any decision on a facility for Uganda.9 Another approach to enhancing liquidity might be the Microfinance Enhancement Facility, sponsored by IFC and the German development bank KfW. The Microfinance Enhancement Facility is a short- to medium-term facility of up to $500 million with initial contributions of $150 million from IFC and $130 million from KfW. The Facility is expected to provide refinancing to more than 100 microfinance institutions in up to 40 countries. Given increased experience worldwide, Uganda will be able to benefit from exptensive experience in MFH lending. Credit Guarantees and the Microfinance Enhancement Facility. Credit enhancements, such as loan guarantees to banks or guarantees of on-lending from banks to MDIs and/or MFIs are another way to help support down-market lending and boost liquidity for these efforts. In fact, a bank/MFI partner approach, pioneered in Latin America, is now utilized in many emerging markets. Several models are utilized in the partner relationship, but in most cases, the bank provides funds while the MFI undertakes origination and servicing. Credit enhancement provided by the government or donors can help kick-start this type of down-market push. just as for the liquidity facility, a credit enhancement mechanism is not recommended in the short-term, although in the longer-term is may be useful.

Pension Reform. Uganda is now addressing pension reform, including appointing a regulator for the pension industry. NSSF would also be subject to this regulation. More appropriate access to NSSF funds via the capital market would be an important step for banks and in the longer-term, the possible liquidity facility. It is recommended that NSSF work through the financial sector for its housing and construction goals. Such intermediation would be a positive step for the capital market and banking sector, rather than NSSF’s current plan to utilize 60 percent of its portfolio directly in development. Land use planning and infrastructure development. While improved loan products and house design are a necessary condition to expansion of housing lending in Uganda, they are far from sufficient for most low income groups. A key supply side barrier is limited availability of land, infrastructure, and planned estates, exacerbated further by some inappropriate building/ planning regulations. Although interest rate subsidies are not included in the proposed pilots, the no-subsidy rule is difficult to sustain for land and infrastructure for lower income groups. Thus, government efforts to improve land titling, land use planning, and infrastructure are vital, along with a reform in the building/ planning code. Since these reforms are likely to take a long time, in the interim it is recommended that some of the land development constraints associated with formal planning code (e.g. minimum plot size, and the building code) simply be waived or relaxed for the pilots, so as to test the model for smaller, but more decent and affordable housing

9 See Sally Merrill, ―Tanzania: Action Plan for Development the Mortgage Market: Report on the Development of a Liquidity Facility‖;

Hassler, O., & Walley, S. Mortgage Liquidity Facilities. World Bank.

