Housing Finance in Djibouti

Introduction

The Republic of Djibouti, independent from France since June 27, 1977, is a small country in the Horn of Africa, located on the west coast of the southern outlet of the Red Sea. It is surrounded by Somalia, Ethiopia, Eritrea and Yemen. Djibouti is also the name of its main city and capital. As per the latest estimates from National Department of Statistics and Population Studies (DISED), Djibouti has 939 298 inhabitants in 2014 with a population growth rate of 2.8%[1]. A feature of the Djiboutian population is that it is largely urban (85%) and the capital, Djibouti City, concentrate over 65% of the total population. The official languages are French and Arabic.

Considered as a hub in the Horn of Africa due to its geostrategic position between Europe and Asia through the Red Sea and Africa to the Gulf countries in the Indian Ocean, Djibouti attracts significant investment in tertiary sector (TIC, Ports). Besides the presence of a French military base, Djibouti also hosts several other military bases, including the only military base of the United States in Africa (AFRICOM).

The Djiboutian economy recorded a slight increase in its GDP growth estimated at 6.5% in 2015 compared to previous year’s estimated at 6% in 2014 and 5% in 2013[2]. GDP is driven by investment and Djiboutian economy is expected to grow further in 2016. Inflation has decreased in 2015 to 2% against 3% in 2014 thanks to lower oil prices and government measures on kerosene that affected consumption. The Djiboutian economy is dominated by the service sector contributing 79.2% of GDP in 2014[3]. Port activity is the main driver of the tertiary sector. It focuses mainly on the transit activity with Ethiopia. The secondary sector burdened by the high cost of production in the country accounts for 18% of the national economy while the primary sector is estimated at only 2.8%[4].

The construction sector in the Republic of Djibouti has experienced sustainable growth since the late 90s. The construction sector has a relatively important place in the economy given its contribution to the creation of employment and its ripple effects on many income-generating activities. The investment volume of the building sector into the economy has reached in 2014 more than 38 billion Djibouti francs (US$ 215 million) against 33 billion in 2013 (US$ 186 million), representing an increase of 15%. This trend is expected to continue in 2016 with the ongoing number of construction projects whose outcome will upgrade significantly the urban landscape of Djibouti city.

Taking advantage of its geo-strategic position, Djibouti hopes to accelerate its regional integration process with the development of its infrastructures (roads, railways and telecommunications and oil pipelines) mainly with Ethiopia and beyond (South Sudan). Besides the upcoming inauguration (end of 2016) of the new electric Railway connecting Djibouti to Addis Ababa, another railway is planned to connect Djibouti to northern Ethiopia to export its potash production. Djibouti plans to construct 6 new ports including 4 new ports which the construction started since 2014 (the ports of Tadjourah and Ghoubet the multipurpose Doraleh port and port livestock Damerjog). Djibouti also seeks to create a large Commercial and Industrial Free Trade Zone in order to become a transhipment hub and a redistribution platform of products and raw materials between East Africa and the world.

Access to Finance

The positive trend of the economy experienced in recent years confirms the good performance of the banking sector in Djibouti. Indeed, the banking sector continued its development by supporting the financing of economic activity and national growth. While the first two banks in the market (BCIMR and BOAMR) dominated the banking sector for many years, the arrival of new banks from 2006 helped streamline the sector and increase banking products. By 2014, there are 10 financial institutions (7 commercial banks and 3 Islamic banks) registered and approved by the Central Bank of Djibouti. In accordance with Law No. 119 adopted in 2011, all authorized financial institutions increased their minimum capital to one billion francs (US$ 5.65 million) instead of 300 million franc initially (US$1.7 million). Islamic financing is not left apart with three local banks (Saba Islamic Bank, Islamic Bank Salam Bank and East Africa) offering Islamic banking products. Microfinance activities are provided by the People’s Savings and Djibouti Credit (CPEC) with its 3 branches (Djibouti, Tadjourah and Ali Sabieh).

The financial sector includes also exchange offices and transfer payment agencies. There were 17 entities in 2014.

