Housing Finance in Algeria

Introduction

The People’s Democratic Republic of Algeria is a North African Maghreb state, with a population of 40.6 million (2016). At 2 381 000 km², it is the largest country in Africa. Algeria has experienced modest yet steady economic growth over the past few years. In 2016  this reached 3.8 percent, and ranged from 4.1 percent to 2.8 percent between 2010 and 2015.[1] Algeria’s GDP grew by 3.7percent in the first quarter of 2017[2], even though the World Bank forecasts real GDP growth for the 2017-2019 period to slow to 1.2 percent[3] (1.5 percent in 2017 and 0.6 percent in 2018[4]). While the World Bank forecasts take into account fiscal consolidation and a weaker hydrocarbon sector growth., the recently approved 2017 Finance Law banks on a 3.9 percent growth rate with increased taxation to compensate for the shortfall in oil and gas revenues. GNI per [5]capita has risen steadily since 2000, reaching a peak of DZD 604 097 (US$ 5 520) in 2013. However, this fell to DZD 532 962 (US$ 4 870) in 2015, and DZD 456 356 (US$ 4 170) in 2016[6]  due to low oil prices. Inflation rose in the past few years, reaching 6.08 percent in April 2016 with an annual average of 6.4 percent. The Office National des Statistiques (ONS) believes inflation will be contained to 4.8 percent in 2017.[7]

The economy remains heavily dependent on the petroleum industry, which accounts for around two-thirds of public revenues and 95 percent of export earnings. The drop in oil prices has significantly weakened Algeria’s fiscal and external balances. Government reserves have dropped significantly, reported at, DZD12 257 billion (US$ 112 billion) in March 2017, and expected to drop to DZD 10 943 billion (US$100 billion) by the end of 2017.[8]

President Bouteflika announced a third five-year investment programme of US$ 262 billion for the period 2015-2019. However, the government subsequently revised this policy in light of lower revenues, and the new focus has been on fiscal consolidation and subsidy reform. Algeria also adopted a new constitution in February 2016, aimed at fostering greater transparency, better governance and a more market-based economy. In July 2016, the Algerian government adopted the New Economic Growth Model (NMCE) 2016-2030,[9] with a stated aim of diversifying Algeria’s economy, reducing oil dependency, and continuing fiscal consolidation. In late 2016, the African Development Bank (AfDB) approved a € 900 million loan to assist Algeria in financing their Industrial and Energy Competiveness Support Programme (PACIE). Despite these changes, non-oil growth in Algeria is expected to increase more slowly than other countries in the region[10].

These sustained budget deficits have put additional pressure on the government’s capacity to deliver its large-scale social housing programmes. These programmes remain an urgent priority as housing is a significant social and economic issue for many Algerians.[11] According to the real estate portal Lkeria.com, the average price to rent an apartment between 60 and 100m² in Algiers is DZD 60 000 (US$ 548 ) more than three times the National Minimum Wage Guaranteed (Salaire National Minimum Garantit, SNMG) which is only DZD 18 000 (US$ 164) per month.

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 the 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. To address the  liquidity crisis of Algerian banks, the government has allocated DZD 42 billion (about US$ 385.5 million) to recapitalise state-owned banks. Before the release of the 2017 Finance Law, there were also announcements that the government was considering privatising state-owned banks by listing them on the Stock Exchange,[1] which would enable them to diversify their funding. However, the law was published in October 2016 without any provisions to initiate a privatisation process. Yet, there has been some notable change towards the liberalisation of private and public companies. The provision prohibiting foreigners from holding more than 49 percent of shares in an Algerian company was withdrawn from both the Law n° 16-09 on the promotion of investment [2] and the 2017 Finance Law.[3]

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. Despite these regulatory reforms, there has been little product innovation even as lower oil revenues have put additional pressure on liquidity, increasing the need for reforms.

