Housing Finance in Cabo Verde

Introduction

Since the global financial crises, Cabo Verde has struggled with slow economic growth and deflation. After adopting a counter-cyclical expansionary fiscal policy in the face of the slowdown, the government now hopes that a series of reforms will improve private sector development. With European economies improving, resulting in an increase in tourism and remittances that underpin the economy, the outlook is now positive.

Cabo Verde has a total population of 539 560 inhabitants[1]. Of this population, 66.2 percent live in urban areas and 61.4 percent (of adults) are employed. The economy grew an average of seven percent during the decade 1992-2002 and six percent from 2002 to 2008. Recent growth has been weaker (0.8 in 2013, 0.6 in 2014, 1.1 in 2015, and 3.9 percent in 2016), as vulnerabilities to the global economy and external shocks have taken their toll. There is little forex risk, as the Cape Verdean Escudo (CVE) is pegged to the Euro, and this has resulted in an almost deflationary environment—the inflation rate has decreased from 1.5 percent in 2013 to 0.1 percent in 2015.

The expansionary fiscal policy that has propped up the economy started in 2010, as the government took advantage of concessionary borrowing rates from international lenders, investing heavily in infrastructure. This increased government debt from 57 percent in 2008 to 125.9 percent of GDP in 2016[2]. The government does not fund debt through Treasury Bills, although this could change in the future as the concessionary rates are an artefact of the times when Cabo Verde was categorised as a low-income country. The central bank has slowly undertaken an expansionary monetary policy, reducing reserve levels and the central bank lending rate in a bid to boost the rate of inflation and economic growth.

Mortgage finance forms an integral part of the financial sector, accounting for 70 percent of credit to households and 35 percent of total credit, which is equivalent to 23 percent of GDP. This figure, though high, is constrained by the poorly performing finance sector, the lack of economies of scale, a necessary dependence on imports for construction materials, and recent economic performance.  The financial sector, in particular, is an area of concern, with low return on assets (ROA) and return on equity (ROE), high costs to income, and a high interest rate spread. The microfinance sector is relatively small, but there are hopes for growth as new laws regulating the sector take effect.

Access to Finance

Since the global financial crises, Cabo Verde has struggled with slow economic growth and deflation. After adopting a counter-cyclical expansionary fiscal policy in the face of the slowdown, the government now hopes that a series of reforms will improve private sector development. With European economies improving, resulting in an increase in tourism and remittances that underpin the economy, the outlook is now positive.

Cabo Verde has a total population of 539 560 inhabitants[1]. Of this population, 66.2 percent live in urban areas and 61.4 percent (of adults) are employed. The economy grew an average of seven percent during the decade 1992-2002 and six percent from 2002 to 2008. Recent growth has been weaker (0.8 in 2013, 0.6 in 2014, 1.1 in 2015, and 3.9 percent in 2016), as vulnerabilities to the global economy and external shocks have taken their toll. There is little forex risk, as the Cape Verdean Escudo (CVE) is pegged to the Euro, and this has resulted in an almost deflationary environment—the inflation rate has decreased from 1.5 percent in 2013 to 0.1 percent in 2015.

The expansionary fiscal policy that has propped up the economy started in 2010, as the government took advantage of concessionary borrowing rates from international lenders, investing heavily in infrastructure. This increased government debt from 57 percent in 2008 to 125.9 percent of GDP in 2016[2]. The government does not fund debt through Treasury Bills, although this could change in the future as the concessionary rates are an artefact of the times when Cabo Verde was categorised as a low-income country. The central bank has slowly undertaken an expansionary monetary policy, reducing reserve levels and the central bank lending rate in a bid to boost the rate of inflation and economic growth.

