Housing Finance in Burundi

Introduction

Burundi’s political environment is steadily stabilising following bouts of instability that have, often, characterized the development of the country since her independence in the 1960s. The most recent wave of civil unrest was witnessed in 2015 with the disputed reelection of the incumbent president. The crisis claimed over 500 lives and displaced over 300 000 residents. While violence has significantly decreased across the country including the city of Bujumbura in 2017, the flow of Foreign Direct Investments has been greatly hampered declining from US$7 million in 2015 to US$ 0.1 million in 2016[i].

Economic growth remained negative for most of 2016 and began to slowly rise to 0.9 percent by mid-2017 due to a fragile political environment. Additionally, there was a noted decline in private sector spending, borne from a contraction in industrial output to -16.9 percent in March 2017 from 24.24 percent in May 2016, and a decline in food production on account of climate shocks and political emigrations[ii]. External trade has also worsened with a 14.4 percent decline in exports from BIF 14 525.2 million (US$ 8.4 million) to BIF 12 636.7 million (US$ 7.29 million) in January 2017. This translated into deeper trade balance deficit at BIF 80 703.8 million (US$ 46.5 million) in January 2017 from BIF 58 933.1 million (US$ 33.99 million) in January 2016.

On a positive note, the country is slowly beginning to witness growth in private investment over the recent months as consumer agro-industries and the cement industry recover, resulting into a 0.9 percent growth rate as at July 2017, on account of resurgent domestic demand. The moderately tight monetary policy stance pursued by the Banque de la République du Burundi has resulted in maintenance of headline inflation at six percent, well below the East Africa Community’s regional integration convergence level of eight percent. This gave a glimpse of hope to the struggling real estate sector by keeping property prices in check and encouraging long-term investors.

The above notwithstanding, Burundi’s GDP per capita has further declined from the decade long average of US$256 to US$227 in 2015 and US$218 by December 2016. This is likely to have a significant impact on affordability of housing units in the country from an average mortgage of US$10 000 to US$7 800 for 20 years at an interest rate of 16 percent per annum.

The structure of the economy remains rural and agrarian, with over 90 percent of the population engaged mainly in agriculture. The urbanization rate, estimated at 12 percent in 2015, declined to 2.08 percent in 2017, compared to an average of 37% in Sub-Saharan Africa. Agriculture, particularly agribusiness, is central to the urban growth strategy of the country, and the overall goal is to support higher agricultural productivity to respond to the growing local demand, and encourage trading of agricultural surpluses to promote non-agricultural activities (for example, tourism) in urban areas.

The impact of the political crisis on the capitalization of the banking sector was insignificant, thanks to a high proportion of deposits being held by commercial banks. At the end of January 2017, the liquidity ratios both in local and in foreign currency remained above the regulatory threshold of 20 percent (Liquid Assets/Total deposits). Banks maintained an average liquidity ratio of 57 percent for local currency. Whereas this position is commendable for ensuring financial sector stability, it is observable that such high holdings impede the process of credit creation by commercial banks. On this note, financing the housing sector is likely to be affected as banks implement caution towards lending and maintain high levels of liquid assets.

On the financing front, domestic credit to individuals and commercial entities has been on the decline, receding from BIF 134.9[iii] billion (US$ 77.81 million) in December 2016 to BIF 91.6 billion (US$52.83 million) in January 2017 on account of the uncertain political and economic environment. However, there was a trend reversal by March 2017 with domestic credit rising to BIF 130[iv] billion (US$74.98 million) by the close of the first quarter. Overall, the total banking sector assets increased by 12.8%, from BIF 1647 billion (US$ 949.96 million) in January 2016 to BIF1858 billion (US$1 071.6 million) in January 2017. The recorded increase was chiefly due to the rise of Treasury bill and treasury bonds with a share of 23.4% of total assets. From the above overview, it is clear that banks increased their investments in treasuries while loans to individuals declined. As the economy stabilizes and more personal loans are approved, total assets will increase.

Bank deposits are beginning to increase as the economy becomes more stable rising from an average of BIF 254 billion (US$ 146.5 million) in 2016 to BIF 263 billion (US$ 151.7 million) in March 2017[v]. This suggests that the investment climate has not been conducive and individuals/corporate find it convenient to hold their money in banks until the economy stabilizes.