With the relaunch of consumer credit in 2016 banks started offering loans on consumer goods with interest rates between 8 and 11 percent.[4] 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. In 2016, outstanding bank loans reached DZD 8 000 billion (us$73 billion)[5] (45 percent of GDP). Housing finance is still an underdeveloped sector, despite the liquidity of the banking sector. However, access to finance is increasing due to government programmes that offer subsidised mortgages, the Rural Housing Programme and the Assisted Housing Programme (LPA) Households who build or improve their house in a rural area can benefit from a subsidised interest rate on their mortgage through the Rural Housing Programme. The LPA programme also facilitates home ownership with a subsidised loan for households who acquire a new housing unit in a multifamily complex. Euromonitor reported a 16.3 percent expansion in the number of households accessing a mortgage in 2017[6] (Yet, access to credit is difficult due to the lack of credit bureaus and registries. Commercial real estate finance in Algeria represents a larger share of total bank lending than retail housing finance.

State-owned banks make nearly all mortgage loans, more than 60 percent of which are attributable to the Caisse National d’Épargne de Prévoyance (CNEP).[7]  Housing finance products are offered at a rate of eight percent and for terms ranging from 20 – 40 years. The maximum loan-to-value ratio for non-government programmes is capped at 70 percent of the total unit cost. The government offers upfront down-payment assistance for households qualifying for social housing programmes, amounting to up to 20 percent of the value of the unit. The level of non-performing loans (NPLs) has been very high in the past, although it has decreased from 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 Société de Refinancement Hypothecaire (SRH), whose goal was 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 DZD 5.7 billion (US$ 52.3 million) held at the treasury, and DZD 1.4 billion (US$ 12.5 million) of its own funds. The SRH facility was

complemented by the  Law n° 06-05 on the securitisation of mortgages 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. In 2016, SRH announced that it was exploring a bond issuance to diversify its financial resources and reduce reliance on the Treasury for funding.

The main institution providing microfinance services is Algérie Poste, which was set up as a government corporation in 2002 to provide both postal and financial services. 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. 95 new branches were opened in 2016 as part of the new deployment plan. [1] However, most of these branches have been closed for security reasons. There are no specialised housing microfinance products, but Algérie Poste offers two types of savings accounts for housing, the livret d’épargne logement (LEL) with two percent interest, and the livret d’épargne populaire (LEP) with 2.5 percent interest, and acts as a service branch for 4.1 million CNEP accounts, Algeria’s largest housing finance lender.

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. It is therefore extremely difficult for low and middle income households to access housing on the private market. In 2017, the average price per square meter of an apartment in Algiers was DZD 220 000 (US$ 2 008), a 20 percent increase compared to 2016. The price per square meter of an apartment in secondary cities like Boumerdès, Blida, Tipaza, Béjaïa and Oran was DZD 130 000 (approximately US$ 1 187).[1] In 2015, the ONS reported the average annual income at DZD 39 200 (US$ 358).Despite the four percent increase from 2014, the average earnings of private sector workers (DZD 32 100, US$ 293) are below that of public sector employees (DZD 54 700, US$ 500). While Algeria has a relatively low rate of inequality with the a Gini coefficient of 36.06 (2010), the price of housing remains beyond the means of most households.  As of December 2016, the average rental price was marked at around DZD 15 000(or US$ 137) a month for a three-bedroom unit. In Algiers this rose to , DZD 62 095 (US$ 567 )[2] and DZD 35 000 (US$ 320) () in other major cities, such as Oran and Constantine. ,. Furthermore, the Ministry of Solidarity reports that 700 000 Algerian families were below the poverty line in 2015.

Housing 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 to demand. Population growth at 1.9  percent per annum, and an urbanisation rate of 2.7 percent per annum in 2015, fuel new demand for housing units in cities, with 70 percent of the total population living in cities. Waiting lists are long and the down payment on homes can also be prohibitive. For households to qualify for the middle income housing programme (Agence de l’Amélioration et du Développement du Logement (AADL) lease-to-own program), a personal contribution of DZD 700 000 and one million (US$ 6 390 – 9 128) is required upfront[3].

