Burgess COMMENTARY
I love the Chototel initiative but only in the relevant context ... and the UK affordable housing crisis or the USA affordable housing crisis are quite different situations. In the UK / USA context affordable housing is made difficult by the profit content of the costs to build affordable housing not to mention the profit that is now embedded into the price of land. The role of profit in making the cost of living in older advanced economies is an issue that is not talked about a lot but explains much of the social malaise that has been growing for the past 40 years, Peter Burgess http://truevaluemetrics.org
Peter Burgess

Building Affordable Homes – Everywhere chototel-logo1

Twelve years ago Kate Barker, an economist, delivered a review of housing supply in the UK. It was optimistically sub-titled ‘delivering stability: securing our future housing needs’.

It was a brilliantly incisive analysis. Point 35 of it said: “over the next ten years, the number of social and affordable houses provided will need to be increased by at least 17,000 per year, requiring annual investment building up to around £1.2 billion, in order to meet the flow of new needy households. If the backlog of those whose need has not been met in the past is to be reduced, then up to 23,000 further houses would need to be supplied, at a cost building up to £1.6 billion.”

Even though new home building in the UK consistently falls below the approximately 250,000 homes a year that’s widely considered to be the minimum necessary, we seem to be doing well with affordable homes; according to the latest official information, 66,640 affordable homes were “provided” in 2014-15, 55% higher year-on-year.

But is that a big enough number?

More important – what is an affordable home? To state the blindingly obvious, it’s a home which people can afford. And that has become well-nigh impossible, not just in the UK but many other places.

In Britain the average property price country-wide is now nudging £300,000. In London it exceeds £500,000; the average pre-tax wage in the UK is around £27,600.

Post-Brexit, property prices are likely to fall, with estimates ranging 8% to 18%, the latter figure a pre-referendum forecast from the Treasury. But even if the average property price fell 20% to £240,000, many people will still struggle to afford to buy a home.

What’s happening in other urban hot-spots around the world is equally depressing.

The 2016 Demographia International Housing Affordability Survey uses the ratio between median household income and average home price (called the Median Multiple, or MM), to determine housing affordability. An MM of three and under is considered affordable; above five is considered “severely unaffordable”.

Demographia found that the 10 cities with the most unaffordable MMs were Hong Kong (MM of 19); Sydney (12.2); Vancouver (10.8); Melbourne (9.7); Auckland (9.7); San Jose (9.7); San Francisco (9.4); London (8.5); Los Angeles (8.1) and San Diego (8.1). All of these cities have experienced a doubling or even tripling of their MM since 1998. Of the UK, Demographia bleakly reported: “Among all markets, the United Kingdom had a Median Multiple of 5. There were no affordable housing markets in the United Kingdom.”

All of which is grim news.

But there are sparks of creative thinking about how to tackle this income/home price problem. One such spark – Chototel, a member of the Social Stock Exchange – might just burn very brightly indeed.

Rhea Silva, the exceptionally poised CEO of Chototel – ‘choto’ is Hindi for ‘small’ – may be about to revolutionise the outlook for the world’s affordable housing. Chototel is all about rebalancing the MM in housing.

Its business proposition is to build small hotels offering affordable accommodation, which, in India – where Chototel is based – means $2/day rental for accommodation of up to four people, in urban areas where the average wage is $5/day. Every room will have a kitchen/pantry, TV, bathroom and toilet, with bedrooms accordingly. The aim, says Silva, is to “give the flexibility of a hotel with the security of a home. The housing market needs disrupting. There is a huge shift in the way people everywhere now regard home ownership. More people are living by themselves, more people are living in urban areas, and homes are increasingly looked upon as transitory. Yet in many cities today renting is completely unaffordable for many people.”

Image: Chototel/pilot project

Chototel currently has two pilot projects, at Nagoghane, 20 kilometres south of Mumbai, and Chakan, a town in the Pune district of Maharashtra. These hotel-homes will prove the concept and lay the future strategy. Tenants will be able to check in for one night, or as many as they like. It’s also a vast potential market – as many as 1.6 billion people globally will struggle to find affordable housing by 2025, according to Silva. The aim is to produce hotels priced for customers at 10% of their income, wherever the hotel is, in Mumbai or London. So if a Chototel appeared in London, the average annual rent ought in theory be considerably less than the current market rates from private landlords.

Moreover, the blueprint for the hotel-homes promises to be incredibly environmentally-friendly; each hotel will be technologically equipped to recycle its water and generate its own electricity, off-grid. Investors will find themselves with a REIT-like structure, in which they will benefit from the rent yield while owning the underlying structures (the hotel-homes).

The overall aim, says Silva, is “to benefit those people who most need secure and affordable homes. Beyond that, the business strategy is to build scale, to attract capital to go out and build or acquire assets. In the UK, the strategy might well be to acquire and retro-fit brownfield sites; given the serious problems currently facing the UK’s affordable housing market, we expect to get a very sympathetic hearing from local and central governments.”

If Chototel doesn’t get that sympathy – from government, and interest from investors – then the housing market is in even worse shape than we imagine. It’s one of the best ideas for profit-with-purpose I have come across in a long time.

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