Housing Finance in Nigeria

Introduction

2016 has so far been a year of vast uncertainty for Nigeria. President Muhammadu Buhari has been negotiating choppy waters since taking office. Oil prices remain low. The Naira recently adopted a flexible exchange rate against the US Dollar which helped to address the foreign currency accessibility that was hampering the import heavy economy. The national budget was passed 6 months after its initial introduction, thereby causing a delay in starting capital expenditure projects. With the merging of the housing sector under the Ministry of Power, Works, and Housing, there is fear that although under a competent minister, the sector might get overlooked.

The Nigerian real estate sector is growing fast and is now the sixth largest sector in the economy. The new government is framing its housing agenda on addressing legislative hurdles around housing and producing 1 million standardised affordable housing units yearly. In 2016, The Federal Government budgeted N40bn ($134.06 million) with the intent to build 250,000 homes. State Governments are also expected to collectively produce a further 250,000 units. 50% of the housing supply deficit is expected to be covered by private investors. The Minister for Power, Works, and Housing, Babatunde Fashola has declared this as the policy the administration will follow while it finalises a specific national plan.

Almost half of Nigeria’s population lives in cities, with 64.2 percent living in slum conditions. Rapid growth of cities have engulfed nearby towns and villages, and pushed back mangrove, while the lack of adequate infrastructure and planning have caused deforestation, congestion, poor health, and poverty. Lagos, Nigeria’s commercial hub has a quality of life of 0.63, which is low compared to commercial centres in Europe like Paris with 0.93 or London with 0.90 according to UN Habitat.

For the majority of Nigerians, mortgage finance is not an option due to the lack of a robust system. Nigeria has a low homeownership rate of 25 percent, lower than that of Indonesia (84 percent), Kenya (73 percent), and South Africa (56 percent)^[i]. The major issues that continue to affect housing in Nigeria include inadequate access to finance, slow administrative procedures, and the high cost of land registration and titling.

Access to Finance

The Nigeria banking sector has grown tremendously over the past few years, both in volume of activity and sophistication. The commercial banking sector assets, according to the Central Bank of Nigeria, grew by only two percent between 2014 and 2015, compared to its 13 percent growth rate between 2013 and 2014.

While consumer credit^[ii] has dropped by seven percent between 2014 and 2015, from N848 billion (US$2.84 billion) to N786 billion (US$2.63 billion), the ratio of consumer credit in comparison to the total credit of the private sector has remained relatively flat^[iii]. Regardless of the several credit growth initiatives being conducted across the board, portfolio diversification within the Nigerian banking sector has not improved.

The microfinance banking industry experienced a slight increase in assets by 1.4 percent in 2015, but saw a six percent decline in its net loans and advances^[iv] also as a result of the slow growth economic environment. Within the same time period, growth attributed to the standardisation of the microfinance banking model has led to increased partnerships and better funding practices. Even with the recapitalisation of the microfinance banks, which led to a 13.4 percent increase in paid up capital, the number of microfinance banks grew from 937 to 958 within the same time period, most of which are state level microfinance banks. However, the impact of the microfinance industry has so far been minimal on the real estate sector. It is estimated that a more prominent role will emerge once much needed low income housing units become available from the supply side.

According to Global Findex (2014), between 2011 and 2014, access to finance^[v] grew from 30 percent to 44 percent. The increase has been driven by growth in payments; however there has been a significant lag in the impact on access to bank loans – two percent in 2011 to five percent in 2014. Mortgage finance is still a small percentage of Nigeria’s GDP, at 0.58 percent – in comparison to the UK (80 percent), USA (77 percent), and South Africa (31 percent). It is clear that the mortgage finance industry in Nigeria is still in its infancy, primarily targeting middle income earners and largely excluding low income earners. The Federal and State government are consciously trying to bridge this gap through initiatives and funds – focusing on affordable and mass housing schemes, and to improve accessibility to mortgage finance.

There are 35 Primary Mortgage Banks (PMBs), and 19 registered banks which also offer mortgages. Interest rates are high and vary considerably from bank to bank. As at July 2016, prime mortgage rates among commercial banks ranged from 11 percent to 27 percent, and maximum mortgage rates ranged from 18 percent to 31 percent. For leading commercial banks offering mortgages, a down payment is required of 25 percent, on average, of the property value, and a repayment term that ranges from 10-20 years.