19

Annex I

Cost Detail for Illustrative Pilot Houses

BILLS OF QUANTITIES FOR A 60 M2 HOUSE

Particulars Uni

t Quantit

y Rate Amount Total

Land Costs

Plot Size m2 150

8,000

1,200,000

1,200,000

Construction Costs

Wall

Laying the Foundation m2 60

5,000

300,000

Building concrete slab m2 60

30,000

1,800,000

Building wall with locally clay burnt Bricks m2 118

28,000

3,304,000

Floor

Building cement screed floor m2 46

5,000

230,000

Windows

Casement Window (Size: 1500 by 1200) No. 1

150,000

150,000


100,000

300,000


80,000

80,000

Doors

Hardwood Paneled Door (Size: 900 by 2400) No. 4

100,000

400,000

Flash Door (Size: 750 by 2100) No. 1

80,000

80,000

Casement Double Door (Size: 1200 by 2400) No. 1

150,000

150,000

Plastering

Internal Plaster m2 108

4,000

432,000

External Plaster m2 182

4,000

728,000

Paint

Three coat emulsion paint to internal walls m2 108

3,000

324,000

Three coat emulsion paint to external walls m2 182

3,000

546,000

Gloss paint to metal surfaces m2 10

2,500

25,000

Three coat emulsion to ceiling m2 46

2,500

115,000

Roof

Roof Construction

700,000

Roofing with pre-coated Iron Sheet - gauge 28 m

2 83

21,000

1,743,000

20

Ceiling -

Construction of Timber Ceiling Framework and expanded wire mesh and plastering m

2 46

10,000

460,000

Sanitation

Shower Tray No. 1

100,000

100,000

WC Pan No. 1

130,000

130,000

Wash hand Basin complete with tap and bottle trap No. 1

80,000

80,000

Fitting pipes and water connection

350,000

Electricity -

Electrical installations and connection

500,000

Kitchen -

Installation of basic kitchen

200,000

Septic Tank

Cost of constructing a 2,000 litre septic tank

400,000

Access Road

Constructing immediate access paved road m2 60

15,000 900,000

Sub-Total 14,527,000

Labor (10%)

1,452,700

Total Cost of Construction

15,979,700

Other Costs

Developer's Profits (20%)

3,195,940

Titling Fees

200,000

House Design Fees

200,000

Total

3,595,940

Grand Total

20,775,640

21


Particulars Unit Quantity Rate Amount Total

Land Costs

Plot Size m2 200

10,000

2,000,000

2,000,000

Construction Costs

Wall


7,500

600,000


40,000

3,200,000

Building wall with concrete bricks m2 212

45,000

9,540,000

Floor

Building Ceramic Floor Tile m2 56

50,000

2,800,000

Windows


150,000

750,000


100,000

100,000


80,000

160,000

Doors


100,000

400,000


80,000

160,000


150,000

150,000

Mild Steel Door (Size: 900 by 2100) No. 1

200,000

200,000

Wardrobes No. 2

200,000

400,000

Plastering


4,000

648,000


4,000

540,000

Paint


3,000

486,000


3,000

405,000


2,500

42,500


2,500

140,000

Roof

Roof Construction

1,500,000

Tiling Roof with Kajansi Tiles No. 1540

2,500

3,850,000

Ceiling -

22

Construction of timber ceiling framework and expanded wire mesh and plastering m

2 56

20,000

1,120,000

Sanitation

Shower Tray No. 1

100,000

100,000

WC Pan No. 1

130,000

130,000


80,000

80,000


350,000

Electricity -


1,000,000

Kitchen -

Installation Kitchen with sink, lockups and tiling No. 1 2,000,000

2,000,000

Access Road -


15,000

900,000

Sub-Total 31,751,500

Labor (10%)

3,175,150


34,926,650

Other Costs

Developer's Profit (20%)

6,985,330

Cost of Setting up a Lagoon

300,000

Titling Fees

200,000

House Design Fees

200,000

Total

7,685,330

Grand Total

44,611,980

23


Particulars Unit Quantity Rate Amount Total

Land Costs

Plot Size m2 200

10,000

2,000,000

2,000,000

Construction Costs

Wall


7,500

712,500


40,000

3,800,000

Building wall with concrete bricks m2 235

45,000

10,575,000

Floor

Building ceramic tiled floor m2 87

50,000

4,350,000

Windows


150,000

450,000


100,000

300,000


80,000

160,000

Doors


100,000

400,000


80,000

160,000


150,000

150,000

Mild Steel Door (Size: 900 by 2100) No. 1

200,000

200,000

Wardrobes No. 2

200,000

400,000

Plastering


4,000

1,068,000


4,000

808,000

Paint


3,000

801,000


3,000

606,000


2,500

160,000


2,500

217,500

Roof

Roof Construction

2,000,000

Tiling roof with Kjansi tiles No. 1680

2,500

4,200,000

Ceiling -

24

Construction of timber ceiling framework and expanded wire mesh and plastering m

2 87

20,000

1,740,000

Sanitation

Shower Tray No. 2

100,000

200,000

WC Pan No. 2

130,000

260,000


80,000

160,000


500,000

Electricity -


1,300,000

Kitchen -

Installation Kitchen with sink, lockups and tiling No. 1

2,000,000

2,000,000

Access Road -


15,000

900,000

Sub-Total

38,578,000

Labor (10%)