According to data from the Central Bank of Djibouti, the integrated banking system balance sheet has closed higher (+ 12.3%) at the end of the year 2014 which stood at 298 billion franc (US$1.7 billion) against 265 million franc (US$ 1.5 billion) recorded December 2013[5]. Furthermore, the bank loans granted by financial institutions accounted for 29.33% of GDP in 2014 against 29.6% in 2013. The volume of loans granted in 2014 was approximated 82 billion Djibouti francs (US$463 million)[6]. Despite the new requirement introduced in 2009 stating that all monthly salaries over 40 000 franc (US$226) should be transferred into bank account; the rate of banking penetration was estimated at 21% in 2015 compared of 20.9% in 2014 and 17.8% in 2013.

The loans granted by financial institutions “called conventional” (non-Islamic) represent 88% of total bank loans estimated at 72 billion Djibouti franc (Us$407 million) against a volume of credits granted by Islamic banks representing 12% of total credits amounting to 10 billion Djibouti franc (US$56 million)[7]. However, we have noted a rapid growth of loans granted by Islamic banks between 2013 and 2014 (+25%) against a 6% increase in loans from traditional banks. With Djibouti’s banking customer base still largely underdeveloped and due to the religious Islamic background of the population, growing Islamic products in various ranges (mortgage, investment loans, vehicles loans etc…) offer by Islamic banking is expected to attract more customers and consequently increase the access to finance[8].

The NPL ratio has increased (+36%) from 12 billion Djibouti franc (US$68 million) in 2013 to 16 billion Djibouti franc (US$90 million) and represents 14.5% of total bank loans in 2014. Short-term credits have increased by 4% estimated in 2014 at 50 billion franc (US$283) against 48 billion franc (US$271 million) in 2013 meanwhile medium-term loans decreased by 1% estimated at 13.3 billion Djibouti franc (US$75 million) in 2014 against 13.4 billion Djibouti franc (US$76 million) in 2013. However, long-term loans had experienced a net increase of 33% from 14 billion franc (US$79 million) in 2013 to 19 billion franc (US$107 million) in 2014. According to Central Bank’s officer, most of long-terms loans are oriented to mortgage financing.

The volume of credit allocated to mortgage loans is estimated at 17 billion Djibouti franc (US$96 million) in 2014 against 14 billion Djibouti franc (US$79 million) in 2013, an increase of 20%. Given the dynamic construction sector in the economy, the volume of credit to housing is expected to increase in 2015 reaching a volume of 23 billion Djibouti franc (US$130 million), according to Central Bank figures. Finally, the housing loans granted in 2014 represented 20.8% of total bank loans granted by credit institutions in Djibouti.

In terms of interest rates, the lowest credit rates (all types of loans) granted was 6.82% while the highest rate was 18%. The Central Bank of Djibouti has noted a slight decline in the interest rates for mortgage loans in 2014 compared to 2013.

Housing Affordability

Djiboutian population is predominantly urban and because of high urbanization rates, neither the private nor the public sectors are able to meet the growing housing needs. Most households who aspire to own private properties have difficulties finding affordable decent houses. The unemployment rate is relatively high in the country. The rate across the country turns around 26% and if we do not take into account the condition of “job search” the unemployment rate is estimated at 48.4%. Most workers are employed in the Administration / Public service as the state is the largest employer in Djibouti (41.3%) followed by private companies that employ 25.9% of workers[9].

At the end of 2013, the National Department of Statistics and Population Studies (DISED) undertook a comprehensive review and update of its methodology for measuring poverty in collaboration with the African Development Bank. Thus, on the basis of a new methodology, the incidence of extreme poverty at the national level stood at 23% in 2013 compared to 46.7% in 2002. A slight decrease was observed in relative poverty coming from 46.7% in 2002 to 40.9% in 2013[10].

Although extreme poverty is declining, incomes of most urban households remain low and do not allow them to access adequate housing facilities and bank financing. According to the Doing Business report published by the World Bank, Djibouti is ranked 181^st out of 189 countries in 2016 for its credit access[11]. There are mainly three types of habitats that characterize the housing sector: Durable Housing (mainly built with durable materials) representing 10.2%; Intermediate Housing (made of durable materials and lightweight materials) representing 58.1%; Precarious Housing (essentially made of lightweight materials and used materials) representing 31.7%. Hence, the majority of residents occupy the 2nd and 3rd type of habitat and only 24.3% are owners with land titles and 30.3% are owners with temporary occupation license.

Access to decent housing and land by the population remain difficult and complex due to several factors that raise up the construction cost: strict construction standards because Djibouti is exposed to seismic risk; non availability of many suppliers of raw materials; the lack competitiveness and limited skills of local contractors; a scarcity of land available for construction; difficulties to meet the financial sector requirements for housing loans.