Housing Supply

In 2015, the Ministry of Housing and Urban Development (MHU) reported a national housing shortage of 720 000 units.[1]  Up to 20 percent of the national housing stock was estimated to be vacant (investment properties or second homes for the higher income). Meanwhile, there are approximately 500 000 precarious dwellings and two million units 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. .

The state is the major supplier of housing. In 2014, the Ministry of Housing and Settlements (MoHS) announced a target of 1.6 million units from 2015 – 2019 with an estimated cost of DZD 6 123 billion (US$ 56 billion). Half of these units were earmarked for public rental housing (LPL), 400 000 for rural areas and the remaining 400 000 for the lease-to-own program (run by Agence de l’Amélioration et du Développement du Logement, AADL, or the Agency for Housing Improvement and Development). In January 2017, 120 000 units were added to the 2019 objective of the AADL.[1] The MoHS, the Crédit Populaire d’Algérie (CPA) and the Caisse nationale du logement (CNL) have signed an agreement for a CNL disbursement of DZD 329 billion (US$ 3 billion) to finance the last 120 000 units and complete the program. Overall, housing programmes have delivered a large number of units over the past decade, with MoHU reporting 810 000 housing units built under the 1999 – 2004 housing programme and 912 326 under the 2005 – 2009 programme. DZD 3 500 – 4 500 billion (US$ 32– 41 billion) was committed for the MoHU’s programme in the 2010 – 2014 budgetary period, yet only 693 000 units of the 1.2 million units planned were actually built. 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. Moreover, serious deficiencies have been reported about the units under construction such as the lack of technical inspection, delivery delays, unfulfilled commitments, and manufacturing defects.[2]

These programmes have required an enormous amount of resources and will continue to in the future. The AADL program itself will require DZD 552 billion (US$5 billion) over the next three years.Increased private sector participation in the provision of affordable housing, through public-private partnerships for instance, is required to decrease the burden of the required investments by the government. Government capacities are limited, around 60 percent of units in the government housing programmes are estimated to have been built by the private sector. Of the estimated 1 800 developers involved in public housing construction, around 80 percent are local Algerian firms, usually working on smaller projects of less than 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.. In February 2017, the MoHS temporarily withdrew accreditation from private developers who had not registered[3] with the tableau national,[4] a formality that has been mandatory since 2012.[5]

There have been initiatives to ‘clean up’ informal settlements 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 to new units, with 9 000 households participating in government programs to build their new homes, and the rest being allocated public rental housing. The Algiers province 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

Limited land availability has severely restricted the growth of the formal real estate market. The state is the primary owner of land and only very limited amounts are made accessible to private individuals or developers. Homeownership is high, due to the cultural importance of owning a home, yet low supply has pushed up prices beyond the affordability threshold of many households. 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 162in the 2017 Doing Business report[1] for registering property, with 10 procedures  taking an average of 55 days, 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 property title when applying for a building permit. In 2017, Algeria went a step further and imposed deadlines for construction permit applications, considerably reducing processing times. Algeria moved up 42 positions in the construction permits ranking and is now ranked 77th out of 190. The process includes 17 procedures and takes an estimated 130 days.

A five percent transfer fee is charged on transaction of immovable property, plus a one 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 (, and is regressive in that the higher the purchase price, the larger the tax rebate.

The majority of households rely on public housing programmes. Other strategies of the urban poor include self-building on informally-squatted government land and buying units in the informal 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.

Housing Policy and Regulations

The government has five types of housing programmes, each targeted at different groups:

	Target Group	Income Level (DZD)	Income Level (US$)	Programme
Rental program	<1.5 SNMG[1]	< 24 000	< 220	Public Rental Housing for households earning less than 1.5 times the minimum wage, in which construction is entirely publically financed on government land and rent is extremely low, at approximately DZD 1095 – 2300 (US$ 10 – 21) per month. To make the allocation more transparent, the government has created a scoring system[2] for applicants.
Homeownership programs (Aide à l’accession à la propriété)	1 – 6 SNMG	18 000 – 108 000	165 – 9850	The Rural Housing Programme, where a household receives a subsidy of DZD 700 000 – 1 000 000 (US$ 6 390 – 9 128)0 for home improvement or new home construction, which is disbursed as progress is made.
	1.5 – 6 SNMG	24 000 – 108 000	220 – 985	AADL (Agence de l’Amélioration et du Développement du Logement): Introduced in 2001, AADL operates a lease-to-own programme for households with little down-payment capacity. Units range in size from 70m2 to 85m2. Small upfront payments are required for entry, and then the lease is guaranteed 100 percent by the state on a zero interest basis.
	1.5 – 6 SNMG	24 000 – 108 000	220 – 985	LPA (Logement Promotionnel Aidé): The Assisted Housing Programme, started in 2010, aims to facilitate home ownership for households earning up to six times the minimum wage. There is an upfront grant of either DZD 395 000 (US$ 3 600) or DZD 702 000 (US$ 6 400) to assist with down-payments and subsidised loan finance with interest rates between one to three percent. Land is provided by the government at discounted rates to developers for these projects to reduce overall cost, but demand is very high. Units are fixed at 70m2 (± three percent) at an average cost of DZD 279 000 (US$ 25 400).
	Civil Servants	NA	NA	Government Employees are also offered low-cost finance, at one percent for a house up to approximately DZD 8 800 000 (US$80 000) for higher dignatories, and DZD 5 500 000 (US$ 50 000) for others.

Demand for all these programmes far outstrips supply. Allocation procedures have come under scrutiny for mismanagement. Efforts to better regulate the application and wait-listing procedures have made some progress, yet have not gone far enough to alleviate social unrest amongst applicants.

Funding for these programs has been problematic in 2017. State-owned banks promised DZD 1 200 billion (US$ 11 billion) in 2013 to finance the government’s housing programs[1] but have only disbursed DZD 150 billion (US$ 1.38 billion) for the completion of two housing projects: 100 000 units in 2013 and 80 000 units in 2015. Additionally, between January and May 2017, foreign companies halted construction works for LPP, social housing, the AADL, and rural program due to DZD 120 billion (US$ 1.1 billion) in unpaid receivables. This resulted in the delivery of 164 000 housing units being disrupted.[2] The state-owned banks, CPA and CNEP, refused to pay the Chinese and Turkish companies responsible for the construction due to liquidity constraints[3], and in May 2017, the CNL had to disburse DZD 134 billion (US$ 1.22 billion) to pay off arrears.

However, a reorganisation of the sector is underway. The government is exploring the possibility of creating a Housing Bank (Banque de l’Habitat) with joint administration under the CNEP and CNL.[4] This new organisation would see banks as mortgage providers, and the CNL provides the provider of construction finance through the Banque de l’Habitat.

Housing Sector Opportunities

The outlook for growth in the Algerian housing finance sector remains largely positive, given the development of a stronger legal framework for mortgages, a growing number of banks offering varied housing finance options, and the renewed pressure to implement financial sector reforms in response to lower oil prices. The new law on the promotion of investment and the 2017 Finance Law considerably relaxed the 49/51 rule, sending a positive signal to foreign investors.  There has also 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 informal market. The informal sector’s annual turnover is estimated at around DZD 4 400 billion (US$40 billion).

The construction sector benefited from a drop in the price of cement from DZD 1 000 (US$ 9.11) per bag in 2016 to DZD 500 – 700 (US$ 4.56 – 6.38) in 2017, after the government intervened to reduce speculation in the sector. The Ministry of Industry expects that downward trend to continue. Additionally, the Groupe Industriel des Ciments d’Algérie (GICA) group is planning to increase its annual production to 20 million tons of cement by 2019-2020 with the expansion of three factories and the creation of two new ones in Sigus and Béchar.[1]

In July 2017, the government placed very strong emphasis on rental housing and stated its intention to shift the housing delivery emphasis from the provision of public housing towards the facilitation of privately-developed affordable housing. The government also intends to facilitate private development of homeownership programs financed through long-term mortgage loans. Public and private partnerships are expected to compensate for decreasing budgets for the housing sector.