Access to Finance

Burundi’s financial sector remains sound, despite going through a period of civil unrest. The banking sector, comprising ten commercial banks, is adequately capitalized and has sufficient capital buffers to absorb inherent risks. The total capital Tier 2 and the core capital Tier 1 adequacy ratios have remained above the regulatory requirement that encompasses the capital buffers requirement of 12.5 percent and 14.5 percent. These two critical measures of bank soundness have recorded an improvement, with total capital ratio increasing from 19.8 percent in January 2016 to 22.9 percent in January 2017, while the core capital ratio increased from 23.2 percent to 26.6 percent over the same period. This improvement in the banking industry’s soundness is likely to provide strong support for large housing finance project deals over the medium term as the country recovers from the downturn.

The banking industry has also experienced a decline in portfolio quality with an observed growth in loan impairment from 17.8 percent to 22.1 percent at the end of January 2017.Over the same period, overdue loans increased by 10.1 percent from BIF 186 096.3 million (US$ 107.34 million)to BIF 204 904.4 million (US$118.19 million) in January 2017.

The tourism and hostel sector was most affected by the political unrest translating into poor performance of loans advanced to this sector with up to 34.8 percent of total advances becoming impaired. Impairments for the construction sector stood at 25.9 percent while manufacturing impairments were 15.5 percent in January 2017.

Against these relatively high rates of impairment in the banking industry and provisioning requirements escalating to 89.8 percent, lenders have become a lot more cautious over the past few months until June 2017 in a bid to avoid significant losses. Several banks have restricted access to finance for large borrowers with preference given to small loans whose impact in terms of loss given default is fairly small. Loans to large exposures are 15.1 percent of total loans in June 2017. This trend is likely to affect developer funding for the housing sector given that most of the sector developments require significantly high financing from lenders.

The increase in impairment provisions and restrictions in large exposures have significantly affected the financial sector’s profitability for the year. Compared to the same period of the previous year, the banking sector’s profitability declined by 7.7%, falling from BIF 3 220.7 million to BIF 2 974.3 million at the end of January 2017. The return-on-Assets (ROA) remained at 0.2 percent and the return-on-equity (ROE) ratios dropped from 1.3 percent to 1.1 percent, year on year basis.

Despite the civil unrest that distorted key operations in the financial sector, there was an observed growth in general bank liabilities in Burundi. As at March 2017, BIF 867 460 million was held as deposits in commercial banks compared to BIF 743 527 million for March 2016.  MFIs on the other hand held BIF 44 059 million in deposits as at March 2017 compared to BIF 48 754 million a year earlier. Despite this 9.6 percent drop in MFI deposits over the year, the observed 16.7 percent growth in commercial bank deposits resulted into a BIF 119.2 million overall growth in deposits for the financial sector. The variance in growth trend between commercial banks and MFIs can be attributed to customers’ view of the soundness of the institutions and therefore translating into confidence to keep higher deposits with commercial banks compared to MFIs during periods of political uncertainty.

On the credit side, there has been a 52 percent decline in overall loan and advances approved by commercial banks over the year to March 2017. Consolidated loans figures declined from BIF 273 264 million in March 2016 to BIF 130 042 in March 2017, chiefly on account of the civil unrest that distorted the economic and investment environment over the period. Normalcy arising from political calmness has seen a reversal in the trend, starting January 2017 with loans approved rising from BIF 91 642 million in January 2017 to BIF 107 599 million in February 2017.

Despite the year-on-year drop in general loans and advances in the economy, loans to the housing sector indicate a positive trend, rising from BIF 78 597 million in March 2016 to BIF 94 155 in March 2017. This can be attributed to the long term nature of housing loans and the inability to liquidate such loans at short notice. The loan balances therefore tend to remain stable over the long term and can be increased when earlier committed amounts are disbursed to complete the projects for which the loans were approved. Interest rates on these loans for commercial banks have been ranging between 16% and 19% per annum, calculated on declining balance.