The Federal Mortgage Bank of Nigeria (FMBN), Nigeria’s apex mortgage institution, promotes mortgage lending and manages the Nigerian housing policy. The FMBN raises capital through the National Housing Fund (NHF), which obtains funding mostly by contributions from salaried employees earning N3 000 (US$15.13) and above monthly, or 2.5 percent of their salary. Although the scheme is open to all, the recruitment structure has mostly targeted larger establishments, recruiting middle income earners and ignoring the low income earners in Small and Medium Enterprises (SMEs). Contributors receive a two percent interest rate per annum and are entitled to apply for the NHF-sponsored loan. Up to N15 million (US$50 234) can be borrowed, and the borrower must make a deposit of between 10 percent and 30 percent.  The FMBN raised N191.9 billion (US$642 million) by March, 2016 from 4.14 million registered contributors under the National Housing Fund (NHF) scheme with over 70 percent coming in the last five years. Additionally, N5.9 billion (US$19.75 million) was refunded to 118 284 eligible individuals.

Last year the Nigerian Mortgage Refinance Corporation (NMRC) raised an additional equity capital of N7.05 billion (US$24.96 million) through general shares flotation. NMRC are looking to further subscribe shares with the International Finance Corporation (IFC) and Shelter Afrique.  The move to raise additional capital was to generate confidence in the credit standing of the NMRC as a bond issuing institution. NMRC has disbursed N1 billion to Imperial Homes Mortgage Bank Limited (formerly GTHomes Limited), in the last quarter of 2015 making them the first mortgage bank to benefit from the refinancing.

While the NMRC has launched initiatives mostly addressing market structure issues^[vi] the impact on the housing delivery has been poor.  The agency launched its first application for 10 000 housing units in July 2014, and approximately 66 402 applications were received. Of this figure, 25 000 applications were said to have pre-qualified, and 9 000 were given an offer letter. Monies had only been disbursed to 33 Nigerians to acquire their homes before the 2015 elections, were a change in the ruling party has resulted in a freeze in payments until the current administration’s policy is clearly laid out. However, Minister Fashola has assured Nigerians that all existing commitments will be honored.

Housing Affordability

More than half of Nigeria’s estimated population of 182.2 million live on less than US$1 a day. The unemployment rate increased by 12.1 percent in the first quarter of 2016, representing a sixth consecutive quarter increase^[vii]. Coupled with the high rate of unemployment, minimum wage remains at N18 000 (US$60.28) per month.  Home purchase and rent prices have grown ahead of general inflation, a standard three bedroom middle income apartment currently commands a rent of US$5 000 per annum and purchase price of US$100 000.
The Federal Governments’ National Housing Fund finances housing schemes with a minimum loan of N5 million (US$16 745) paid over a maximum of 30 years^[viii]. This requires a 10percent equity payment amounting to N500 000 (US$1 675) and additional monthly repayments of N12 500 (US$41.86) per month. In an agreement with National Housing policy that states that no more than 20 percent should be spent on housing expenditure, the average monthly income of a Nigerian should be N62 500 (US$209.31). This is unrealistic for the majority of Nigerians who earn the minimum wage of US$60.28 per month. Mostly, the equity payment, which requires almost nine years of salary savings has been too restrictive resulting in weak take up of the schemes.

There are several factors that contribute to the high cost of housing; land allocation costs, high cost of funding, high cost of building material and therefore construction, logistical challenges, and the dearth of skilled artisans. In addition, taxes and fees also increase the sale price of a house. In Nigeria it takes an average of two and a half months, and 13 procedures to obtain land titles (paying stamp duty, registration of land title and obtaining Governor’s consent), while getting the Certificate of Occupancy is an expensive process that often takes upwards of five years. This has led to a large number of people residing in informal settlements, outnumbering those who stay in decent accommodation in high density urban areas like Lagos, Port Harcourt, and Kano.
Fifty to sixty percent of the total construction input goes to building materials, and with the floating of the naira to the dollar this year it is expected that the price of construction would slightly increase as many construction items remain on the government’s list of 44 items disqualified from getting foreign exchange from the Central Bank of Nigeria (CBN)^[ix] forcing importers to source from a scarcer black market. Eventually, with a focus of this administration on building up the local industry through standardization and national production, contractors will be able to source materials locally, and prices will fall.