Mortgage finance forms an integral part of the financial sector, accounting for 70 percent of credit to households and 35 percent of total credit, which is equivalent to 23 percent of GDP. This figure, though high, is constrained by the poorly performing finance sector, the lack of economies of scale, a necessary dependence on imports for construction materials, and recent economic performance.  The financial sector, in particular, is an area of concern, with low return on assets (ROA) and return on equity (ROE), high costs to income, and a high interest rate spread. The microfinance sector is relatively small, but there are hopes for growth as new laws regulating the sector take effect.

Housing Affordability

In the absence of easily accessible publications on the property market, it is difficult to assess average property prices. Caixa has properties listed from CVE 2.7 million (US$ 28 800)[1] and BCA from CVE 3.8 million (US$ $40 527)[2]. The lowest priced property is EUR 25 000 (US$ 29 354) on Cape Verde Property[3], and EUR 28 000 (US$ 32 877) on Nôscasa[4] and Cabo Verde Imobiliaria[5]. This indicates that properties on the formal market will likely start at CVE 2 million (US$ 21 330).  Global Property Guide states that, on average, the price per a square metre is US$ 1 300[6], but there are likely properties that cost less than this. From the advertisements on the websites, houses sell for between EUR 40 000 and EUR 80 000 for the middle of the market and over EUR 100 000 at the upper-end of the market. The cheapest newly built house by a developer in 2017 is built by IFH and on sale for CVE 2.9 million (US$ 30 929)[7].

In terms of affordability, the mortgage calculator on website of BCA has the monthly repayments for a mortgage worth CVE 2 million, with a term of 30 years and an interest rate of 11.5 percent, at CVE 19 000 (US$ 200)[8]. Considering that generally it is advised that no more than a third of income is spent on housing, the household would have to earn CVE 60 000 (US$ 607) a month, or CVE 720 000 (US$ 7 300) a year. This is quite high considering Cabo Verdean GDP per capita of US$ 3 080 in 2015[9].

There are fewer advertisements for rental properties, and it is not clear what average market prices would be. Instituto Nacional de Estastica (INE), the national institute of statistics, publishes data for the section of the consumer price index that accounts for “rent of housing, water, electricity, gas and other fuels”, which decreased by four percent from 2015 to 2016, which is less than the 11 percent decrease from 2014 to 2015. Though this is for a basket of goods, it does suggest that prices in the rental market are stable or decreasing.

Housing Supply

The 2010 census counted 114 469 housing units, 73 percent of which are single story and 18 percent are two-story[1].  In terms of construction, 10 percent of units were constructed between 2005 and 2010, while nine percent were constructed between 2000 and 2004. There are 20 135 buildings registered on the deeds registry[2]. The most recent figure for the housing deficit cannot be accurate considering the census numbers, as it put the figure at 85 027 housing units in 2010[3]. The deficit is mostly accounted for by the large number of households living in informal settlements around the major cities. The lack of adequate housing supply in Cabo Verde resulted in the United Nations Special Rapporteur on Human Rights issuing a press release in 2015 urging the country to prioritise housing for the poorest Cabo Verdeans[4].

There are a number of proxies that can be used to grasp market trends. Construction accounted for 7.92 percent of GDP in 2015, down significantly from nine percent in 2014, while real estate accounted for 7.95 percent of GDP in 2015, roughly the same amount as the previous year (8.03 percent)[5]. INE publishes an index that tracks the use and sale of construction materials[6]. The index shows an improvement in the use and sale of materials from 2016 and 2017 compared to 2015. In contrast, the indicator for base materials, which includes cement, steel, sand and other essential construction materials, decreased by 11.7 percent from 2016 to 2017. The second quarter of 2017 recorded a 12.8 percent quarter-on-quarter increase in the use of cement

INE also publishes a range of survey data on Cabo Verdeans. The data[7] shows that 78.6 percent of households live in free-standing houses, compared to 20 percent who live in apartments. In terms of building materials, 84.4 percent of residents live in units that are constructed out of reinforced concrete, while 50 percent of residents have cement floors and 48.8 percent have mosaic flooring. This data reflects the results of the remarkable development of Cabo Verde since the 1980s. Another published variable records the number of divisions within a house, which can be used as a proxy for the number of rooms: 28.6 percent of households have one division, 34.8 percent have two, 22.9 percent have three, and 13.8 percent have four or more. From this, it can be assumed that most houses have three rooms, and few have five or more.