Three banks (the Burundi Bank of Commerce and Investment, Eco Bank Burundi and KCB Bank) and the two Financial Institutions (the Fund for the Promotion of Urban Housing and the National Bank for Economic Development), offer housing and real estate loans. Housing and real estate loans range between BIF 500 000 and BIF 50 000 000, for a tenor of between four and 20 years, at high interest rates of between 16 and 19 percent. Medium-term mortgages (maturing in two to seven years) account for 33 percent of the total stock of loans granted by the institutions in March 2017, rising marginally from 32 percent in March 2016. Long-term mortgages (15 to 20 years) increased from 17 percent in March 2016, to 20 percent in March 2017. The Fund for the Promotion of Urban Housing (FPHU) is still the largest housing finance lender, and accounts for about 72 percent of the market, largely focusing on the middle and high income earners. As of 2016, its loan portfolio surpassed US$ 7 million, with over 40% percent of which being mortgage loans.

Housing Affordability

Burundi suffers from low household incomes that greatly affect affordability for housing units and eligibility for housing finance in the country. Modest income households earning between BIF 4 000 (US$3.3) to BIF 50000 (US$42) constitute 81 percent of the working population. Sadly, the country’s high annual population growth of 3.2 percent and the youthfulness of the population underline a demographic challenge to the country’s undeveloped housing and housing finance sector/industry.

The recent civil unrest exacerbated the affordability challenge in the country, largely through corporate downsizing or total closure of operations in Burundi. In the Financial sector, Ecobank Burundi retrenched over 70 workers, citing poor economic performance and low profitability. Data from the United Nations indicates more than 300 000 people were reported to have fled the country and thousands disappeared without trace. Most of the civilians who fled the country were engaged in productive employment in the Burundi. With a population of 11.8 million, such massive emigrations, accounting for 2.6 percent of the population greatly affected the economy and hampered the performance of key operations of many corporate entities in Burundi, as was the case with Ecobank, discussed earlier in this paragraph.

Given that the average monthly net salary (after tax) for Burundians is US$ 64.98, it is unlikely that such low income earners can afford a two bedroom house, at about US$ 25 000 on the property markets. Regretably, prospective individual developers would equally struggle to put up a similar two bedroom house at the lower side of US$15 000. Acquiring a mortgage will also be an uphill task for most Bujumbura low income earners given the Mortgage Interest Rate is at an average 16 percent and their incomes are below the minimum BIF 1 million required by banks to offer mortgage finance.  Less than 0.1% of the population earn above BIF 1 million.

For those in the middle and high income brackets (above BIF 1.5 million) the average mortgage taken up from financial institutions is about US$30 000. Through subsidies from the government and development partners such as Habitat for Humanity, complemented by beneficiaries input (in kind contribution), 39 460 households were able to purchase a dwelling and use rehabilitated social facilities. However 540 000 families are still internally displaced or likely to return from abroad without any homes to go to.

Housing Supply

The legal framework does not foster the creation of a viable housing sector and mortgage market. Government housing policy does not reveal any clear strategy, and there is no coordination among the bodies responsible for its successful implementation.

The supply side of housing units in Burundi is dominated by individual home-owners establishing their homes for occupation and a few more low cost units for rental purposes, particularly in the major urban areas. The basic type of housing in the rural areas is the grass-thatched hut, made of wooden poles and covered with mud.

High interest rates and immature mortgage markets in Burundi have hampered sales volumes. Interest rates have remained high at 16.5 percent, impeding affordability for low income households. Banks are reluctant to finance developers because of the difficulties in off-loading stocks of houses, given the low level of incomes and the weakness of developers (with respect to cash flow analysis and marketing budgeting). This has led to a stagnation of development projects, particularly in the mid-market segment with the exception of high-end residential property sales. For example, the civil servants housing project, of about 2 000 units, by Biz Planners, has since 2014, been on halt. Each house was planned at US$ 30 000.

Construction costs are relatively high as most of the building materials such as cement, steel bars and roofing iron sheets are imported and overland transport costs are relatively high. For instance , the cost of a 50 kg bag of cement is US$25 compared to US$8.9 for the same 32.5 grade 50 kg bag in Uganda. In terms of delivery of housing units, this high cost translates into over US$31 000 for a one bedroom structure compared to US$20 000 for a similar unit in Uganda.

Furthermore, the poor quality of construction in commercial as well as residential space has resulted in lesser take-up of such properties, leading to dead supply stock in the market. For example, 27 three-bedroom houses, by Agglobu Ltd, have been on the market for over three years. The houses cost between US$ 205 000 and US$ 225 000.