In an effort to ensure that land transactions are carried out with minimum difficultly, in January 2015, Lagos State cut down land use charges from 13 percent to 3 percent of the property’s value. The Federal Government is also pushing for a reduction in land transaction fees from 16 percent to three percent. As a result of the high cost of housing^[x] in Nigeria,  51 percent of Nigerians live in rented accommodation, 40 percent of which are paying between N20 000 (US$66.98) and N100 000 (US$334.89) yearly (Kolawole 2014).

With the majority of the population forced to rent and low regulatory monitoring regarding rentals, landlords and estate agents dictate the market. To curb this, the Lagos Tenancy Bill of 2011 was promulgated as a law. Amongst other aspects, it states that landlords can only charge for one year’s rent in advance. However, the law is not being enforced and people seeking rental accommodation still face issues of landlords requesting payments of two or more years. Agency fees are another expense the Lagos Tenancy Law has been unable to govern, and it is very high in Nigeria, at 10 percent, in comparison to countries such as; Ghana – five percent, and Kenya – 1.25 percent. In some cases this law has led to agencies charging 20 percent to ensure they receive the two years’ worth of commission. This is fueling the rise of innovative schemes by property developers such as rent to purchase, in which you pay a larger rent than usual, but have the option of purchasing the home at the end of the rent stay.

Overall, there is a strong push by the administration to focus interventions on lower income earners who are aspiring to be homeowners, and have been traditionally sidelined by the property market which is predominately controlled and used by the elite.

Housing Supply

In Nigeria, neither the government nor the private sector provides sufficient housing units especially for the masses that need and demand it. Housing production is at approximately 100 000 units per year and this is highly inadequate because at least 1 000 000 units are needed yearly to bridge the 17 million housing deficit. It is estimated that it will cost US$363 billion to curb the current housing deficit and the number is expected to grow at two million houses per year at a constant population growth of 2.7 percent per year.

The rapid population increase and rural to urban migration have contributed to the shortfall of housing in Nigerian urban centers. The cost of building materials, access to infrastructure, deficiency of housing finance arrangements, stringent loan conditions from mortgage banks, time to process legal documents and inadequate government housing policies are also major issues affecting housing delivery. Lagos State has announced a housing scheme to build 50 housing units in each of the 57 Local Government Areas in five years to mitigate rural urban migration.

The Nigerian government has identified the need for public private partnerships for low income housing supply. In October 2014, the Minister of Lands, Housing and Urban Development, stated that the Federal Government has created an enabling environment for the private sector to take the lead in the provision of housing for millions of Nigerians. In addition to requiring that all Armed Forces and Civil Service Agencies increase their housing stock for their staff, the Federal Government has also requested that all universities be able to house their entire student populace.

In May 2015, Lafarge Africa Plc. in partnership with LAPO Microfinance and Fortis MFB announced their construction of 500 housing units in the Federal Capital Territory; this is in addition to schemes in Cross River, Gombe, and Ogun State where 3 000 units have already been delivered in the Ile-Irorun low-cost housing project. Another development on going with a public private partnership model is the 10 000 unit Rock City housing project taking place in Abuja. The partnership is between Rock of Ages Properties (Chicason Group) and the Federal Capital Development Authority’s Development Control Department. Chicason is aiming to expand this to Nigeria’s 36 states and deliver a total of 100 000 homes.

The informal workforce is one that continues to be left out of government and private sector led initiatives. Instead they find unused pockets of land to build and develop units in un-serviced areas leading to increased slum formations.

Property Markets

Business Monitor International Research (BMI) estimates that the real estate industry value will grow from US$11.4 billion in 2015 to US$16.5 billion in 2017. This fast growth was attributed to the fast growing middle-class driving demand for residential property development and, indirectly retail, industrial and commercial real estate development. However, economic insecurity has curtailed the growth of higher income housing as many remain unoccupied, a bigger squeeze on the middle income sector which is seeing increasing defaults in rent payments, and a stronger focus by the government on lower income housing.

