Housing Finance in Nigeria

Introduction

Nigeria over the past year has faced significant economic challenges, factored by a GDP contraction, foreign exchange instability, and a gap in governance. Uncertainty in the oil sector remains as communities in the Niger Delta pulled out of peace talks following recent flair ups in the region. This is in addition to agitation from pro-Biafra separatists in the south-east, a diminished but still relevant Boko Haram in the north-east, and skirmishes through the middle belt and south-west between Fulani herdsmen and local farmers. The Naira has stabilised against the US Dollar, however liquidity is still constrained. Combined with an OPEC guided oil production cap at 1.8 million barrels per day there are signs of a timid economic recovery, as inflation reached double digits by the end of 2016 and remain high. In line with Buhari’s made in Nigeria drive, there was a marked reduction in imports, from US$ 52.3 billion to US$ 35.2 billion from the end of 2015 to 2016, although this could be as a result of liquidity constraints. Agricultural output has continued to increase, although the IMF cautions that diversification in other aspects of the economy has stalled. With an overwhelming portfolio, there is concern that Minister for Power, Works, and Housing, Babatunde Fashola has struggled to be impactful in the housing sector.

The Nigerian real estate sector accounts for roughly eight percent of the Nigerian economy. In 2017, The Federal Government housing budget stands at N41bn (US$114 million), and there is sparse progress in the government’s annual production of one million standardised affordable housing units. According to the Managing Director, Federal Mortgage Bank of Nigeria (FMBN), the housing deficit is estimated at between 17 to 20 million housing units with a potential cost of N6 trillion (US$16 billion), and a 900 000 annual unit deficit increase. The Finance Minister  recently announced the Family Homes Fund, a public private partnership, which will have the federal government give as part of the Medium Term Expenditure Framework (MTEF) seed funding of N 100 billion (US$278 million) over the next three years. It is hoped that the funds from this three year planning cycle will be matched by domestic and external partners to help give discounted mortgages to potential homeowners.

Almost half of Nigeria’s population lives in cities, and it continues to witness a disproportion in supply and demand between social economic brackets. While a high income area like Ikoyi in Lagos is reportedly 60 percent empty, overcrowding is a major issue in many poorer areas. This leads to increased conversion of rural areas to semi-urban and urban spaces, often without the necessary plans and policies in place.

For the majority of Nigerians, mortgage finance is not an option due to the lack of a robust system, as loan repayment costs remain prohibitively high. 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

According to EFINA in collaboration with the Nigerian Bureau of Statistics, while the level of (formally) banked population grew by an additional 2% over the last 2 years – 36.3% in 2014 and 38.3% in 2016, growth of the total population outpaced the growth of the banked population. Additionally, the financially excluded population grew from 36.9 million to 40.1 million. A key factor responsible for the increase in the financially excluded was the drop in the contribution of MFBs to formal financial inclusion (from 2.6 million to 1.8 million), which is a reflection of the current challenging economic environment — low employment rate, lower disposable income and Increasing inflation rate with greater impact felt by the bottom of  the pyramid.

Consumer credit in the commercial banking industry decreased by 3.1% from N 786 billion (US$2.2billion) in 2015 to N762 billion (US$2.1 billion) in 2016, the ratio of consumer credit in comparison to the total credit of the private sector also dropped  from 3.8% to 3.5%. The drop can be attributed to a weak consumer demand, increased risk uncertainties by banks for consumer credit, and a high cost of funds in the economy.

The total assets in the microfinance banking industry decreased by 6% from N361 billion in 2015 (US$1 billion) to NGN 342 billion in 2016 (US$0.9 billion). The shareholders’ fund also decreased by 8% from NGN 84.2 billion in 2015 (US$234 million) to NGN 77.1 billion in 2016 (US$214 million). The underperformance within the MFB sector, is a reflection of the country’s economic challenges, in the way of losses resulting from the increasing non-performing loan portfolio.

