Housing Finance in Algeria

Introduction

The People’s Democratic Republic of Algeria is a North African Maghreb state, with a population of 39.7 million inhabitants in 2016. At 2 381 000 km², it is the largest country in Africa. Algeria has had modest yet steady growth over the past few years, projected at 3.6 percent in 2016, and ranging from 4.1 percent to 2.8 percent between 2010 and 2015. GNI per capita has risen steadily since 2000, reaching a peak of US$5 520 in 2013, however, this has fallen to US$4 870 in 2015, due to low oil prices. Inflation has risen in the past years, reaching 6.08 percent as of April 2016, compared to an average of 4.76 percent from 2011 to 2016.

The economy remains heavily dependent on the petroleum industry, which accounts for around two-thirds of public revenues and 95 percent of export earnings. Although the drop in oil prices has yet to result in slower growth, it has significantly weakened Algeria’s fiscal and external balances. Fiscal savings have been depleted to finance large and sustained budget deficits, of around 20 percent of GDP. Government reserves have dropped significantly, reported at US$136.9 million in June 2016, having dropped US$6.1 billion in the year.

President Bouteflika announced a third five-year investment programme of US$262 billion for the period 2015 – 2019. However, government have sub-sequently revised this policy in order to substantially reduce public spending in light of lower revenues, and the new focus has been on fiscal consolidation and subsidy reform. Algeria has also adopted a new constitution in February 2016, aimed at fostering greater transparency, better governance and a more market-based economy.

Sustained budget deficits may put additional pressure on the need to diversify the Algerian economy and deliver the government’s large-scale social housing programmes, particularly to reach the ambitious targets of 1.6 million units planned for 2015 to 2019.

Access to Finance

The banking system in Algeria is dominated by six state-owned banks, which control almost 90 percent of banking assets, 80 percent of all loans and continue to play a key role in financing of government-prioritised projects. The central bank, Bank of Algeria, also oversees 14 privately-owned banks, nine non-bank financial

institutions and 23 insurance companies. Efforts to carry out financial sector reforms have been slow or are often put on hold, particularly liberalisation of state-owned banks and companies.

Since Bouteflika came into power in 1999, Algeria has attempted to reform the mortgage system by improving access to capital markets and deepening the market toward lower income groups. Yet, despite regulatory reforms, past trends of excess liquidity while oil revenues were high and heavy public spending have previously acted as a disincentive for banks to carry out product innovation. Lower oil revenues are putting additional pressure on liquidity and reforms to attract further deposits, and cultivate long-term savings, or resolve asset-liability mismatches.

A four-year ban on consumer lending ended in 2014, banks have since been able to offer new unsecured and higher interest loans on consumer goods. Domestic credit to the private sector has increased rapidly over the past years, rising from 18.5 percent of GDP in 2014 to 45.5 percent of GDP in 2015. Housing finance is still an underdeveloped sector, despite the liquidity of the banking sector. In 2015, mortgage lending remained only approximately one percent of GDP at a similar level to 2014, even though there has been growth in the number of loans over the past 5 years due to the delivery of housing through government programmes that offer subsidised mortgages. Yet, access to credit being very difficult due to the lack of credit bureaus and credit registry. In general, commercial real estate finance in Algeria represents a larger share of total bank lending than retail housing finance.

State-owned banks make up nearly all mortgage loans, more than 60 percent of which are attributable to the CNEP (Caisse National d’Épargne de Prévoyance – National Savings and Providence Fund). Housing finance products range in duration from 20 to a maximum of 40 years at a mortgage lending rate of eight percent. The maximum loan-to-value ratio for non-government programmes is capped at 70 percent of the total unit cost. Government offers upfront down-payment assistance for households qualifying for social housing programmes, which amounts up to 20 percent of the value of the unit. The level of non-performing loans (NPLs) has been very high in the past, though it has been decreasing, from a high of 21 percent in 2009 to 9.4 percent in 2015. Until now, rather than repossessing homes, most NPLs have usually been restructured, either through swaps for T-bonds (in public sector banks) or rescheduling repayment schedules, the costs of which have been absorbed by the state.

