Africa's Mortgage Market Is Transforming

Kwaku Gima has spent almost fifteen years building his family a house, and it's still not finished. The floor hasn't been plastered smooth and the kitchen cabinets are yet to be fitted. Last year the 47 year old high school teacher in Ghana got a mortgage from a co-operative society to build a home he expects to be complete within nine months.

The difference? Gima built his first house the traditional African way: One stage at a time, over many years whenever he could spare something from his paycheck.

The scenario resonates throughout sub-Saharan Africa where the mortgage market remains undeveloped against the background of a growing middle class in need of affordable homes (the World Bank estimates the middle class population will be 43 million come 2030.) Growing economies in countries such as Nigeria, Ghana, Zambia, Angola and Kenya have attracted investor interest.

Demand for residential housing aimed at the middle class, and also catering to specialised niche markets such as provision of housing and office space to the expatriate and business communities, is witnessing a surge across cities in Africa.

The result has been a boom in the real estate sector as developers push to provide housing in urban areas.

TradeInvest Africa interviewed some experts about how the rising demand for affordable housing is affecting the property and housing finance markets in West Africa.

“The challenge with provision of housing has not been building or lack of demand, but access to financing to buy homes. What is missing are lenders willing to take the risk,” says independent investment consultant Joel Vusumuzi.

Finding financial partners willing to provide potential buyers with mortgages is a big hurdle for developers. Most banks and other financial institutions outside South Africa are currently limiting their services to provision of home financing schemes through large companies and government agencies; as well as financing building loans – at least until the secondary mortgage market develops.

According to development analyst Bright Simons, government owned or sponsored mutual fund driven housing schemes and the pseudo-mortgage arrangements that allow public sector employees to own their own property have proven to be relevant. “Housing schemes and mortgages tend to be inseparable in Africa, particularly as the secondary market is effectively vacant,” he says.

Regulatory and legislative environments not tailored for mortgages, as well as a consumer base wary of acquiring assets through personal debt have stifled mortgage take-up in many countries. But the situation has been changing.

“Financing mortgages in Africa could be a major challenge to institutions unless they are totally committed,” says Dominic Adu, chief executive of Ghana Home Loans (GHL). GHL is a specialised residential mortgage finance company which has offered loans valued at over $80 million dollars since it’s inception in 2006.

“We found ourselves operating in an environment where even identifying the applicant was a challenge, let alone establishing their credit-worthiness in the absence of credit bureaus," he says. Coupled with manual title searches and registration processes, GHL also had to deal with the cost and delays in registration of titles and collateral.

GHL, (whose financiers include the International Finance Corporation and South Africa’s Standard Bank), has been championing interventions in Ghana’s housing sector that saw the government there recently pass a bill on credit bureaus and new legislation on foreclosure.

Due to increasing sophistication in Ghana’s legal framework, housing to cater for especially the lower end of the market has increased because private estate developers are able to sell properties to buyers with as little as a 15% deposit. “We believe strongly that we have perfected the model and that the potential constraint on us is investors’ appetite for long-term African mortgage backed securities,” adds Adu.

State-owned companies in sub-Saharan Africa have previously provided housing for their workers, an experiment with socialism which has been stopped by hard economic realities. Governments have sold off most of the stock to occupants, and now shortages running into millions of housing units exist in urban areas.

“Many parts of Africa have welfare housing that can easily provide the grist for an expansionary mortgage strategy on the part of bold investors,” says Simons. “Ideally the deal comes with a home improvement package, the government gets some cash for other schemes, and the buyer is blessed with a newly minted mortgage,” he adds.

The development of the mortgage industry mostly hinges on addressing issues pertaining to land title. According to a review on housing finance in sub-Saharan Africa conducted by UK firm FinMark Trust, 75% of Africans can’t access a mortgage largely because they lack title deeds to their land. The research identified the majority of people affected as low income earners who are in the first place unbanked.

