Influence of Land Value on the Profitability of Low-Income Housing Projects in Periphery of Lima

In the previous decade the real estate sector in Peru has grown significantly, especially in Lima and in housing projects. In this effort the Peruvian government has been a key stakeholder implementing two important housing programmes: Mivivienda which is targeted to middle class and Techo Propio which is for low-income people. Mivivienda has been one of the most successful programs from the government because not only the demand but also the supply of new dwellings have greatly increased. However, for Techo Propio there is still a great imbalance: the housing demand is the greatest and continues growing but there are few housing projects for poor people in spite of the large subsidy to finance the construction developers who prefer to develop Mivivienda projects. The effective demand for low-income housing of more than a quarter of million dwellings in Lima alone is in stark contrast to the supply that is about the hundredth. The first step to solve this mystery is to understand that the problem is not about subsidy; there are some empirical evidences that it could be the scarcity of serviced land in Lima and other economic and social factors. The approach of this research is financial analysis from the point of view of the supply side. This research investigates the influence of land in the total profit obtained by developers from social housing projects that are subsidized by government. This research is quantitative and exploratory, with case studies (eight projects) about Techo Propio Peruvian social housing program. The context of this thesis is the peripheral area of Lima and the period of time covered in the study is the decade from 2001 to 2010. The research question asks if the profit because of the land strategy (to buy a plot and wait an amount of time until the price increases without doing anything else) is greater than the profit because of the project itself (the cash flow obtained by the effort to sell and build dwellings). The methodology consists mainly in the use of discounted cash flow analysis as a financial tool to explore the profitability of each project. The raw data was obtained mainly through interviews from developers and from the files of the public institution which promotes the programme. Some key performance indicators such as the unitary net present value (NPV per square meter of plot invested) and the return on investment (ROI: NPV per dollar invested) to compare the results among all projects were also used. The methodology is complemented with some qualitative and sensitivity analysis. Using the selected indicators, the findings show that only three projects out of eight have greater unitary net present value because of land than because of the project itself. In three projects the total profit is negative and in two of them the profit because of land is negative. Using the return on investment, five projects of eight have greater profitability because of land than because of the project itself. In general, the return on investment qualifies better the benefits generated from land strategy than the net present value per square meter. Regarding the conclusions, after the comparison among projects using the key performance indicators, simple descriptive statistics and the sensitivity analysis for a typical Techo Propio project, there are opposite results among projects. For that situation it is not possible to conclude in a positive or negative response to the research question. Nevertheless, this research has proved in some way, based mainly on the results of indicators and on some qualitative information, that Techo Propio has many problems to make it profitable for private developers and is much less successful than Mivivienda. A land strategy based only on buying a plot of land and waiting time to increase its price is not possible any more in Lima. Land strategy needs some partners, private developers, banks, landowners and central and local government to use some modalities of plot acquisition such as real estate investment trust. For developers land strategy can also include an optimum floor area ratio and mix uses, and for the government the design of some instruments for land value capture. Finally, this research contributes to better understand Techo Propio as a social housing programme especially from the point of view of the private developers. Why there are few projects and dwellings built of this type in Lima, why the profitability is very small or even negative, and why in some cases the land contributed significantly to the total profit. Although the results of the quantitative analysis are not very conclusive it is possible to say that Techo Propio is not profitable enough for developers. Land value, profitability, profit because of land strategy, profit because of project itself, subsidy, low-income housing, Techo Propio (TP), Mivivienda (MV).