Nigeria: Excerpt From Africa Housing Finance Yearbook 2015

Overview

This year has been an exciting yet uncertain year for Nigeria. The presidential and state elections took place in April, leading to a new party, the All Progressive Congress, taking the presidential office. The Naira has spiralled up and down against the US Dollar for the majority of the year leaving local and foreign investors unsure of the future.

The Nigerian real estate sector is growing fast and is now the sixth largest sector in the economy. Even though it is still unclear what the new government’s agenda is with regards to housing delivery and strengthening the housing and mortgage market, government regulatory reforms in the past ten years are helping to create an enabling environment for housing delivery.

Despite the growth, the quality of housing stock in Nigeria is poor because the construction industry is driven by cost minimization rather than value maximization. The lack of a regulatory body and a non-existent legally binding building code has led to the continued poor performance of contractors leading to poorly constructed buildings.

Almost half of Nigeria’s population live in cities, with 80 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.

Where populations are expanding rapidly land is becoming increasingly scarce and communal land rights are more individualized. In rural areas commercial and other interest have bought up rights to smallholdings either on the informal market or via applications for certification from the government. In urban areas where the majority of the population live in informal settlements the government takes over the land if development needs are deemed to be of high interest. For example in the Nigerian capital, Abuja, the government has destroyed more than 800 000 homes since 2003 because they do not fit in to the Abuja master plan that focuses on prestige and luxury.

For the majority of Nigerians mortgage finance is not an option due to the lack of a robust system. Nigeria has a low home-ownership rate of 25 percent, lower than that of Indonesia (84 percent), Kenya (73 percent), and South Africa (56 percent). 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, experienced growth of 13 percent between 2013 and 2014. There has also been on-going acquisition of banks within the sector, contributing to the continued consolidation of the sector and the increase in competition amongst players.

While consumer credit has grown by eight percent between 2013 and 2014, from N782 billion (US$3.93 billion) to N848 billion (US$4.26 billion), the ratio of consumer credit to total credit to the private sector has remained relatively flat . While there are several initiatives that have aided the credit growth across the board, portfolio diversification within the Nigerian banking sector is not seen to have improved.

The micro-finance banking industry experienced a strong growth of 11 percent in assets over the past year, as well as 26 percent in net loans and advances . Within the same time period, growth attributed to the standardization of the micro-finance banking model has led to increased partnerships and better funding practices. Even with the recapitalization of the micro-finance bank, which led to a 13.4 percent increase in paid up capital, the number of micro-finance banks grew from 820 to 903 within the same time period, most of which are state level micro-finance banks.

According to Global Findex (2014), between 2011 and 2014, the access to finance grew from 30 percent to 44 percent. The growth however has been driven by growth payments, but there has been a significant lag in the impact on access to loans – two percent in 2011 to five percent in 2014. Mortgage finance is still a small percentage of Nigeria’s GDP, at 0.5 percent. In comparison to the UK (80 percent), USA (77 percent), and South Africa (31 percent). It is clear that the mortgage finance in Nigeria is still in its infancy and does not cater to low income earners. The government both federal and states are consciously trying to bridge this gap through policies and funds – land swap initiatives, affordable and mass housing schemes and accessible mortgage finance.

In addition to the Primary Mortgage Banks (PMBs), 19 registered banks also offer mortgages. Interest rates are high and vary considerably from bank to bank. As at September 2014, 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 20-30 percent of the property value, and a repayment term that ranges from 10-15 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$15.70) and above monthly, of 2.5 percent of their salary. Contributors receive a two percent interest rate per annum and are entitled to apply for the NHF-sponsored loan. Up to N15 million (US$75 360) can be borrowed, and the borrower must make a deposit of between 10 percent and 30 percent. In January 2015, FMBN reached an average NHF collection of N2.4 billion per month from its over 4 million subscribers, however only 60 000 houses have been built, representing 1.5 percent penetration. The Nigerian Mortgage Refinance Corporation (NMRC) which launched in 2013, is a liquidity facility with a US$250 million, 40 year term loan from the World Bank. The NMRC provides long-term refinancing to mortgage originators, hopefully also reducing interest rates. This year the NMRC is raising additional equity capital of N2.8 billion (US$143 million) through a shelf registration programme. The move to raise additional capital was to generate confidence in the credit standing of the NMRC as a bond issuing institution.