A mortgage refinancing facility was created in 1997, known as Societe de Refinancement Hypothecaire, or SRH, which had the goals to improve banking intermediation for housing finance and promote the use of secondary financial markets to facilitate access to long-term finance for mortgage loans. SRH was initially capitalised with a fund of US$52.3 million held at the treasury, and US$12.5 million of its own funds. The SRH facility was complemented by the new securitisation law that came into force in 2006. The objective of the legislation was to free up capital to support banks to fund housing construction, yet the expansion of secondary mortgage markets has been limited by the lack of development of primary mortgage markets and historically high rate of NPLs. There are no recent reports on the performance of the SRH and the value of the loans that have been refinanced. Yet, in 2016, SRH announced that it was exploring a bond issuance to diversify its financial resources and reduce reliance on the Treasury for funding.

Lease-to-own programmes have recently become a very popular way to access housing in Algeria. In 2011, the SRH facility received approval to operate directly in real estate leasing. There are five non-bank financial institutions specialising in leasing services, including real estate, which includes Ijar Leasing Algérie and El Djazaïr Ijar.

The main institution providing microfinance services is Algérie Poste, which was set up as a government corporation on January 14, 2002, to provide both postal and financial services. Algérie Poste has a large branch network, especially in rural  areas. In October 2015, Algérie Poste comprised of 3 668 bank branches and 18.5 million accounts, compared to just over 2 000 commercial bank branches or 5.1 branches per 100 000 inhabitants. There are no specialised housing microfinance products, but Algerie Poste offers a savings for housing account, with two percent interest, and acts as a service branch for 4.1 million CNEP accounts, Algeria’s largest housing finance lender. A large government program of modernisation of the system has continued to be a focus, with Algerie Poste offering online and mobile banking services for the first time in 2014.

Housing Affordability

Housing affordability is a significant problem in Algeria and the cause of substantial social unrest. While the supply of housing for high income and expatriate buyers appears to be sufficient, there is a distinct undersupply of affordable housing for the bottom 60 percent of the population. Prices to buy housing in the main urban centres are equivalent to those of major European cities, it is therefore extremely difficult for households, especially low and middle income, to access housing on the private market. In 2016, the average price per square metre to buy an apartment in the inner city was US$1,600 and US$920 outside of the city centre.

The GNI per capita reduced from US$5 490 in 2014 to US$4 780 in 2015, due to the effect of lower oil prices. There are limited statistics available on household incomes and poverty levels in Algeria. In 2014, the net average salary in Algeria (excluding agriculture) was reported at US$480 (DA 52 700) per month in the public sector and US$282 (DA 31 000) per month in the private sector, marking a 4.7 percent increase from 2013. Yet, even though the level of inequality is low, with the Gini coefficient last measured at 36.06 in 2010, the price of housing is beyond the means of most households with rentals priced at an average of US$136 (or DA15 000) for a three-bedroom unit nationally, and at beyond US$250 (DA25 000) per month, in major cities, Algiers, Oran and Constantine. Furthermore, the Ministry of Solidarity reports that 700 000 Algerian families were below the poverty line in 2015.

Public policy is focussed on building a large amount of very low-cost rental and subsidised housing units, yet government supply is not able to respond entirely to demand. Occupancy rates are still high in Algeria, though have been reducing, reported at 4.3 persons per household in 2015. Population growth, measured at 1.7 percent per annum, and an urbanisation growth rate of 2.7 percent per annum in 2015, fuels new demand each year for housing units in cities, with 70% of the total population living in cities. However, waiting lists are long and the down payment to buy a dwelling can also be prohibitive. For the middle-income housing programme, between DA 700 000 and 1 million (US$6 400 – 9 100) is required upfront.

