Linking the Capital Markets to Access to Finance for Affordable Housing Delivery
In any nation the provision of Housing is a key barometer of development and wealth creation and as we begin to reposition the Nigerian economy. Nigeria can no longer afford to be an exception.
The statistics about the Housing deficit are well known and well documented the solutions are equally well outlined but what has been missing is a road map for implementation.
The Ministry of Finance has identified the housing sector as a key element in the efforts to revive our economy. We believe that this sector has some unique characteristics that make it a conduit for job, wealth and opportunity creation across income groups and across the entire geography of the nation.
We have critically examined the financial value chain to assess where interventions are required to stimulate activity.
In financial terms there are three clear phases in Housing Provision and each has unique financial needs in which the capital markets play a critical role.
Development
Sale and Mortgage Origination
Mortgage repayment and refinancing
I will briefly analyse these and identify how Government intends to intervene to ensure sustainable and predictable development of the industry.
Development finance is the most critical phase of the programme as it is the foundation on which the entire programme must rest. Currently there is no appropriately priced pool of funding for this phase of the cycle. Interest rates north of 20% can not deliver affordable housing. In addition construction is the riskiest phase in the value chain and therefore needs the most attention, as there is project risk, developer risk as well as the commercial risk of selling the completed properties.
Let me quickly speak to a much misunderstood concept of the potential role of pension funds in housing provision. The pension funds have been frequently touted as a funding solution to most needs in Nigeria including housing. Pension funds do represent a pool of long term funds, they are not an ideal source for housing at the development stage due to the high level of risk associated with this phase. Pension funds must not be used to take direct developer risk. What pension funds need are predictable flows of annuity income to meet future pension payment obligations and this is provided at the mortgage phase rather than the development phase.
The solution for the needs of development phase is creative government intervention particularly at this early stage in the development of the industry, where there is a need to provide proof on concept which will attract private capital. This Government plans, with appropriate safeguards, to de-risk lending to approved Housing Developers in order to stimulate growth of the sector. This de risking process will make it easier for banks to extend credit and for the issuance of bonds by developers. That de-risking process will entail the government providing guarantees and other credit enhancement to make the sector attractive and viable. Issuing promissory notes for the cost of land will reduce initial outlay and reduce developer financing requirements whilst creating valuable assets for the State Governments. During the actual construction phase, the Federal Government will act to reduce the cost of funds for the sector and will guarantee the off take of approved schemes.
However government can not and will not issue a blank cheque guarantee and this is where the critical interface with the Ministry of Housing with its plans for standardisation, will be important. Government will issue guarantees only to qualified developers, operating approved schemes who have assessed and demonstrable capacity to deliver schemes on time and within approved price bands. Standardisation is key to enable monitoring of progress and management of the risks. Standardisation will enable government to quickly identify and correct underperforming projects by applying an objective and measurable template. It will also provide the basis for an easily understood cost and pricing model.
Government provision of leverage and guarantees are critical in attracting private sector funds into the industry. The ideal funding mix for mass housing development will be, developer’s equity, borrowed funds and government guarantees. As the industry matures we will gradually reduce the role of government and enable private capital to support the industry. The initial catalysis from Government is essential to stimulate the growth needed and de-risk the sector.
We estimate that we can attract at least N400Billion to the sector each year from domestic sources and even more from international sources. This will create thousands of affordable homes each year as well as considerable employment and commercial opportunities. Nigerians will be engaged as construction workers and artisans through the value chain into the manufacture of materials, finishing and other supplies. Also the management of the housing stock and its maintenance will create a new industry for Housing Management Professionals.
At the second stage, that of mortgage origination, we recognise that the capital market needs large pools of mortgages to create a deep market of mortgage backed securities. In that regard we are advocating the introduction of Housing Co-operatives and other entities that will make titling, risk profiling and the general process of mortgage origination and easier.
We anticipate that buyers of the Housing Stock to provide deposits of at least 20% of the costs of the property and pay the balance monthly with mortgages of up to 20 years. Government is already developing plans to extend the yield curve in domestic securities out to 20 years to provide a baseline price.
We expect that deposits will be built up by a combination of savings and in some cases the opportunity to unlock pension account balances. Introducing the concept of “saving towards a house deposit” will be a novel development which we expect to spawn a new range of housing related savings product offerings by Commercial and Mortgage Banks and will increase the level of savings generally. We equally expect that traditional sources of funding within family and community in Nigeria and in the diaspora to be channelled towards securing deposits. We expect a new generation of a property owning family communities to sprout up across Nigeria.
The provision of mortgages with predictable monthly repayments will free Nigerians from the pressure of sourcing bulk funds to pay annual house rents and will align the cost of housing with the manner in which most people’s earnings are received. That is a monthly repayment will be matched with a monthly income. This will make cash flow easier to manage. Currently the level of mortgage creation in Nigeria is just 1% of GDP compared to 6% in India and 30% in South Africa.
Compulsory insurance of mortgages is an important function in de-risking the opportunity the default risk must be mitigated to ensure optimal pricing of pools of mortgages. The predictable and insured annuity stream that mortgages will provide make them an ideal investment for the portfolios of our pension funds and we fully expect a very active and competitive involvement at this stage of the cycle. This will overtime reduce the cost of mortgages and will extend the tenure over which they can be repaid. Gradually this will enhance affordability and make the dream of home ownership a reality for millions of Nigerian families whilst providing attractive returns on pension investments.
The ability of Housing to provide avenues for wealth creation can not be overstated. Transforming our workers from tenants to homeowners is how true generational wealth can be developed. The provision of affordable housing is also an essential tool in the fight against corruption. An employee with a 35 year working life must have the reasonable expectation of being able to accumulate tangible assets without the need to compromise. The Mortgage market affords this opportunity allowing capital assets to be acquired from legitimate earnings over the income lifecycle and creating true and transferable value.
Outright home ownership may not be an affordable or an appropriate option for everyone in our society and in defining solutions for affordable housing we must not overlook the needs of some of essential public sector workers such as The Police, The Military and our Customs Service. Many of these professions require their workers to transfer location and thus it may not be feasible to participate in Mortgage purchases. We are therefore exploring shared ownership and other models that will enable capital accumulation but will provide much needed flexibility and affordability. Partnerships that will see redevelopment of existing barrack in prime location is being explored to provide decent but affordable homes for these key workers. In such cases we will fund housing by creating instruments that are a hybrid offering a combination of capital appreciation and income.
We already have the mechanism in place for the refinancing of mortgages through the Nigerian Mortgage Refinancing Company (NMRC). The NMRC was developed with the future needs of the sector in view and as our plans are implemented the role they will play will be a significant and a critical one. NMRC has already raised over US$350Bn of capital via a Series 1 15 year fixed rate bond. It has refinanced over N1Bn of mortgages but we expect this number to appreciate aggressively as we rollout our plans.
There has been much discussion on the housing deficit but there is a need to change the narrative to begin to discuss the housing opportunity. Our outlook is that this will be a private sector led initiative with the government playing a supporting and enabling role. We believe that now is the ideal time for Nigeria to talk the bold and needed steps to implement rather than analyse, we believe that as the turnaround in our economy unfolds the Housing Sector will play a pivotal role rapidly accelerating capital formation and transforming community across our nation.
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