Housing Supply

The analysis of the housing sector in Djibouti has revealed a gap between supply and demand in housing. Housing needs are mainly driven by the rate of population growth and the rapid urbanization. Due to the lack of proper official figures, new housing needs are estimated at 3 000 units per year. Considering the large deficit accumulated in the past years, Djibouti has to realize more than 10 000 houses to catch the imbalance between supply and demand[12].

Real estate development in Djibouti remains low compared to other African countries such as Senegal or Morocco. Private property developers cater to the high income bracket and they are totally absent from the other segments. This tendency has been developed in the early 2000s with the economic development that increased the demand for high income houses. The number of Djiboutian property developers who are able to complete the whole chain of land development, marketing, construction is small. For example Al Neima, a private real estate developer, realized in 2012-2013 37 duplex villas (6 rooms) for approximately 38 and 42 million Djibouti franc (USD$214 – 237 thousand) each or another private developer, EDC, which is currently implementing a program of 100 villas whose value is around 25 to 30 million Djibouti franc (US$141 -169 thousand) in Gabode area. The financial model proposed by the developer is as follows: 30% upon signing the reservation contract, 50% to be paid when the main structures are over, and 20% when the house is completely finished.

Public housing promotion is undertaken by the two public operators: Real Estate of Djibouti (SID) and the Housing Fund (FDH). The SID is the old public institution whose primary mission is the realization of housing and managing land with infrastructures for upper-middle and high income groups. As for the Housing Fund (FDH), its main priority is to provide social housing units and land with basic infrastructures to the low income groups. These two state companies produced 1979 plots of land and provided 1 814 housing units during the period of 2009-2014 which represent on average about 330 parcels / year and 300 housing units / year[13]. Besides, it has been recorded 378 building permits in 2015 compared to 309 building permits in 2014. The Doing Business 2016 report has confirmed the progress made by Djibouti back in 2015 in reducing the process and the delay for obtaining a building permit (Djibouti ranks in 124^th position out 189 countries in 2016 compared to 2015 ranked in 128^th position).

The government intends to intensify the production of affordable housing and plots of land with infrastructures for the middle and low incomes group. Thus, it is planned in 2016 the launch of a program to build 2 500 apartments with the funds from Arab donors (Saudi Fund for Development, Arab Fund for Economic and Social Development). The SID will also launch in November 2016 a project of managing 100 hectares which represent more than 5 000 plots of various sizes. Helping the public developers and also encouraging private real estate developers, the government plans to establish a Housing Bank in December 2016. The implementation process of this new banking institution dedicated to the habitat is being formalized given the fact that the Central Bank of Djibouti has already issued provisional licence.

Property Markets

The Republic of Djibouti, in contrary to other African countries, has a considerable advantage in terms of property development. Indeed, by law, any vacant land without an owner belongs to the State. All (or almost) non-urbanized areas belong to the State. Public Land Management is operated by the Department of Land and Property Titles Conservation of the Ministry of Budget. Currently, throughout the territory, about 22 000 land titles were issued and registered by this Department since the independence of the Republic of Djibouti.

The potential of the land market is huge and the government plans to accelerate land regularization process for the benefit of the people who still hold the temporary occupation license. Once the regularization procedure is complete, the owner gets a land registration certificate (CIF) to enable them to develop the land or housing within a legal framework and following the rules of urban planning. In addition, the CIF legally opens the door to obtaining mortgage credit from local banks. According to Doing Business 2016, Djibouti is ranked in 168^th position out of 189 countries in the field of registering property. Indeed, the process of obtaining the final title is costly and sometimes too long for individuals. There are three different ways to proceed with the land registration: for temporary occupation certificate holders (TOP), regularization of land is done through the Housing Fund (FDH) with the payment of an advance of 20 000Fdj (US$113), 4% of the sale value for name change, 10% of the sale value for the registration and 16 000Fdj (US$90) for stamp duty; Individuals buying land directly from the Department of Land and Property Titles Conservation of the Ministry of Budget pay 4% of the sale value for the name change, 10% for the registration and 16 000Fdj (US$90) for stamp duty; Finally, the regularization of land obtained through the sale from one person to another individual is done through a notary by paying the same ratios (4% and 10% + 16 000Fdj stamps) and by adding notarial fees ranging from 100 000Fdj to 250 000Fdj (Us$565-1413). In addition, if the purchaser is buying his first land then he must pay transfer duty (name change) which corresponds to 9% of the sale value (7% tax and 2% mutation). Otherwise, the rate increased from 9% to 12% (10% tax and 2% mutation). Any investor or private developer can obtain the allocation of land once its real estate project is approved by the Minister Delegate for Housing.