Housing Supply

In 2015, the Ministry of Housing and Urban Development (MHU) reported a national housing shortage of 720 000 units. However, of the national housing stock, MHU estimates that up to 20 percent are vacant, which largely act either as investment properties or second homes for the higher-income. Meanwhile, there are approximately 500 000 units that are still designated precarious dwellings and two million are in poor condition, having been constructed prior to independence in 1962.

Annual supply is estimated at 80 000 dwellings, while annual demand is estimated at 300 000 units per year to respond to new demand and reduce the housing deficit. The MHU has continued to administer programmes to overcome the backlog with mass-scale public construction of social units of various types utilising several public institutions for the program’s implementation, including the national real estate company, ENPI.

The state is the major supplier of various types of housing through the use of national budget. In May 2014, the Ministry of Housing and Settlements announced the construction target of 1.6 million units over a five-year period from 2015 – 2019 with an estimated cost of US$56 billion, in addition to the 650 000 units that were already in progress in 2014. Half of these units were planned by the government to be public rental housing (LPL), while 400 000 were planned for rural areas and the remaining 400 000 would be built as part of the lease-to-own program (AADL). Overall, housing programmes have delivered a large number of units over the past decade, with MHU reporting that 810 000 housing units were built under the 1999 – 2004 housing programme and 912 326 under the 2005 – 2009 programme. A massive DA 3 500 to 4 500 billion (US$46 billion – 60 billion) was committed for the MHU’s programme in the 2010 – 2014 budgetary period, yet only 693 000 units of the 1.2 million units planned were produced. In recent years, lengthy administrative processes and disputes over some project sites and mismanagement of funds contributed to a shortfall, with the number of completions per annum falling below 100 000 units.

These programmes have required an enormous effort that is both widely publicised and visible. Around 60 percent of units in these government housing programmes are estimated to have been built by the private sector. Of the estimated 1 800 building developers involved in public housing construction, around 80 percent are local Algerian firms, usually working on smaller projects of 100, 200 or 500 units. The remaining 20 percent of developers are foreign, including joint-venture contracts with companies from Portugal, Spain, Turkey, China and the Gulf States. At the height of housing delivery in the 2010 – 14 programme, there were an estimated 35 000 – 60 000 Chinese construction workers in Algeria at any one time.

Despite the extent of housing construction, there is still a backlog. In 2014, 72 000 residents were surveyed as still living in precarious housing in Algiers. There have been additional initiatives to clean up shantytowns with the slum eradication project Résorption de l’Habitat Précaire, a programme that included slum-upgrading, redevelopment or resettlement. Started in 1999 with a World Bank loan of US$150 million, this program initially identified 65 target sites, accounting for 30 390 inadequate units, housing 172 000 residents. In July 2014, this program gained a further commitment of US$90 million from the new government for the improvement of inadequate units. As a result, between June 2014 and May 2016, 39 000 families were relocated into new units, with 9 000 households participating in government programs to build their new homes, and the rest being allocated to public rental housing. The Algiers province have secured another 180 hectares to allocate to new affordable housing projets of all types, including lease-to-own, public rental and subsidised for-sale units.

Property Markets

Constraints to the availability of land have severely restricted the emergence of a formal real estate market. The state is the primary owner of land in Algeria and only very limited supply is made accessible to private individuals or developers. There are very high rates of home ownership, due to the cultural importance of owning a home for Algerians, yet low supply has pushed up prices beyond the affordability threshold of many households and as a result, the rental market is growing.

There is a deeds registry, though the land registration system is cumbersome and unclear. Algeria has continued to maintain a low ranking of 163rd in the 2016 Doing Business report for registering property, with 10 procedures, taking an average of 55 days (increasing from 48 days in 2012), and costing 7.1 percent of the property value. Many apartments or plots are left vacant due to disputes over tenure. In 2016, Algeria made dealing with construction permits easier by eliminating the legal requirement to provide a certified copy of a property title when applying for a building permit. Yet, this process still takes 17 procedures and an estimated 204 days, ranking Algeria at 204th in the world.