Mortgage finance remains 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.  There are 57 major mortgage providers in Nigeria – Commercial Banks (22), Primary Mortgage Banks (34), Federal Mortgage Bank of Nigeria (1), the Nigerian Mortgage Refinance Company (1)

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$8.33) 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); additionally some states, such as Lagos, Kano, Edo, Niger, have withdrawn from the scheme. Contributors receive a two percent interest rate per annum and are entitled to apply for the NHF-sponsored loan. Up to N15 million (US$41 667) can be borrowed, and the borrower must make a deposit of between 10 percent and 30 percent. FMBN offers one of the lowest mortgage rate on its products – 6%, compared to all banks, which range from 16-32%. Equity contribution ranges from 10-30% depending on size of loan, with a maximum tenor of 30 years. Between January to June 2017, the bank made a total collection of N9.5 billion (US$26 million) under the NHF and disbursed a sum of N1.1 billion (US$3 million).

As at the end of 2016, the Nigerian NMRC had refinanced mortgages amounting to NGN8 billion (US$22 million) – the amount of its inaugural bond issue. The company is currently in the process of going to the market with its second bond issue of N20 billion (US$ 56 million), which was initially planned for the 3^rd quarter in 2016, but was delayed due to high inflation and interest rates. Additionally the company, in line with its condition for credit recourse, exchanged refinanced non-performing mortgages of N172.5 million (US$479 167) with three Primary Lending Institutions for performing mortgages of N208.9 million (US$580 028).

The government recently launched a National Housing Fund Programme, under the Social Investment Fund. The programme housed within the Central Bank of Nigeria was setup to increase access to affordable housing and home ownership. The first initiative under the NHFP is called ‘My Own Home’ which already has US$300 million in funding (funders include the government, World Bank and AFDB) of which 80% of the funding will be disbursed through microfinance firms (10 firms have been selected). The remaining 20% of the funding will be used to capitalise mortgage guarantee and insurance, as well as provide technical assistance services to the relevant stakeholders.

Housing Affordability

More than half of Nigeria’s estimated population of 186 million live on less than US$1 a day. The unemployment rate increased from 10.4% in 2016 to 14.2% in 2017. Coupled with the high rate of unemployment, minimum wage remains at N18 000 (US$60.28) per month, which has remained constant for the past six years, even with an increasing inflation rate  at more than 16% today. 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.

Fifty to sixty percent of the total construction input goes to building materials, and with the floating of the Naira to the US Dollar, 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)^[i] forcing importers to source from a scarcer black market.

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 three 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 in Nigeria,  51 percent of Nigerians live in rented accommodation, 40 percent of which are paying between N20 000 (US$55.56) and N100 000 (US$222.22) 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 to 20 million housing deficit by 2033 if the population continues at its annual growth rate of 3.5 percent. It is estimated that it will cost US$363 billion to curb the current housing deficit and the number is expected to keep growing.

President Muhammad Buhari stated that his government would supply two million new middle-class homes in the first year, and one million new middle-class homes for every year of his tenure. This would be coupled with four million lower-class houses and homeowners by the end of his first 4 year term. This was to be rolled out with longer mortgage payment structures, however, given the myriad of economic challenges the country faced over the last year, housing has not been high on the agenda. There was also to be a National Infrastructure Development bank capable of providing nominal single digit interest rates, but this has also not been implemented as yet.

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. Minister of Power, Works, and Housing, Mr. Babatunde Raji recently announced the construction of 165 blocks of 2 000 units of housing estates across the various states under the National Housing Programme (NHP). Although many states are yet to benefit from the scheme, the Federal Integrated Staff Housing (FISH) program, intended to provide decent civil servant accommodation, has been launched by the Head of Service of the federation, Mrs. Winifred Oyo-Ita.

The Nigerian government has identified the need for public private partnerships for low income housing supply, and actively tasked the private sector to take the lead in the provision of housing for millions of Nigerians. In addition, the government has looked to external support, with the Infrastructure Bank and Sinohydro Corporation Limited  of China finalising a deal for an ultra-modern 27 storey high complex in Lagos state.