FinMark fronted a strong case for opportunities in non-mortgage finance, and particularly micro-financing for housing delivery.

Micro-finance for housing is an emerging trend that established micro-finance institutions are exploring as a way of diversifying their lending portfolios beyond providing small enterprise loans.

South African micro-financier Blue Financial Services acknowledges the tremendous need for housing and housing products in Africa, and plans to tailor the product range currently offered in South Africa for the 13 countries in which it operates. “Obviously funding is crucial,” says Blue's general manager of Home Loans, George Earle. “We are constantly looking for funding particularly for housing micro-finance, as the terms of these loans are generally longer,” he adds.

Expert opinion

Mortgage lenders in Nigeria recently called for improved basic infrastructure, saying it was a major challenge as it adds up to 30% of housing development costs. Gboyega Fatimilehin, chief executive officer of Lagos-based real estate firm Diya, Fatimilehin & Co gives his take on the industry.

How has the credit crunch affected Nigeria’s mortgage market?

It has significantly affected the ability to lend, borrow and buy. The situation in Nigeria is further exacerbated by recent banking reforms implemented by the Central Bank of Nigeria as most lending/financial institutions are now struggling to recover unpaid loans and are therefore skeptical about releasing new loans. The quantum of contribution from Nigerians in diaspora has been dramatically reduced. Previously diaspora capital inflow has been used to purchase in cash, or handed over to relatives to help them build. Notwithstanding this, investing in real estate is a good bet, but with a certain level of caution. Proper feasibility and viability appraisals must be adequately evaluated before delving into any venture.

What is the average interest rate currently paid on mortgages?

The Central Bank of Nigeria directive for the interest rate is 22%, while commercial banks and other financial institutions charge 23-25%. This may however vary based on the amount sought and the nature and viability of the proposed project.

What about incentives and regulations implemented by the government to develop the mortgage industry?

They exist but have not yielded the much desired result. The mortgage market in Nigeria is still very under-developed with little and often times failed regulations by the government. Furthermore the interest rate is very high and this acts as a disincentive for prospective home owners and property investors as most mortgages in Nigeria are really not mortgages per se. Previous interventions such as the establishment of the Nigerian Building Society and the Federal Mortgage Bank of Nigeria, are yet to yield the desired result.

Are there investors outside the mortgage industry offering concessional terms to house buyers in deals mimicking mortgage financing?

Yes, some credit and thrift institutions and cooperatives offer concessionary terms to house buyers outside the mortgage industries on reasonable terms. A typical example is the Executive Housing Cooperative which was founded to help young people to get on the property ladder at reasonable cost. But such efforts are too limited to have a major effect on the Nigerian market because of the huge gap existing in demand and supply.

Would you say the market for personal finance is seeing greater demand ? If so, what are the factors fueling it’s growth?

Yes. It is actually a major source of development in housing provision for the renting market. Factors fuelling it include increased incomes, level of literacy and trade. The Inadequacy of mortgage financing at low interest rates on a long term basis is making people turn to personal finance to fund the purchase of homes and other assets. A very large factor that fuel this is the unequal distribution of wealth with about 2% of the population holding 90% of the wealth.

How can challenges facing the Nigerian mortgage industry be addressed?

The industry can be reformed through the following;

  1. Adequacy of financing terms – long term and low interest rates
  2. More government regulation and control
  3. Amending the Land Use Act and computerising land titling through the use of GIS (Geographic Information system) to hasten and reduce cost of transactions in land thereby enhancing accessibility for development purposes.
  4. Establish cooperative housing
  5. Stability of economic factors such as interest rates, inflation and exchange rate.

The middle class in Nigeria is growing bigger by the day, This presents endless business opportunities for developers, suppliers of construction materials, as well as financial institutions.

If there is sustained economic growth in Africa at the predicted 6%, people are likely to earn more and demand assets such as houses – a very welcome piece of news for property investors and banks plannning to diversify into housing finance.

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