3,857,800


42,435,800

Other Costs

Developer's Profit (20%)

8,487,160

Cost of Setting up a Lagoon

300,000

Titling Fees

200,000

House Design Fees

200,000

Total

9,187,160

Grand Total

53,622,960

25

Annex II

House Diagrams

60m2 House

6,690

8,420

230

3,000

230

3,000

230

2303,000

2301,500

2303,000

230

1,5002301,500230

3,000

230

2303,000

2304,730

230

Bedroom 01 Bedroom 02

Sitting / dining room

Verandah

Bathroom

Kitchenette

26

80m2 House

8,840

1,537 1,599 1,581 1,200600

1600 830234

3,996230

4,150230

3,430600

549

600

501900 1,615

645

2302,850

150

1,000

150

1,000

1503,080

230

2,895

1,599

4,346

8,840

763

1,699

600

1,880

2,400

X

X

Sitting/ Dinning room

Access lobby

Wbh

WC SHKitchen

Bedroom 01

Master bedroom

Verandah

Ground floor plan

27

95m2 House

1,200

1,200

600

9,020

2303,600

2304,730

230

230 1,0501,500

1,050 2301,200

1,0151,500

1,015 230

230

3,600

150 1,200150 1,200230

3,600

230

230

3,600

150300600 300150300 600300230

3,600

230

10,590

2301,570230

4,500

230

1,950

1501,500230

2301,570230

4,500

230375

1,200

375 150300

900

300 230

1,200

2303,600

2302,100

1502,480

230

230 1,0501,500

1,050 230 4501,200

450 150900

1501,430

230

9,020

1,800

8,790

Store

Kitchen

Dining

Living room

Master bedroom

LAYOUT PLAN

Bathroom

Bathroom

Bedroom

pv

Wardrobe

Wardrobe

pv

V e r a n d a h

pv

pv

pv

pv

pv

pv

pv pv

pv

pv

pv

pv

Office001

A: 95.52 m2H: 2.70 m

28

Annex III

Illustrative Loan Development Forms for the Pilot Projects

I. Microfinance for Housing (MFH) Loan Design Parameters

Loan Feature

Proposed Parameters

Comment

LTV: Maximum & minimum loan amount for 3 stage, 60m2 Incremental Building

Options for Term (assuming 2-year cap is removed)

Options for term of each loan in the incremental building approach

Interest Rate: relation to new MFH home improvement loan product? Relation to current micro-business loans? mark-up over mini-mortgage rates? Treasuries?

Fixed rate loans available? For what terms?

Will the interest rate vary across the customer set? If yes, according to what variables:

Term?

Previous microfinance loans


LTV?

Other?


Prior micro-loan required?

Savings required?

If yes, what period and amount

If yes, is savings balance kept for life of loan?

Title required

Co-signors required?

Other collateral required


Other requirements or terms

Do terms (rate, tenor) vary by income, credit history, loan-to-value, payment to –income


Bank evaluation of incremental design

Bank evaluation of quality of materials

Other comments

29

II. Mini-mortgage Loan Design Parameters

Loan Feature

Proposed Parameters

Comment

LTV: maximum loan amount for 80m2 or 95m2 starter home at costs of UGX at cost of X

Maximum Term

Interest Rate: relationship mortgage rate? Mark-up? Relation to Treasuries?

Variable/fixed rate rules

Will the interest rate vary across the customer set? If yes, according to what variables:

Term?


LTV?

Other?

Maximum and minimum loan-to-value ratio


Prior loan required?

Savings required?

If yes, what period and amount

If yes, is savings balance kept for life of loan?

Title required

Co-signors required?

Other collateral required


Other requirements or terms

Do terms (rate, tenor) vary by income, credit history, loan-to-value, payment to –income, etc.