While the agency has launched initiatives most of which addressing market structure issues the impact on the housing delivery has been poor. The agency launched its first application for 10 000 housing units in July 2014, but about 66 402 applications were received. Of this figure, 25 000 applications are said to have been pre-qualified; 9 000 have been given offer letter, while monies have been disbursed to 33 Nigerians to acquire their homes.

The National Pension Commission recently stated its plan for its over seven million subscribers to the Contribution Pension Scheme (CPS) to apply part of their Retirement Savings Account as equity contribution for residential mortgage. The process is said to be at an advanced stage, and it is expected to help bridge the housing deficit.

Affordability

More than half of Nigeria’s estimated population of 178.5 million live on less than US$1 a day. The unemployment rate increased by 861 111 in the first quarter of 2015, representing 7.5 percent compared to 6.4 percent in the last quarter of 2014. Coupled with the high rate of unemployment, minimum wage remains at N18 000 (US$90.43) per month. Home prices and rent have grown ahead of general inflation and homes for rent and sale on the market are very expensive.

Within the Federal Governments’ Affordable Home Ownership Scheme launched in 2014 the minimum price of a home is N4.5 million (US$22 607.95) with a size of 30 m2 paid over the maximum of 15 years. This will mean monthly payments of N25 000 (US$125.60) a month. In 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 N125 000 (US$628.00). This is unrealistic for the majority of Nigerians who earn minimum wage or less. Even some middle income earners, identified by the African Development Bank who earn between N75 000 (US$376.80) and N300 000 (US$1 507.20) are unable to afford a home on the Federal Government’s Affordable Home Ownership Scheme. It is therefore no surprise that the take-up of the Affordable Home Ownership Scheme, has been weak due of the high costs associated with home ownership.

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 on average four months and 12 procedures to conclude a perfection of title to land (paying stamp duty, registration of land title and obtaining Governor’s consent).

The high cost and time required to obtain certificates of occupancy increases land prices and keeps land transactions within the informal market while reducing security of tenure after the sale. Fifty to 60 percent of the total construction input goes to building materials and with the tumble of the Naira to the dollar this year it was expected that the price of construction would increase due to a large majority of material imports.

In an effort to ensure that land transactions are carried out with minimum difficultly, in January 2015, Lagos State cut down land use charges in the state from 13 percent to three percent of a 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 and 40 percent of which are paying between N20 000 (US$100.48) and N100 000 (US$502.40) yearly (Kolawole, Y 2014).
With the majority of the population renting and low regulatory monitoring regarding rentals, landlords and estate agents dictate the market. To curb this the 2011 Lagos Tenancy Bill was written in to law. It states that landlords can only charge for one year’s rent in advance. However, the law is not being enforced and people seeking rented accommodation are still facing issues of landlords requesting payments of two or more years. Agency fees are another expense the Lagos Tenancy Law has been unable to govern. Even though it is already very high in Nigeria, at 10 percent, exceeding the rest of Africa; in Ghana it is five percent and Kenya is 1.25 percent, the law has led to agencies charging 20 percent to ensure they receive the two years’ worth of commission.

Overall, the policies and interventions implemented by the federal and state governments cater mainly for the middle to high income section of the populace. In some cases they do reach low income earners but they are rarely directed at the informal sector.

Housing supply

In Nigeria, neither the government nor the private sector provides sufficient housing delivery. Housing production is at approximately 100 000 units per year and this is highly inadequate because at least 800 000 units per year is needed to bridge the gap of the 17 million deficit. It is estimated that it will cost US$363 billion to curb the housing deficit and the number is expected to grow at two million houses per year at the current population growth of 2.8 percent per year.

The rapid population increase, and rural to urban migration have contributed to the shortfall of housing in Nigeria. The cost of building materials, access to infrastructure, deficiency of housing finance arrangement, stringent loan conditions from mortgage banks, time to process legal documents and inadequate government policies are also major issues affecting housing delivery.

