Housing Finance in Tunisia

Introduction

Before the revolution of 2011, Tunisia was widely regarded as one of the best performing countries in terms of economic and human development of the Middle East and North Africa (MENA) region. After the instability and associated slowing economic growth, the country rebounded, adopting a new constitution in 2014. Despite the constant threat of terrorism, this is in contrast to other MENA countries that underwent similar revolutions.

GDP grew by 0.8 percent in 2015 against 2.3 percent in 2014[i], the lowest since the 2011 economic slowdown. The drop in the national savings rate (12.2 percent of GNDI in 2015, against 14.4 percent in 2014), along with the investment rate regression (19.4 percent of GDP in 2015, against 20.6 percent in 2014) meant an increase in external financing needs. The rate of external debt to Gross National Disposable Income (GNDI) rose from 44.3 percent in 2014 to 48.3 percent 2015.

The unemployment rate recorded in 2015 was 15.4 percent, increasing from 15 percent in the fourth quarter of 2014. Women’s unemployment rate is higher at 22.6 percent, while the graduate unemployment rate is 38.7 percent[ii], with higher education graduates at 31.2 percent.

Housing is the second largest item of expenditure for Tunisian households. Although housing is increasingly available, its affordability is increasingly problematic, especially since 2011. Increased demand, more onerous liquidity requirements for mortgage lenders and the limited availability of housing microfinance inhibit the growth of the housing finance market.

Access to Finance

Tunisia has a reasonably well-developed financial sector, which is regulated by the Central Bank of Tunisia. Over the past four decades, a sophisticated mortgage-based housing finance system has developed. There are a large number of financial institutions offering loan products for housing, including over 20 private commercial banks, in addition to the three state-owned banks. Until the early 2000s, the publically-owned Housing Bank (Banque de l’Habitat), established as a result of the National Housing and Savings Fund’s shift to Universal Bank, had been the single player in the mortgage market. The de-compartmentalisation and deregulation of the banking sector (pursuant to the Law No. 2001-65 on credit institutions) have allowed new actors to strategically position themselves in this market. This move was mainly due to the declining performance of the main actor, the Housing Bank (the Housing Bank’s share of the home purchase savings collection market dropped from over 80 percent in 2003 to less than 60 percent in 2014), and to the attractiveness of the housing finance market. Strategic interest in this market has led to fiercer competition between credit institutions that frequently launch dedicated promotional campaigns. An example of this is Al Baraka Bank’s[iii] ongoing “Maskan” advertising campaign. Overall, product offering in this market has become largely undifferentiated but conditions of access to housing finance have considerably expanded through the launching of specialised products tailored to various categories of clients.

While private lending is focused on high to middle income households, there have been savings-for-housing programmes for the formally employed since the 1970s. The Housing Bank is the exclusive manager of a state-subsidised housing loan for low income households called FOPROLOS. Loan rates for mortgages range from 2.5 to 5.75 percent for three different income eligibility brackets, targeted at households earning a regular salary at between minimum wage and up to 4.5 times minimum wage (set at US$ 152 a month – from May 2015 onwards). This compares to an average 7.78 percent rate for mortgages available at commercial rates, in July 2015.

According to the Central Bank’s 2015 annual report, the total value of long-term loans to home-buyers increased by 8.3 percent between 2014 and 2015, reaching US$ 3.71 billion. Mortgage lending is approximately equivalent to 8.6 percent of GDP. Rules modified in 2007[iv] limit loan-to-value ratios to below 80 percent (though up to 90 percent in social lending programmes, like FOPROLOS), and a maximum term of 25 years. Part of this law also requires long-term liquidity matching requirements for loans over 10 years and a requirement that interest rates must be fixed for housing loans longer than 15 years. This requirement means many banks are funded by sovereign bonds and are hesitant to offer loans beyond 15 years. Current challenges include a lack of liquidity and a high level of non-performing loans, which was reported to have increased from 12 percent in 2010 (pre-revolution) to 15.7 percent in 2015[v]. It should be noted that the Supplementary Budget Law of 2015 included measures to treat debts held by beneficiaries of housing credits issued as part of social housing initiatives[vi].

In terms of secondary markets, Tunisia has a stock exchange (BVMT) and, in 2001, developed the legal framework for securitisation to facilitate access to long-term funding for mortgage finance. However, activity has been extremely limited with only two transactions (in 2006 and 2007 respectively, amounting to US$80 million) by a single institution, the International Arab Bank of Tunisia (BIAT). There is also an alternative capital securities market for Tunisian companies that cannot be listed on the main market.

The Decree-Law No. 2011-117 on Micro-Finance Institutions of 5 November 2011, opening the way for new entrants. The government has set up a licensing authority with the assistance of the German Development Agency. This sector is likely to experience growth in the coming years, yet has been slow to launch due to political and regulatory uncertainty for new entrants.  However, the additional untapped market has been estimated at between 0.7 and one million.

