Housing Finance in Cabo Verde

Introduction

Cape Verde, officially since 24^th October 2013 also known as Cabo Verde is an archipelago of ten islands and is 570 km off the coast of West Africa. It has a land area of 4 033 km² and became independent since 1975. Praia, the capital city, on the largest of the nine inhabited islands, has a population of 130 000, of Cape Verde’s total population of 524 832 inhabitants in 2015. One out of four Cape Verdeans lives in Praia. The country is well urbanized at 62% in 2010. The country is divided into 22 municipalities.

Annual Cape Verde GDP was estimated at US$ 3 423 billion in 2015 with a GDP per capita of US $ 6 500 in 2015. Cape Verde’s sustained economic growth over the last 40 years means that it is one of only two countries in Africa to move since 2008 from least developed to middle income categorization. GDP average growth was seven percent per year during the decade 1992-2002 and six percent from 2002 to 2008. Recent economic growth has been weaker (two percent in 2014, up from 0.7 percent in 2013), as its economy is closely linked to the global economy and vulnerable to external shocks. Cape Verde is a serviced based economy with 72% of GDP generated by services. Tourism accounts for 80 percent of the tertiary sector and 25 percent of total GDP.

Remittances from its diaspora, who amount to slightly over Cape Verde’s population, contribute substantially to its GDP (11.7 percent in 2015); 80 percent of remittances are from Europe. Deposits from Cape Verdean diaspora accounts for 37 percent of total deposits in the banking sector and growth regularly for five percent per year. Remittances are stable and a growing financial source for Cape Verde development and it is mainly used in consumption and housing investments. Ranked by GDP percentage, Cape Verde is the fifth place among countries remittance recipients in Africa. The provision of housing finance is strongly related to emigrants remittances mainly invested in real estate and construction.

In terms of imports, 40 percent, including most of Cape Verde’s imports, are from Portugal, its former colonial ruler from which it gained independence in 1975. A further 20 percent are the Netherlands, while two thirds of exports are to Spain. Cape Verde is a member of ECOWAS, though the regional block only accounts for two percent of trade. Measures, including reduced levies and taxes for imports, developing infrastructures are set up to encourage trade among ECOWAS countries.

Cape Verde undertook an expansionary fiscal policy, from 2010, to counteract a slowdown. This involved taking advantage of the concessionary borrowing rates offered to the government, trying to target investment into infrastructural developments that would help the country overcome some inhibitors of growth. This increased government debt to 116.2 percent   of GDP at the end of 2015, rising from 57 percent in 2008. The service of debt (the debt payment annually from the budget) maintains a high budget deficit estimated at – 7.1 percent of GDP in 2015. Reforms have been undertaken to increase revenue and tax collection, and social expenditure has been safeguarded from recent austerity measures.

Cape Verde ranks highly on good governance indicators, has in place strong political institutions that regulate government policy and have good relations with donor institutions, most recently securing a US$15.5 million loan from the World Bank ‘to strengthen the country’s macroeconomic resilience to external shocks’.

Access to Finance

Cabo Verde has a strong and well managed financial sector managed by one institution: the Central Bank of Cape Verde. Credit institutions, special credits institutions as saving and credits unions, non-banking institutions, insurance companies and stock exchange are supervised and regulated by the central bank.

Cape Verde created a company managing the fundos de Habitacao de Interesse Social supporting the national strategy of social housing.

Cape Verde has a relatively well developed banking sector, with seven of the eight main banks offering mortgages. The four commercial banks operating in the domestic market are members of the stock exchange.  The main banks operating in Cape Verde are Banco Comercial do Atlantico, Caixa Economica do CaboVerde, Banco Interatlantico which are branches of foreign banks and Banco Caboverdiano do Negocios which have majority local ownership. The two dominant commercial banks account for 90 percent of assets and deposits. These banks are generally risk adverse because of the high rate of non-performing loans.

This has resulted in excess liquidity in the sector, with a capital-adequacy ratio of 13 percent in 2014, above the ten percent requirement. Thus, capital has a relatively high cost and credit provided to the private sector which decreased by four percent in 2014.

In terms of government’s ability to counter this trend, African Economic Outlook 2016 argues that Cape Verde’s weak transmission mechanism limits its ability to increase the supply of credit in the market through expansionary monetary policy. Nonetheless, government has pursued this, decreasing the benchmark interest rate to 4.3 percent in 2014, from 5.8 percent, and the discount rate and the rate of their lending facility by the same amount. The generally low inflation rate (which was negative in 2014, resulting in deflation), the reasonable foreign exchange reserves and the pegging of the currency to the Euro has allowed for this expansionary approach as the high rate of debt has restricted the possibility of expansionary fiscal policy. As government is unable to take advantage of the concessionary rates on credit because of Cape Verde’s improved development status, the country is no longer LDC member, greater sensitivity of the transmission mechanism to monetary policy is important.