Through the National Policy on Housing (2006), the Federal Government set a target of delivering one million housing units every year. This is being done through land swap initiatives, affordable and mass housing schemes and accessible mortgage finance to ensure low and middle income earners have access to safe, decent and affordable housing. However the policies in place are yet to meet the housing deficit, for example the Affordable Housing Scheme can only provide about 3 percent of the required housing stock needed.

In November 2014, the Federal Capital Territory in partnership with the Nigeria Labour Congress, the Trade Union Congress and Good Homes Development Co. Ltd laid the foundation for 40 000 housing units for workers in Abuja. The hope is that this scheme, currently under construction, will empower civil servants to own a house.

The Nigerian government has identified the need for public private partnerships for low income housing supply. To this end, 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 front seat in the provision of housing for millions of Nigerians.

In May 2015, Lafarge Africa Plc. in partnership with LAPO Microfinance announced their construction of 500 housing units in the Federal Capital Territory, Abuja on land provided by Federal Ministry of Lands, Housing and Urban Development. 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 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.

Policy and Regulation

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. Even though the new federal administration has not placed housing at the forefront of its agenda, continued housing policies and regulations are in place with an aim to shrink the housing deficit and meet the demand of the Nigerian population.

The Land Use Act (1978) continues to dictate and hinder the land market in Nigeria. To date the objectives 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. Via 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 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 the Act. 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.

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. As a result, the majority of transactions are 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 and registration.
The 2012 National Housing Policy emphasizes the role of private sector financing with the hope of bringing about mass housing, skills acquisition, disaster management, urban renewal, slum upgrading, and job creation. The target of the policy is to ensure one million houses are built 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 operatives. FMBN administers and collects the Federal Housing Fund.
To improve on the objectives of the National Housing Fund Act, The Managing Director/Chief Executive Officer of FMBN, Gimba Yau Kumo, stated in July 2015 that the Federal Mortgage Bank had developed FMBN Home Renovation Loan (FHRL) (Ezea. S, 2015 ). FHRL has been designed to assist contributors to the National Housing Fund for renovations.

Property markets

The Nigerian real estate sector is growing faster than the average GDP at a rate of 8.7 percent (GDP growth at 7.4 percent). BMI estimates that the real estate industry value will grow over the next 2 years, from USD 11.4 billion in 2015 to USD 16.5 billion. This fast growth can be attributed to the fast growing middle-class driving demand for residential property development and, indirectly retail, industrial and commercial real estate development.

Nigeria’s property market is currently stimulated by several large scale projects, including Eko Atlantic , the World Trade Centre Project in Abuja, and the Wings Project in Lagos . The affordable housing market growth is stifled due to structural issues like predominance of less than mortgage-able quality housing and low number of titled land. Land prices are on the rise, driven by low availability, recent devaluation of the Naira and the increase in inflation. However real estate companies are increasingly selling more land units than home units, as a result of the higher impact the macroeconomic drivers have on the cost of building, which threatens their profit margins. Stakeholders in the real estate market have alluded the speculative pricing approach of both land and home units, rather than the assessment of demand characteristics of the area where the land and home units are located – poor data has been identified as a driving factor to this practice. Where titles do exist, geospatial data and the formal registry system is inadequate, and bottlenecks arise in the property transfer system.

According to the World Bank’s Doing Business 2014 & 2015 Reports, Nigeria ranks close to the worst globally, 185th out of 189 countries for registering property. The World Bank estimated that this registration process takes 70 days in 2015 (77 days in 2014) , and costs about 18.6% (20.8% in 2014) percent of the value of the property, more than double the average for Sub-Saharan Africa, and five times the OECD average.

Opportunities

While there has been some growth in the housing sector, it appears only to serve the high income customer segment – the luxury residential market is expected to soon experience an oversupply. The mid to low income segment, where the housing gap lies mostly, have yet to experience the change. As seen in the other emerging markets, housing for the mid to low income customer segment is profitable. For this segment of the market, housing micro-finance would play a significant role in capturing this opportunity.

Regardless of the issues facing the sector, real estate projects are increasingly being launched and completed and investors are even getting higher. 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, de-risking of the sector is bound to happen and new investors can expect the market to continue delivering positive results.

http://www.housingfinanceafrica.org/country/nigeria/