Bank evaluation of house quality and design

Other comments

30

Annex IV

Profiles of Participating Developers Akright Projects, which has agreed to be the participating developer for the modest income pilot: (www.akright.biz) has been in the real estate business for the last ten years. During this time, the firm has constructed over 1,000 houses in addition to partnering with organizations like Uganda Revenue Authority10 and UN-Habitat to build houses for their projects. Mortgage finance has been provided for Akright’s houses from DFCU Bank, Stanbic Bank and Housing Finance Bank11. Construction finance is from the firm’s own resources, although in some cases, DFCU and Shelter Afrique, Tanzania have financed part of the firm’s developments. For the modest income pilot, Akright is willing to construct 200 modestly priced houses along Entebbe Road, in its Kakungulu Estate, for which mortgages would be provided by DFCU and/or HFB. The price would range between UGX 40 million and UGX 60 million ($20,000 - $30,000). The target market for these houses would include: teachers, (as there several primary and secondary schools in this area), staff at Entebbe Airport (for example, Civil Aviation staff), and security personnel at the Entebbe State House. Jomayi Property Consultants (www.jomayi.co.ug): Jomayi has agreed to participate as a developer in the low-modest pilot. Jomayi has been in the real estate business for the last 12 years, and since its inception, the firm has been specializing in selling plots of land. More recently, Jomayi started constructing houses, targeting the middle and modest income classes. The houses are priced as low as UGX 33 million ($16,500), with mortgage finance from DFCU, Centenary Bank and Hosing Finance Bank. Jomayi’s greatest challenge is in accessing construction finance, and asset finance for purchasing excavation and brick making machinery that will help improve on its economies of scale.

10

In January 2008, Akright partnered with Uganda Revenue Authority to provide housing for its employees in a deal worth UGX 6 billion. Mortgages for these houses will be provided by DFCU 11

Akright believes that in some instances, banks have undervalued some of its properties by as much as 50 percent, thus limiting availability of mortgage finance to its clients.

http://www.akright.biz/

http://www.jomayi.co.ug/

31

Annex V

Profiles of Potential Lenders for the Pilot Projects

Lender

Products Offered

Underwriting Terms Loan Amounts (UGX, Millions)

Interest Rates per Annum (%)

Current Mortgage Book (UGX Billions)

Additional Information

DFCU Bank

Mortgages, categorized under:

Home improvement loans

House Purchase loans

Salaried Income

Payment not to exceed 40 percent of salaried income

Loan tenure of up to 15 years

Value of loan to property is between 70 & 80%

Collateral is the property and land title

From 10 to 800

Between 16 and 19

47 Issues matched loans to Microfinance Institutions, some of which have been used to develop Housing Microfinance Products Land Loans Salaried Income

Payment not to exceed 40 percent of salaried income


Value of loan to property is 100%

Secured by land title

From 5 to 75

22 Currently at 2.5, but bank plans on increasing by seven folds

Centenary Bank

Mortgages

only for incremental home improvements

Both formal and informal incomes are considered

Collateral is the land title

Payment not to exceed 40 to 60 percent of borrower’s Surplus income

Loan Tenure of up to 3 years


From 5 to 30

22 40 None

Housing Microfinance Loans for

incremental home improvements


Collateral could either be a land title, a sales agreement or household valuables




5 and below

22

32

HFB Mortgages, categorized under:

Home improvement loans

House Purchase loans

Salaried Income

Payment not to exceed 35 percent


Value of loan to property is between 70 & 80%

Collateral is the property and land title

From 10 to 800

Between 17 and 18

150 None

Growing House Loans

Salaried Income

House should be at the ream beam and in Kampala

Payment not to exceed 35 percent



Collateral is the property and the land title

Evaluation of Bills of Quantities

Up to 30 17

PRIDE


incremental home improvements under the Mortgage and Asset Financing Product


Collateral is a land title




From 0.2 to 20

25 0.5 None

FINCA


incremental home improvements


Collateral is a land title

Payment not to exceed 50 percent of borrower’s Surplus income



From 0.4 to 10

24 About 3 None