Building concrete markets: The role of insurance in property markets in Africa
The housing shortfall in Africa is immense. For instance, the World Bank (2017) estimates that across eight countries in West Africa about 800,000 new housing units are needed every year to address the housing shortages. Yet, banks in these countries collectively only issue 15,000 new mortgages per year. Similar shortages also exist in the commercial and industrial space.
On paper, property market development supports GDP growth and employment opportunities through new construction, the supply of materials and equipment, renovation, maintenance and the provision of professional real estate services. Indirectly, property markets also support development by building resilient communities and cities, particularly in the face of rapid urbanisation and high population growth. And at a personal level, acquiring property helps individuals to build assets, wealth and resilience. So the property market gap deprives countries and individuals of important economic opportunities.
How do we close the gap? Although increased funding is becoming available for investment in property markets, it seems that finding suitable vehicles through which to funnel these investments is not easy. Property finance instruments on the continent are largely underdeveloped and expensive. The problem lies partly with the lack of sufficient capacity to implement large-scale developments. The Centre for Affordable Housing Finance (CAHF) notes that, outside of South Africa, there are very few developers with sufficient capacity to sustain annual delivery of more than 500 housing units. Moreover, property development and construction are risky ventures.
So, can insurance help? In principle, yes.
Well-functioning insurance markets transfer risk and intermediate capital for productive opportunities — all functions that can support property markets. Yet, experience across Sub-Saharan Africa suggests that this role is not yet adequately realised.
Risk transfer
Evidence in African markets shows that insurance plays a larger role after property market development than in catalysing property development. The underdeveloped and risky nature of the market means that covering niche risks for property developers is simply not seen as a large-scale, viable opportunity.
Once property is developed, most property insurance is only taken when required as a prerequisite for finance, and even then, it is not retained once it is no longer required. Properties are also often undervalued to reduce premiums, and clients tend to insure more frequent risks like professional liability rather than more severe risks, like fire.
In the absence of insurance solutions, the burden rests mostly on property developers to absorb risks. This, in turn, undermines the viability of the market, which creates a vicious cycle.
Intermediation
In principle, insurers as institutional investors should also play a role in investment into the property market, either directly or by mobilising and catalysing capital markets.
Direct property investments are popular in less developed insurance markets, where the alternative investment opportunities may be limited and the stock market may be underdeveloped. Regulation often plays a role by setting minimum thresholds for investment in property markets.
Outside of direct property investments, however, there is a lack of feasible investment-ready opportunities in the sub-Saharan Africa property market. As markets develop, insurers typically require more and more aggregated investment mechanisms with efficient management costs. They also require a portfolio of investments with varying maturities in order to meet liquidity demands. Property market investment mechanisms in Sub-Saharan Africa largely do not meet these requirements. As a result, the proportion of insurance funds invested in property markets decreases substantially as the insurance market develops. Regulatory requirements for investment tend to follow these realities, with a switch from minimum requirements to a maximum requirement. Although new vehicles are emerging to address investor needs (such as real estate investment trusts, or REITs), these remain underdeveloped due to regulatory restrictions or a lack of trust and awareness among investors. By and large, property market investments are therefore still not very liquid or aggregated, which limits the amount of institutional investment that can be funnelled into the sector.
Even if the investment opportunities beyond direct property investment had existed, the amount of capital mobilised through insurers in most sub-Saharan African markets remain, for the most part, too constrained to be a big driver of property market development.
Promoting the role of insurers in the property market
But all is not doom and gloom. We recently completed a study with FSD Africa under our Risk, Remittance and Integrity programme on the links between the insurance sector and property market development. From the findings, it is clear that the development community can promote the role of the insurance market in the property market (or other relevant economic sectors) by entrenching a holistic value chain lens in dialogues between the insurance sector, regulators and stakeholders from the real economy. This requires an understanding of the multifaceted ecosystem of the particular industry, including the actors in its value chain, and the incentives, risks and barriers faced by these actors at each segment of the value chain. There is also a need to (further) promote the development of investment vehicles that would allow efficient and aggregated investments into property markets at scale, and to rethink insurance products that meet the needs and limitations of property owners.