Nigeria’s property market is currently stimulated by several large scale projects, including Eko Atlantic^[xi], the World Trade Centre Project in Abuja, and the Wings Project in Lagos^[xii]. However, the Federal Government is focused on the affordable housing market, but growth is stifled due to structural issues like predominance of less quality housing and low number of titled land. Land prices are on the rise, driven by low availability, increase in inflation, and speculation. However, as a result of the higher impact macroeconomic drivers have on the cost of building, real estate companies are increasingly selling more land parcels than home units, to protect their profit margins. Stakeholders in the real estate market have alluded to the speculative pricing approach of both land and home units, rather than the assessment of demand characteristics of the area where the land and housing units are located – poor data and quack surveyors have been identified as driving factors to this practice. Nigeria’s 5 000 estate surveyors are grossly inadequate to service the property market, and this has allowed for unofficial middlemen to increase prices as they pose as agents, grossly distorting the market particularly in high-brow areas of Lagos, Abuja, and Port Harcourt.

According to the World Bank’s Doing Business 2016 Report, Nigeria ranks close to the worst globally, positioned at number 169^th out of 189 countries for registering property.  The World Bank estimated that this registration process takes 77 days in 2016 (70 days in 2015), and costs about 10 percent (18.6 percent in 2015) of the value of the property, which highlights some incremental progress.

Housing Policy and Regulations

 The 1999 Nigerian Constitution states that all citizens have the right to acquire and own immovable property. Similarly Vision 20:2020 advocates for adequate housing for all Nigerian citizens. The current administration has vowed to tackle the obstacles hindering land acquisition with an aim to shrinking the housing deficit and meeting the demand of the Nigerian population. To this regard, Senate President, Bukola Saraki, says the Senate is working to repeal the 1978 Land Use Act by December 2016.

The Land Use Act (1978) continues to dictate and hinder the land market in Nigeria. To date the objectives^[xiii] of the Act have not been achieved and further to this, the law has led to further distortion and abuse of citizens’ rights to access and own land. Due to the Land Use Act, urban land is managed by the Governor of a state through a Land Use and Allocation Committee who dispense land through the granting of Certificates of Occupancy. ‘Other lands’ (not urban) is managed by Local Government through a Land Allocation Advisory Committee. Legally a Nigerian who has a Certificate of Occupancy, which is expensive and often takes upwards of five years to obtain, does not own the land but is a statutory occupant. This Act is constantly in contention and a committee was created to develop a bill to amend it. However, even though a conclusion was met in 2014 where amendments were made, the core of the Act remains the same, stating that the Governor of the State owns all land in that State and therefore is responsible for the allocation of land. There were slight adjustments such as an increase in the amortization period from 25 years to 30, interest on NHF loans to PMI’s were marginally reduced from 5% to 4%, while the lending rate to contributors dropped by three percent points to six percent^[xiv].

Nigeria has three distinct land markets; 1) a market for direct state allocation, 2) a market for pre-1978 land rights, which have not been converted, and 3) an informal market where no statuary of occupancy exists, resulting in the majority of transactions being informal or private. It is estimated that one percent of land transactions occur on the formal market and 25 percent involve a certificate of occupancy but the transactions are done without required consent, payment of taxes or registration.

The National Housing Policy of 2012 emphasizes the role of private sector financing highlighting that it should be involved with mass housing, skills acquisition, disaster management, urban renewal, slum upgrading, and job creation. The target of the policy is to guide the building of one million houses yearly, through a variety of schemes such as NMRC.

Other policies and regulations that impact the housing market are the National Housing Fund Act (1992) and the Federal Mortgage Bank Act (1993). Both Acts aim to ensure a constant supply of loans to Nigerians for the purpose of building, purchasing and improvement of residential properties. FMBN, as part of the Federal Mortgage Bank Act, serves as a secondary mortgage institution, providing credit facilities to primary mortgage institutions, real estate development companies or bodies, housing corporations and housing co-operatives. FMBN administers, collects and manages the Federal Housing Fund.

Housing Sector Opportunities

While traditionally growth in the housing sector was fueled by serving the high income customer segment, a harsher economic climate is curbing the oversupplied and mis-priced luxury residential market. The mid to low income segment, where the housing gap lies mostly, is clearly the focus of this administration. With strong emphasis on housing the civil servants, the military forces, students, and low income workers, there should be significant growth in this segment. As seen in the other emerging markets, housing for the mid to low income segment is profitable. Indications from this administration also point to strengthening the local housing manufacturing sector, and easing the legal process.

Regardless of the issues facing the low-income housing sector, real estate projects with greater investments are increasingly being launched and completed across the socioeconomic spectrum.  With several housing initiatives (e.g. NMRC, FMBN etc.) playing a dual role of ensuring long term funding as well as driving initiatives that address the structural issues facing the property market, especially within the residential property sector, it is bound to grow.