The microfinance sector has yet to grow substantially due to restrictive regulation and interest-rate caps set before the Revolution. Only one institution, Enda Inter-Arabe, operates at any scale. At the end of 2013, Enda had 231 520 clients, and a gross loan portfolio of US$ 96 million, with a default rate of only 0.55 percent. In 2014, EBRD provided Enda with a loan for US$ 6.2 million to support them to scale their operations to micro and small and medium enterprises. In 2008, Enda launched a new product, called “Eddar”, specifically for housing improvements to respond to the high demand in this market segment. Loan size and terms grew in 2014, ranging from US$567 to US$2 834, over a maximum period of 24 months. At the end of 2013, the Eddar loan made up 12 percent of Enda’s total portfolio. Average loans were for US$900 and for a 15 month term.

Zitouna Bank was the first institution in 2009 to launch a Mourabaha product. The government is working with the Islamic Development Bank to issue its first Sukuk bonds, which has been presented as a cheap means to access long-term finance. Ultimately, only an estimated 4.1 percent of Tunisian households have access to housing loans.

There is a state programme of subsidised construction finance for residential property developers. The Housing Bank can finance up to 80 percent of the total cost of a project if the housing units are “social” units at 6.78 percent per annum, and up to 70 percent if they are “economic” or “high-standing” units, at 7.28 and 8.28 percent per annum respectively. This financing system was introduced as part of the National Housing Strategy (1988) that saw the private sector as an important housing producer.

Housing Affordability

 Due to progressive housing policies since independence in 1956, housing is more affordable in Tunisia compared to other countries in the region. Overall price-to-income index is often quoted as five, yet this number does not reflect the reality for low-income households, which is a growing market segment as youth unemployment remains high at 40 percent[vii]. These households usually cannot qualify for housing loans and do not have the capacity to pay for even a modest unit.

According to Brookings Institute, the size of Tunisia’s middle class reached more than 40 percent of the total population in 2010, up from 25 percent in 2000. Per capita spending averaged US$2 360 a year in 2010, which ranged from US$1 496 in the Centre West region to US$3 228 in Tunis. In 2012, 1.2 percent of households had expenditure of less than US$2 500 a month, 12.8 percent spent between US$2 500 – US$5 000, 24.9 percent between US$5 001 – US$7 500, 20.9 percent between US$7 501 – US$10 000 and 40.2 percent above US$10 000. In May 2015, the minimum monthly income for a 48-hour working week increased to US$ 152. Yet, this still leaves the lowest tier of formally employed people with only approximately US$ 40 – US$ 80 a month to spend on housing.

In terms of affordability, a 2012 analysis by UN HABITAT calculated that a house of 75 square metres built progressively on peri-urban land would cost about US$14 000, or US$187.5 per a square metre. Such a unit has a price-to-annual-income ratio close to nine for the lowest decile households. Assuming 30 percent of income could be mobilised for monthly housing payments, the repayments required on the cheapest housing loan makes this unit unaffordable to 30 percent of Tunisians households.

The government programme, FOPROLOS, was designed in 1977 to provide housing finance for low-income groups and is still the main tool assisting access to affordable housing. There are three main categories:

• FOPROLOS 1: Households earning between 1-2 times minimum wage can purchase a unit below 50 square metres at US$25 500, with a loan of 90 percent LTV for 25 years, at 2.5 percent per annum.
• FOPROLOS 2: Households earning between 2-3 times minimum wage can purchase a unit below 75 square metres at US$32 100, with a loan of 90 percent LTV for 25 years, at 4.0 percent per annum.
• FOPROLOS 3: Households earning between 3-4.5 times minimum wage can purchase a unit of between 80-100 square meters at less than US$43 400, with a loan of 85 percent LTV for 25 years, at 5.75 percent per annum.

However, in recent years, the cost of a FOPROLOS home has become inaccessible to the target groups, with housing costs at around US$510 a square metre. Qualifying criteria do not enable households with irregular incomes to participate. Furthermore, loan ceilings have not increased with cost of production, so it is difficult for developers to offer a housing supply to match the subsidised financial product. There are clear indicators that, in its current shape, this mechanism is not suited for the attainment of its set objectives, thus prompting a spill over of the demand into the informal sector. According to data from MEATDD, the share of approved FOPROLOS housing units offered by private developers only represented on average six percent of the total approved housing units between 2004 and 2013.  FOPROLOS remains largely underutilised due to a lack of adapted supply rather than a lack of resources. The cumulative surplus (unspent resources) of FOPROLOS reached almost US$230 million at the end of 2013.

This has prompted the government of Tunisia to launch a reflection on the overhaul of the FOPROLOS mechanism, which is widely regarded as obsolete, as part of the new Housing Strategy presented to the Prime Minister in October 2015. The upcoming reform will aim to increase affordable access to housing and should include an extension of the repayment terms as well as a decrease of the self-financing rate but also revised eligibility criteria. The strategy also provides for a new guarantee fund mechanism aimed at promoting access to housing finance, including through FOPROLOS, to modest households that are not affiliated to social security or do not hold a bank account. A removal of the de jure monopoly of the Housing Bank on subsidised FOPROLOS loans is also under consideration.