To respond to the need for more housing units, a new and attractive social housing project “the new Rugo” has been kick started with the blend between modern and traditional building style. It combines the tenets of traditional design and the modern parameters to achieve social housing concepts that cut across the low income to middle income markets.

The Rugo is the traditional Burundi & Rwandan houses and is the backbone for the New Rugo project. New Rugo is majorly a low-cost housing project that draws its inspiration from vernacular solutions, mainly the Rugo. It is typically comprised of three houses that can be valued independently at an average price in the region of US$ 35 000. With low cost technologies and cultural appropriateness, the developed housing is aimed at empowering fragile communities in Burundi.

Property Markets

Eighty perecent of the property market in Burundi is residential. Bujumbura the capital city has traditionally been occupied by nearly 50 percent non Burundians who are mostly nationals of neighbouring countries like Tanzania, DR Congo, Uganda and Europe.

Monthly rent for 85 m² furnished accommodation in a prime area in Bujumbura is estimated at about BIF 3 million per monthly. A 45 m² furnished studio in similar area is estimated at about BIF 0.5 million. Utilities for one month (heating, electricity, gas) for one person in 45 m² studio is BIF 100 000. And yet the average monthly income for a household renting is about BIF 45 000.

The market space for land, residential and commercial real estate in Burundi remain both underdeveloped and depressed. The country suffers from the dearth of real estate listing agencies. Most agencies available are based in neighboring countries including Kenya and Rwanda. Additionally, property valuation firms are in short supply. Knight Frank, based in Uganda has been the leading provider of real estate valuation services in Burundi for a long time. Large scale construction projects are dominated by foreign firms, largely from China.  On the whole, the country’s property market is still in its infancy. There are a limited number of market participants on the supply side, largely due to low levels of market demand as determined by low income levels of over 60 percent of the country’s population.

Targeted construction and delivery of low priced housing units would be appropriate in such a market. However, in the absence of appropriately positioned developers and sizeable government incentives, delivery of affordable housing may remain unachievable in the short to medium term. Additionally, reduction in budget support and foreign aid has incapacitated the government and increased its inability to build support infrastructure for the housing sector in terms of energy and transport facilities.  With half of the country’s budget slashed on account of reduced foreign aid, government investments for housing infrastructure are likely to be affected, translating into slow growth in property markets in the country.

Housing Policy and Regulations

Burundi’s National Urban Planning and Housing Policy provides the regulatory framework for the management of water, environment, land and the urban developments. The policy was introduced with the core objectives of promoting a coordinated management of the environment, sound management of land, water, forests, and air, and the preservation of ecological balance.

The policy is intended to promote social development and allow each Burundian to have access to high quality housing and basic services. In formulating this policy, the government intended to create an enabling framework for the development of 855 hectares of land and construction of 26 000 homes annually. In addition to the policy, the government issued a decree in January 2014 on the structure of the National Commission on Land and Other Assets (CNTB). The CNTB, established in 2006, is authorized to resettle refugees who return and to resolve land disputes. Since its inception, over 38 000 cases have been handled and determined. The commission has been instrumental in determining land ownership and therefore housing developments on such land for the last decade.

Housing Sector Opportunities

Burundi has experienced relative peace over the last few months. Political refugees have started to return to the country after establishing that there is safety in the country. As more individuals return to their former places of work and increase the productive capacity of the economy, there will be need to construct housing units for their accommodation. Due to the general level of income in the country, development of affordable housing units will need to be encouraged through appropriate government incentives. Alongside the incentives, financial institutions will need to develop appropriate financing products to accommodate the needs of low income earners desiring to become home owners. Additional opportunities would exist in the wider financial sector comprised of the pension industry and the insurance industry. Traditionally, these two segments have provided long term finance to boost the mortgage market in several countries globally. There is therefore a need to have renewed housing focus by the of L’Institut nationale de sécurité sociale (INSS), the leading pension services provider in Burundi. The availability of least priced mortgage financing is likely to increase the number of people eligible for mortgage finance who would in turn increase demand for affordable housing units. This would then translate into an increase in the delivery of housing stock for such client segments. However, all this would be dependent on a stable political and economic environment coupled with an enabling regulatory framework.