The  government has undertaken initiatives to increase the supply of housing since 2004, culminating in 2009 being declared the ‘Year of Housing’. To mark the ‘Year of Housing’, the Sistema Nacional de Habitação de Interesse Social (SNHIS) was launched. Informally known as Casa Para Todos,it took the form of a programme providing affordable mortgages to low income households through Novo Banco. The programme intended to build 8 500 units: 3 650 for households earning less than CVE 40 000 (US$ 426) a month, 3 100 for households earning between CVE 40 000 (US$ 426) and 100 000 (US$ 1 066), and 1 750 for households earning between CVE 100 000 (US$ 1 066) and CVE 180 000 (US$ 1 919). The Portuguese government undertook to provide a EUR 200 million (US$ 233 million) loan to support the programme, but it is not clear if the loan was paid out. As a result, there is confusion over the number of houses completed under programme, as figures have not been publicly released. However, the SNHIS, which was enshrined in legislation in 2010 and updated in 2014, continues today as an interest rate subsidy for mortgages.

Property Markets

Cabo Verde has an efficient property registration system. Using the Ease of Doing Business indicators as a proxy for housing, registering a property takes 22 days, the same as OECD high income countries, and costs 2.3 percent of the property value, below both the OECD (4.2 percent) and Sub-Saharan Africa (eight percent) rates[1]. The country has a functional deeds registry, which takes between one and three days to obtain a certificate proving ownership of a property. Since 2010, when the law governing the land registry was passed, there is an electronic registry that anyone can search for free. The registry does not yet include all properties in Cabo Verde. There is also an electronic database that can be checked for mortgages on the property, but there is no electronic database on cadastral information.

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 Cabo Verde’s larger islands. Many realtors cater to the international market, particularly potential expats or Europeans looking for a holiday home. Cabo Verde recently introduced a law that grants residence visas to investors who purchase a property for more than EUR 80 000 (US$ 93 788) in municipalities where GDP per capita is lower than the national average and for more than EUR 120 000 (US$ 140 682) where GDP per capita is higher than the national average[2].

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[3].

Housing Policy and Regulations

The reforms pursued by the government since the economic slowdown have been extensive and varied. On the regulatory side, new laws have been passed for the financial sector (Lei n. 61/VIII/2014 and Lei n. 62/VIII/2014) and microfinance sector (Lei n. 83/VIII/2015), urban planning (Lei n. 60/VIII/2014), and are under consideration for a deposit guarantee fund and land use management. These laws follow a flurry of laws that were passed around 2010.

The rental market is regulated, allowing for a maximum increase of rent by 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.

Another important regulation is the requirement for tax clearance to be issued 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, Cabo Verde introduced tax incentives for large investments, and in 2014, it commenced with the digitisation of its deeds registry. The poverty reduction strategy for 2012-2016, Estratégia de Crescimento e de Redução da Pobreza III (2012 – 2016), aimed to decrease the housing deficit by 20 percent, supporting the households in the purchase of 8 500 units and refurbishing 15 000 units[1].

Housing Sector Opportunities

With the global economy largely recovered, Cabo Verde’s outlook is promising. The financial sector is large despite its need for competition, mortgages are relatively easy to access and offer long terms, and the government is doing its utmost to encourage private sector development. The new microfinance law has opened the market up to new entrants, entrants who will hopefully offer the housing microfinance that is needed by households living informally in urban areas. The small population prevents large-scale developments, but a stable exchange rate, an expansionary monetary policy, flexible taxation on investments, and a relatively sophisticated mortgage market provides many opportunities for housing development.