Housing Supply

The 2014 census and housing survey, released in September 2015[viii], recorded a total housing stock of 3 289 903 units, an increase of 789 103 units since the last census in 2004. This exceeds the number of households, which was recorded at 2 712 976 in 2014. 79.2 percent of Tunisians own their home and an estimated 17.7 percent of the units are vacant, which are usually high-cost units, purchased as secondary homes, luxury rental properties, or speculative investment properties.

Of the annual demand, estimated at 77 000 units per year, around 40 percent is built informally on an incremental basis on quasi-formally subdivided land—the land is bought and acquired through notary deed. A total of 42 587 building permits were issued in 2013[ix]. Of the formal units, approximately 80 percent are constructed by individual households (responsible for 28 000 building permits and 38 300 units per year), two percent by public developers and 18 percent by registered developers, who tend to target middle to high-income groups.

Property Markets

There are two land registration systems. The first regime was established by the Decree-Law of 20 February 1964 on the registration of agricultural lands. This land is compulsory, free of charge, and state-administrated. The second regime involves voluntary applications to register land by land-owners, usually based on a notarial deed. The land registration system involves three main actors: first, the property court, which is the competent judicial authority, intervenes at the onset of the registration process by issuing a registration judgement; second, the Land Survey and Topography Agency (Office de Topographie et de Cadastre, OTC) is a technical body mandated with boundary marking and allotment operations as well as establishing land plans; and, third, the Landed Property Registry  (Conservation de la PropriétéFoncière, CPF) is responsible for issuing, updating, and maintaining title deeds.

The real estate and construction sector is an important contributor to national GDP and employment. In the first quarter of 2016, the number of jobs in the construction and settlements sector was measured at 459 800, which represents 13.5 percent of total employment. The housing sector also accounted for three percent of the revenues of the state via taxes collected from rental and property management, VAT generated by construction and local land taxes.

Prices in the formal real estate market have been increasing at a rate of eight percent an annum since 1990, and have continued to rise following the Revolution. The rental market has experienced increased demand, and higher rentals, due to the Libyans who have fled unrest in Libya. According to the Ministry’s Housing Observatory, in 2010 the average price of a housing unit was US$36 180 at a size of 134 square metres, or US$270 per square metres. Meanwhile, the Global Property Guide reports that the average sale price for a house in Tunis can reach as high as US$2 100 – US$41 00 a square metre.

The number of registered real estate developers continues to increase in Tunisia after the regulatory framework for the profession was put in place in 1990. There are more than 2 700 registered developers today. However, this number is not indicative of an increase in the production of housing, as many investors register as developers to benefit from tax incentives for property construction.

Housing Policy and Regulations

In force for more than 40 years, government financial assistance mechanisms for the housing sector mainly consist of financial subsidies, such as subsidised interest rates and tax exoneration on home saving accounts. To a lesser extent, there are land subsidies through the Housing Land Agency (Agence Foncièred’ Habitation), which also has the objective of reducing land speculation. This regime was enhanced in 2007 through the issuing of direct subsidies by the National Solidarity Fund (Fonds National de Solidarité), targeted to benefit households wishing to purchase social housing. Complementary mechanisms were established in the 1980s in the form of slum upgrading schemes managed by the Urban Rehabilitation and Renovation Agency (ARRU) and the National Programme for the Resorbing of Rudimentary Lodging (PNRLR).

In 2014, the Ministry of Public Works, Housing and Settlements undertook a comprehensive review of its housing policy, particularly in terms of exploring public-private partnerships. The review also looked at possible reforms of the subsidy programmes intended to widen the scope and rationalise government housing aid, as well as the expansion of the mandate of FOPROLOS. Preliminary recommendations for a new National Housing Strategy were presented by the government in September 2014 and included revitalising the role of the Housing Land Agency in land provision.

Housing Sector Opportunities

Despite a slowdown in the pace of new constructions (as evidenced by a 6.5 percent decrease in the demand for cement in the first quarter of 2015 according, to the Ministry of Industry), and as the outlook of capital markets and the banking sector remains uncertain, Tunisians continue to put their money in real estate as housing in Tunisia is still considered a secure and profitable form of investment. The construction boom can be seen in both the informal and formal sector, particularly apparent in the high cost of land and construction materials. However, continued price rises may not be sustainable, and there is a risk of this further excluding low to middle-income households from homeownership.

Contribution of the housing sector to GDP was estimated at US$2.8 billion in 2014, representing 6.6 percent of GDP. Removing restrictions on foreign ownership of property and the rise in demand for Islamic housing finance may allow the sector to grow significantly.

A slight upturn in the population growth rate will help to drive the market’s expansion. With regard to solvency of the demand, the impact of the economic changes underwent by the country since 2011 will tend to “variabilise” income levels. Demand for housing credits will grow in complexity and will less and less rely on traditional products, which will impact the evolution of the nature of demand.