Stress tests in 2011 revealed the high concentration of loans in the construction sector. These loans have the highest rate of non-performance in Cape Verde. The predominant use of credit in the construction sector is for the developments for the tourist industry. The NPL rate rose to as high as 20 percent in 2013, two-thirds of which are accounted for by corporates. The remaining NPL stock, though specific rates are not publicly available, are loans by households, the majority for which is accounted for by non-performing mortgages. Banks have begun to slowly write off NPLs in order to avoid shocks to their balance sheets.

Credit to individuals for housing, according to HOFINET, increased from     US$54 million in 2000 to just under US$348 million in 2010. As of December 2013, this figure stood at over US$433 million, worth over 22 percent of GDP. Mortgage lending depends on remittances, as 40 percent of deposits held by banks are from the Cape Verdean diaspora and many Cape Verdeans depend on remittances to pay off mortgages. In terms of mortgages available, Banco Interatlântico offers mortgages, to purchase or construct a house, at 90 percent of property value, 100 percent under special circumstances. BCA offers a range of mortgages between CVE 50 000 (US$500) and CVE 30 million (US$300 000), financing between 90 and 100 percent of the value, for terms up to 30 years at an interest rate of 11.5 percent, though higher for lower income households. They generally only lend if repayments are a maximum of         30 percent of household income. Government provides subsidized interest rates on mortgages, with one scheme targeting young home buyers under the age of 30 (on average, if it is a couple). Additionally, the interest portion of mortgage repayments can be deducted from taxes due.

There are 50 000 accounts in the microfinance sector, making the potential size of housing microfinance (HMF) small. And, according to MFW4A, 75 percent of unemployed Cape Verdeans were unaware that they could access credit through microfinance. Though not only a microfinance bank, recently launched Novo Banco focuses on providing microcredit and serving low income households. Microfinance is used for rebuilding and rehabilitation of houses owned by vulnerable groups. Mobile banking has potential for more formal finance, 75 percent of the adult population in the archipelago own a mobile phone. Mobile banking drives people to the formal financial system. This can improve deposits to formal sector and could spur private credit. Almost 55 adults in 1 000 have a bank account. In 2015, electronic banks operations account for 78,5 percent of total operations in Cape Verde. The short term funding base needs to be convert to long term finance mobilizing pension funds, insurance, long term deposits to feed capital markets. Two major bonds targeting housing and real estate were launched in 2014 and 2015. In addition to this, Cape Verde needs sovereign investment funds and private subscription.

Lastly, the Cape Verde bond market is nascent. The Cape Verde capital market is dominated by commercial banks and consequently it depends on external financial flows as development aid, foreign direct investments, and remittances. It is important to develop a capital market for diversifying loan sources and making affordable long term financing work for housing sector.

Housing Affordability

Listings for one bedrooms are for around EUR 25 000 (US$28 000), but go lower. Though the Global Property Guide states that, on average, the price per m2 is US$1 300, there are units available for considerably less. There are units available as small as 25 m2, at EUR 800 (US$903) per m2. Of housing advertised by estate agents on Santiago, a two bedroom unit costs CVE 6 million (US$60 000) to purchase, while another two bedroom unit was from  CVE 20 000 (US$200) a month. Prices go up to, and past, CVE 24 million (US$250 000) at the high income end of the market.

Transactions costs remain high in Cape Verde formal housing market. Around 13.5 percent is distributed between five percent of agent’s commission paid by seller and buyers have to pay three percent of taxes, 2.5 percent of registration fees, and three percent of legal fees.

This is quite high considering Cape Verdean GDP per capita of US$ 6 500 in 2015. To address this, government has launched the “Casa Para Todos” programme, which is examined below, and it tries to accommodate low income households, with rent set to a ratio. Though, only one third of units are being built will be affordable to low income households, despite them making up 75 percent of the demand.

The biggest affordability issue for housing in Cape Verde remains having to import most of the required building materials. There is no cement manufacturing plant in the country, with most imports coming from Portugal. Cempor, which is part of InterCement, is the largest company operating in the market, but saw sales of cement drop by seven percent in 2013, selling 176 metric tons in the year. In 2011, the country imported a total EUR 21.5 million in cement, its second largest import. The sales of cement, and other construction materials, are VAT exempt.