Lagos has taken the lead in housing supply with a vast array of new projects on the way. Orange Island (focused on the middle class) is to cover 150 hectares of land in Lekki, at an estimated cost of N40 billion (US$ 111 million). It should accommodate 25 000 people and be completed by 2019. Another project set to be completed around that time, is the ultra luxurious 25-storey residential building planned by Fujimoto Construction Limited. The proposed tallest residential building in Lagos will be called The Lorenzo and located in Ikoyi. Grenadine Homes, will develop Atlantic Resort (focused on the high income class), a 142 storey one to three bedroom residential tower in Victoria Island. The upcoming Lekki Free Trade zone has triggered a rash of housing development in Ibeju, Lekki with over five residential estates being built.

With the progress of the Lekki Free Trade zone, developers like Primewaterview Holdings Limited have taken the opportunity to build middle-class housing estates along the highway linking the trade zone with the old business districts in Ikoyi and Victoria Island. This is helping to decongest parts of the mainland as former residents of Surulere and Yaba make the move. Despite, increasing options for the middle class and the lower-class market remains underserved, while high income areas like Ikoyi are approximated at only 40% occupancy.

Most of the new developments are private sector led targeting the middle and upper classes. Most developments targeted at the lower income bracket are government led, unfortunately the housing ministry has not really taken off in this administration.

Property Markets

The real estate sector which accounts for 8% of the Nigerian economy, in GDP terms, has been plagued with market uncertainty and drop in demand, reflective of the underperformance in the mortgage and consumer lending sectors. Additional drivers to the sector’s underperformance include the rising production costs and decreased foreign investment in the country, as a result of extreme volatility in the country’s currency.

The economic slowdown has severely impacted the demand side of the market, which has led to high vacancy rates, especially in the prime and luxury property markets. On property values, Abuja has seen a significant drop in property value; Lagos has seen a marginal increase especially in mid market property segments; property markets in the North East, affected by political instability and security have seen a significant drop given a high level of uncertainty and drop in demand, while the neighbouring markets to the North East have seen a marginal increase in property values as a result of migration to these regions. However, there has been an appreciation in property values for underdeveloped land, as a result of the growing demand of developers and investors taking up land as an investment for future projects.

In parallel, housing developments have stalled majorly for prime and luxury property markets across the country, while there has been a marginal increase in mid market segments, specifically in states like Lagos, Kaduna and Rivers.

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.

According to the World Bank’s Doing Business 2017 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 the average property registration process takes 69.6 days in 2017, and costs 10.5 percent 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. Despite each successive administration since the return to democracy trying to significantly amend the 1978 Land Use Act, the task still eludes the Senate. The leading recommendation by experts is to expunge the Act from the Constitution and have it redrawn.

The Land Use Act (1978) continues to dictate and hinder the land market in Nigeria. To date the objectives^[i] of the Act, which was to make land more easily available has not been achieved, instead leading to further distortion and abuse of citizens’ rights to access and own land. Formerly, land could be bought from communities, individuals, and institutes, but 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 more than five years to obtain, does not own the land but is a statutory occupant, as the government remains the sole trustee of land. There have been slight adjustments to the Act, 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^[ii].

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.

Housing Sector Opportunities

Given the economic slowdown, it is expected that there will be a slow recovery in the pure market driven activity within the housing market – government driven initiatives are expected to be the main driver of growth within the housing market. Market segment wise, the prime and luxury market segment is expected to face the slowest growth, while the mid-market is expected to grow the fastest. Currently, the luxury supply market is far outpacing demand, with many projects started during the oil boom years, coming to fruition now and remaining empty.

Investors have not been sensitised to the benefits of low cost housing yet, and the government will need to take the lead. The middle income segment currently remains the most attractive, with the speed of occupancy in the Lekki axis of Lagos highlighting demand in this area. More land area in other states should be dedicated to this, as the middle income purchasers are also key to developing a healthy mortgage system.

Regardless of the investments and programmes being introduced in the market (e.g. NMRC, NHFP, FMBN), efforts need to be established to ease the access to housing and housing finance, e.g. process of registering property, mortgage lending rates, rental laws, housing pricing, etc.