• Monday, Nov 29, 2021
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Analysis: Why Bangladesh needs affordable housing

  • Published at 05:34 pm October 23rd, 2021
Dhaka city aerial shot
An aerial shot of Dhaka Syed Zakir Hossain/Dhaka Tribune

Bangladesh is struggling to provide adequate housing at a pace that matches its rapid urban growth

Bangladesh has been a development success story. 

A remarkable export-oriented expansion of the garments sector and robust inflows of remittances propelled strong economic growth and rapid poverty reduction. 

Now, as the country celebrates 50 years of independence, it seeks to become an upper-middle-income economy in the next decade.

This will require maintaining strong rates of economic growth amidst the existential threat from climate change.   

Bangladesh is one of the most vulnerable countries to climate change in the world. 

With rising threats of climate change in coastal areas and limited income opportunities in rural areas, around 20 million people are expected to migrate, many of them to cities. 

Such massive rural-urban migration will put huge pressure on already stretched urban infrastructure with congested roads, inadequate sanitation and acute housing deficits in urban areas.

The housing gap

Bangladesh is struggling to provide adequate housing at a pace that matches its rapid urban growth.

Approximately 12 million urban households (69% of Bangladesh’s urban population) still reside in informal houses. 

Meanwhile, the cost of apartments in major cities has skyrocketed because of land prices and rising cost of construction materials. 

According to an assessment by the International Finance Corporation (IFC), the demand for urban affordable housing is estimated to increase from 6 to 10.5 million units by 2030. 

In contrast, only 17,000 units were available on the market in 2019.

Based on this study, there is a need to upgrade or build 3.5 million affordable housing units in the immediate term (and additional units in the longer term to meet demands), which could require around $59 billion of new investments. 

This would generate important positive externalities in industries such as construction materials, house maintenance and housing finance, while increasing utility revenues for the government and creating new jobs at a large scale. 

While housing can make a significant contribution to creating jobs, several challenges constrain the sector’s growth despite strong interest by developers and financial institutions in building affordable and green housing. 

Both the public and private sectors need to work together to find solutions. 

There is also a need for reforms supported by a clear national vision and roadmap. 

IFC has considerable expertise in this area with an aggregated exposure of $2.2 billion over 60 committed projects in the housing sector worldwide as of 2020; and $737 million committed in 21 projects in South Asia alone.

Areas for reforms

For many in Bangladesh, obtaining financing for affordable housing remains a challenge. 

Most individuals do not have adequate savings for a down payment and lack documentary proof of income due to the informal nature of jobs.

Mortgage finance penetration in Bangladesh’s housing market is low at 3% of gross domestic product (compared with 10% in India and 50-70% in developed countries) and mostly concentrated in the upper-income segment. 

Strong financial institutions as well as conducive and prudent banking and housing sector regulations are needed. 

In addition, given the long maturity of these assets and the banks’ reliance on short-term funding sources, it is critical to introduce adequate instruments that would allow financial institutions to be more active in the housing market without increasing the risks of the system. 

Developing the bond market and allowing non-bank financial institutions (NBFIs) to borrow foreign capital will encourage financiers to invest in long-term assets. 

Longer-term funding from both local and foreign sources will also improve extension of housing finance.

Regulatory reforms to boost the supply of housing—housing planning, digitization of land records, and simplification of land registration processes—can also help lead to increased mortgage penetration in the country. 

A lack of affordable land in densely populated urban centers deters private sector developers from building affordable housing units within city boundaries. 

Developing affordable housing plans around industrial zones and in peripheral areas of the cities could be a solution if coupled with improved transport connectivity for easier commutes, as has been done in many countries globally.

Successful models of affordable housing through public-private partnerships are prevalent in other emerging economies in the region and have supported economic recovery. 

Bangladesh also could explore this approach, which can help strengthen the country’s affordable housing sector.

Post-Covid resilient recovery
 

 Bangladesh has weathered the Covid-19 crisis better than other countries in Asia, maintaining positive rates of economic growth in the past two years.

Still, the pandemic generated major economic disruptions and amplified some of the structural weaknesses related to economic diversification and the financial sector. 

Now, as the country emerges from the pandemic, the housing sector could become an important engine of growth. 

The development of the affordable housing sector is already included in Bangladesh’s 8th Five-Year plan.

Incentivizing uptake of green technologies in the affordable housing sector can also support the government’s Nationally Determined Contributions (NDCs) economy-wide target of achieving 15% relative greenhouse gas (GHG) emission reduction compared to business-as-usual by 2030. 

Builders and financiers can take advantage of IFC’s landmark certification initiative, Edge (Excellence in Design for Greater Efficiencies), which provides a standardized green performance certification system as well as access to MAGC (Market Accelerator for Green Construction), and a pool of blended finance and technical assistance funds to incentivize green construction. 

Most importantly, a safe place to stay is our fundamental right. Sustainable Development Goal (SDG) 11 is about making “cities and human settlements inclusive, safe, resilient, and sustainable.”

Investments in the affordable housing sector can also help achieve co-related and positive outcomes in health and education, while ensuring green, inclusive and sustainable growth.

IFC is ready to be part of this exciting journey and partner with public and private stakeholders to ensure everyone in Bangladesh has a place called home. 

 

Alfonso Garcia Mora is regional vice president for Asia and Pacific, and Hector Gomez Ang is regional director for South Asia at the International Finance Corporation, a member of the World Bank Group, and the largest global development institution focused on the private sector in emerging markets.

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