Housing Supply

In 2011, according to the IMF, the country had a housing deficit of 85 027 housing units, the result of which are the informal settlements around the major cities. Almost 58 percent of housing deficit is in Santiago Island and 25 percent in capital Praia. The United Nations Commissioner for Human Rights issued a press release for a report published in 2016 on housing in Cape Verde.

The Cape Verdean government has undertaken initiatives to increase the supply of housing since 2004, even deeming 2009 as the ‘Year of Housing’. To mark this year, Casa Para Todos was launched. The programme aimed to meet the quantity and quality challenges reducing the housing deficit by 20 percent by 2016 by building 6 010 units and improving or rehabilitating 24 percent representing 15 843 housing units before 2016.  A national system for social interest housing is set up and supported by a special financial tool the Fonds National d’Habitat d’Interêt social. For this, a EUR 200 million loan from the Portuguese government was granted. In August 2015, an article in the press stated that a delayed disbursement of EUR17 million by Portugal. The suspension, it was claimed, was because Cape Verdean government was not paying ten percent of the costs, as per the agreement. There is confusion over the number of houses completed, and reports state that only 800 are occupied, as a study of the programme has not been publicly released. Beyond Case Para Todos, there is Operation Esperanca, launched in 2003, implemented in Cape Verde Solidarity Foundation, which has rehabilitated 3 000 homes. Now, the target is to rehabilitate, expand or rebuild 18 000 houses with about 50 000 persons as beneficiaries. Rehabilitation is a main challenge; it is allowed to improve both housing stocks and new constructions. Improvements of old and precarious houses could spur the property markets, expanding it to poor and vulnerable people.

Property Markets

There are a number of established estate agents, offering rentals and properties at a wide-variety of price points. They are relatively formal, and operate on Cape Verde’s larger islands. Many realtors cater to the international market, particularly potential expats or Europeans looking for a holiday home. This suggests the strong performance of the upper end of the market. Banking sector continues to expand and non-performing loans decreased. (www.heritage.org)

Property is subject to a three percent property tax, 2.5 percent registration fee and a three percent legal fee, all payable by the buyer. Real estate agents generally charge five percent of the property value, which is paid by the seller. This is according to the Global Property Guide. The World Bank Doing Business Indicators 2015 state that the cost of registering a property is 3.7 percent of its value, perhaps lower because of reforms in 2012. Registering property takes 22 days and involves six procedures.

Confidence in the construction sector worsened in 2014, according to the BCV, and has constantly remained lower than other sectors. At the same time, imports of building materials was up in the first half of 2014, increasing on average of 16 percent month-on-month after two consecutive years of decline. Cement imports have also improved, from March to July 2014, but not to the same levels of imports of building materials.

Housing Policy and Regulations

The microfinance sector is regulated by the BCV, under specialised microfinance legislation introduced in 2010. This legislation should be updated this year, allowing MFIs to take deposits, increasing transparency of the sector and encouraging foreign investment into the sector.

The rental market is regulated, allowing for a maximum increase of 8.3 percent a year. The tenant has the right to reject a suggested rental increase, and terminate the rental agreement with one month notice if this happens. In addition, if the contract does not explicitly stipulate future possible rental increases, the landlord may not raise rentals for a period of five years. Landlord’s are not allowed to demand more than a month’s rental upfront, and can only evict a tenant with permission from a court. The rental legislation is Decree-Law 47.344, of 25 November 1966, as amended by Decree-Law 12-C/97, of 30 June 1997.

Other important policies and regulations that should be noted is the requirement of tax clearance to purchase property, as the municipality will only transfer the deed once property taxes are paid. All transfers involve site inspections by municipalities. In 2013, Cape Verde introduced tax incentives for large investments, and in 2014, it commented digitisation of its deeds registry. The National Urban Policy is currently under elaboration, a national housing policy is currently being drawn up and there are plans to establish a National Habitat Committee, all by the Ministry of Environment, Housing and Territorial Planning, with the assistance of UN Habitat.

Housing Sector Opportunities

Cape Verde has a relatively well developed housing and housing finance market. However, as the global economy continues to slow down, and the country growth plateaus, there will be increasing demand for more affordable housing. At the same time, a significant portion of the housing stock will be in need of refurbishment in the coming years, while the housing backlog continues to be substantial, considering the size of the population. If efforts to increase trade with West Africa are effective, it’ll open up Cape Verde to new markets, hopefully decreasing the costs of construction in the country. Overall, a stable exchange rate, an expansionary monetary policy, flexible taxation for investments and a relatively sophisticated mortgage market provides many opportunities for housing development.