The Chamber of Commerce of Djibouti has registered 3 186 businesses in 2015 against 3 021 companies in 2014. The service companies account for nearly 77.6% of legally constituted companies followed by the construction sector (21.1%) and industry (1.1%) and agriculture (0.2%)[14]. In 2015, the Chamber has recorded the registration of 673 construction companies compared to 666 in 2014, a slight increase of 1%. The construction sector employed 9 144 people in 2014 compared to 8 440 in 2013 and 6 909 in 2012[15].

Housing Policy and Regulations

In 2011, it is set up within the Ministry of Housing, Urban Development and Environment a State Secretary for Housing to promote the housing sector and find lasting solutions to the deficit in housing. Given its importance in the institutional platform, the department was renamed in 2016 “Delegate Ministry for Housing.”

From 2011, the department has developed and implemented a necessary regulatory and policy framework to develop this sector. In addition to several strategic studies undertaken in order to promote the housing sector, the Delegate Ministry for Housing has implemented a series of legislative and regulatory texts to encourage potential investors and private developers to invest in the real estate sector. The public operators have seen a redefinition of their roles to adapt their status (real estate development, land management, financial institution), to improve their response and management capacity and to refocus their activities on clear and well-defined missions.

Real estate developers from the private sector are also an important part of the housing production chain that has been lacking so far in Djibouti. Apart from the social housing program that requires involvement of the State, the private sector must play its role and should cover effectively the other segments of demand and especially the middle class whose net monthly revenues are around 250 000-350 000Fdj (US$ 1 413-1 979). The department responsible for housing has implemented the Law No. 13 / AN / 13 / 7èmeL fixing rules governing property development business in Djibouti. The law has been completed with two decrees:

– Obtaining approval of real estate developer and conditions of realization of real estate projects;

– Disposal of conditions and procedures for real estate;

A National Housing Strategy that is being finalized with the assistance of the World Bank plans a major investment program to develop the real estate sector in Djibouti through the implementation of four key areas: 1) increasing the supply of affordable plots of land for the majority of households, 2) developing the production of affordable housing units 3) stimulating the housing rehabilitation program in precarious existing neighbourhoods 4) developing further banking mechanism and microfinance system for the low income groups. The investment amount required for the realization of the housing sector’s development strategy is estimated at more than 52 billion Djibouti franc (US$ 294 million).

The government has launched in 2015 a new project targeting low income people called “Self Construction Program”. The government has provided to lower income household plot of land of 90m² and has given raw material to build their homes. Assistance is brought by the Housing Funds Operator and repayment will not exceed 5 000 Djibouti francs (US$28) over 20-25 years.

Housing Sector Opportunities

The real estate sector in Djibouti suffers from a deficit of around 10 000 affordable housing units for the lower and middle income groups. While the state, through the two public operators (SID and FDH) targets its housing policy for helping to provide decent houses for low income groups, the potential to provide housing for middle income class remains to be developed by the private sector. The regulatory policies put in place by the state on real estate activities provide tax advantages and import duty exemptions for any private developer who is willing to operate in the real estate sector.

Relying on its geostrategic position and the development of railway infrastructures, port and airports, Djibouti intends to accelerate its economic development and growth that will create jobs. The expected economic growth will improve the purchasing power of the local population and enable them to afford decent houses.

The real estate sector in Djibouti is expected to experience a considerable expansion in the future especially with the construction of a 1 500 social houses funded by the Saudi Fund for Development (US$ 35 million). Another project funded by the Arab Fund for Economic and Social Development (US$ 30 million) is also expected to produce 1 000 houses. In addition, Djibouti has submitted a request of financing to the Saudi Fund for Development and the Islamic Development Bank (IDB) for the construction of 3 000 houses.

Several international private promoters from different backgrounds have submitted real estate projects feasibility studies for approval. In the perspective of creating a new economic pole in the capital, negotiations are also underway with a Moroccan company for the realization of basic infrastructures developments (water supply, roads, electricity) on a plot of 480 hectares in the south of Balbala for an estimation cost of $110 million.