A five percent transfer fee is charged on transaction of immovable property, plus a 1 percent registration fee. The government has attempted to increase the supply of land with a tax rebate if the land is sold for housing. However, this measure has primarily benefitted high-income groups, who are the ones that are able to afford land in the first place, and is regressive, as the higher the purchase price, the larger the tax rebate. With 90 percent of the population living within only 10 percent of the national territory, and growing demand caused by population growth and urban migration, difficulties to access land are likely to continue without any significant reforms in land policy.

The majority of households are forced to rely on public housing programmes, or otherwise self-build on informally-squatted government land or buy units on the black market. Due to the enormous price gaps between the private property market and affordable housing developed by the state, many of the social housing units are quickly released into a thriving black market, where title transfer is not formally registered. The mark-up of the property value can be up to 40 percent and real estate brokers engaged in the business demand high commissions to facilitate the transactions.

To incentivise property development, Algeria introduced a Real Estate Development Guarantee Fund (FGCMPI) in 1997 and made a Certificate of Guarantee on advance payments for off-plan sales compulsory. Its purpose is to reimburse payments made by purchasers in the event of the developer defaulting on their obligations.

Housing Policy and Regulations

From 1999 to 2012, one third of those in the Algiers region applied for some sort of government housing assistance. The government has five types of housing programmes, with different target groups and tenure outcomes. In 2013 and 2014, the thresholds for several programs were revised and a new LPP program was introduced for middle class households, resulting in the following set of housing options (see next page).

Demand for all these programmes is high and supply is still insufficient. Allocation procedures have been brought under scrutiny for mismanagement and arguments over allocations, which are the cause of many protests. Efforts to better regulate the application and wait-listing procedures have made some progress, yet have not gone far enough to alleviate this social unrest.

A scoring system has been introduced to the public rental housing programme, which gives preference to families based on their income, current living situation, familial situation, and improves transparency. Specific issues to resolve are the verification of the eligibility of applicants as waitlists are managed locally, there can be duplication of applications across regions and people may already own property or move to precarious housing in shantytowns simply to qualify for government assistance. In addition, there is a challenge to eradicate fraudulent documents of identification or false certificates of accommodation.

Housing Sector Opportunities

The outlook for growth in the Algerian housing finance sector remains largely positive, given the development of stronger legal frameworks for mortgages, a growing number of banks offering varied housing finance options, including housing microfinance, and the renewed pressure to implement financial sector reforms in response to lower oil prices. Although there has been a decline of European investment in Algeria after the introduction of a 49/51 rule, which limits the participation of foreign investors in local companies to 49 percent, there has been a revival of interest from Gulf investors.

Bank of Algeria continues to introduce refinancing instruments to guard against potential inflationary pressures and maintain the level of capitalisation of the banking sector. An amnesty announced in July 2015 for companies and individuals to deposit undeclared income from informal trading into banks for a seven percent fee may also increase liquidity and formalisation of the black market. The informal sector’s turnover is estimated at around US$40 billion per annum.

Housing production faces challenges on the supply side, caused by a lack of land available for private development. There has not been much progress in recent times. As a result, land title is not always clear, restricting housing supply. A World Bank project from 2002 until 2007 included a nation-wide systematic registration system for physical and legal properties, and the expansion of the cadastre. New legislation has also helped to standardise and digitise the registration procedures and designed a special ad-hoc procedure to expedite the process in urban areas. A 2011 law that was enacted to grant leases for state land to foreign investors for 99 years instead of 20 years, has been promising to stimulate private investment in real estate, yet the state has been slow in making this serviced land available due to the incompleteness of the deeds registry.

Earlier this year, the government stated its intention to shift the housing delivery emphasis from the provision of public housing towards the facilitation of privately-developed affordable housing, financed through long-term mortgage loans.