Innovative Financing of Affordable Housing
Innovative Financing of Affordable Housing in Nigeria Presented by S K Yemi Adelakun
Chairman Finance Africa at the 11th Abuja Housing Show on the 18th July 2017 at the International Conference Centre, Abuja
1. Definition and Objectives of Affordable Housing
Affordable housing has been defined as housing which is deemed affordable to those with a median household income. Generally the term affordable housing describes housing, whether rented or owned, that is affordable at different income brackets. Most nations regard housing costs to be affordable at or below 30% of one’s income and these include Nigeria. There is a rule limiting Federal Civil Servants to a maximum of 30% of their income to service mortgage loan.
2. Therefore, the aim of any affordable housing programme is to provide, through special arrangements, sustainable housing to the low and medium income earners in the society at a price that can be serviced by not more than 30% of their income. Ordinarily, it would be difficult if not impossible for members of this group to acquire decent houses at prevailing market prices with 30% of their income.
3. Beyond income, other determinants of housing affordability or mortgage eligibility are tenure of mortgage and interest rate.
In order to put the definition of Affordable housing and determinants of affordability into proper perspective, let us consider the following scenarios for housing affordability or mortgage eligibility
Scenario 1: Affordability for 20 years tenure at 6%, 12% and 18% interest rate
Annual Income 6%. 12%. 18%
N1 million < N4m N2.5m N1.8m N2 million < N8m N5m. N3.6m N3 million < N12m N7.5m. N5.4m N4 million < N15m N10m N7.2m Scenario 2: Affordability for 10years tenure at 6%, 12% and 18% interest rate. Annual Income 6% 12% 18% N1 m. N 2.5m N1.94m N1.54m N2 m N5m. N3.87m N3m N3 m N7.5m. N5.8m N4.6m N4 m N10m. N7.7m N6.1m To understand the implications of the above scenarios, It should be noted that the annual salary of a newly employed graduate into the civil service in Nigeria is less than N1 million and the salary of a Director is below N4 million. While new graduates can qualify for mortgage tenure of 20 years a Director due to age and retirement date may not qualify for more than 10 years. There are many civil servants in need of housing earning well below N1 million per annum given the fact that the annual minimum wage is N216,000. This applies to other formal and informal income earners. The above scenarios also highlight the implications of interest rate differentials on affordability for people in the same income bracket. 4. The deduction from this analysis is that for houses to be affordable to income earners, the prices should be between N2 million and N15 million and mortgage and construction finance must be at single digit interest rate. This also applies to people in the informal sectors whose housing needs must equally be catered for. Houses must therefore be designed and constructed to fit within this price bandwidth and financed at single digit interest rate to be affordable 5. This situation poses both challenges and opportunities for all stakeholders who have important role and responsibilities that must be discharged in a collaborative manner. a. Government The government has a Leadership Role to play in effective delivery of Affordable Housing for people in the formal and informal sectors alike. Allocation of land, management of interest rate, enabling environment, incentives and financing are some of the areas requiring government intervention. The justifications for government interventions in affordable housing include: a. dividend of democracy and welfare of average Nigerians b. Inability of majority of Nigerians to afford housing at prevailing market prices c. constitutional requirement for government to guarantee decent accommodation for Nigerians d. Government’s promise to provide 1 million houses per annum e. Housing is a basic necessity that will Improve quality of life and standard of living of Nigerians f. support government war against corrupt practices, terrorism and other social vices G. Create avenues for skill acquisition and employment generation H. Housing has Multiplier effect of growing the economy. b. Private Sector Partners On the part of the private partner, latest technology in construction, expertise, low cost funding, economies of scale and moderate return on investment should be the value proposition. Non-profit organisations and philanthropists that can add value to the delivery of affordable housing projects are also available. c. Offtakers There is a role for the would-be beneficiaries of affordable housing. They must first organize themselves into formidable housing cooperatives or join existing ones. They must actively engage in group savings towards equity contribution for mortgage financing and there should be attitudinal change towards new designs of houses. The trend in affordable housing is now multiple stories as opposed to bungalows. Commercial orientation and entrepreneurial skills should be developed among members of the cooperatives for additional income. 6. In view of the foregoing, Affordable housing cannot be left to market forces or be achieved through award of contracts. There must be deliberate government policies and concerted efforts of all stakeholders, beneficiaries inclusive, to achieve affordable housing. 7. Success Factors in Affordable Housing The key success factors in affordable housing are a. Data on offtakers’ demand and affordability index b. minimization of costs including cost of land, construction, infrastructure, building materials, labour, supervision, designs, consultancies, government taxes and charges, and cost of construction finance and cost of mortgage finance. c. adequate, easy and cost effective access to resources including land, materials, technology, skilled labour, and more importantly finance, d. Legal framework guiding industry activities e. Quality assurance f. Leadership role by government g. Strategic partnerships among stakeholders h. Housing Revolving Fund i. construction Finance at single digit interest rate j. Mortgage finance for off takers at single digit interest rate k. Equity contribution by off takers l. Standardized mortgage origination and recovery system n. Land Title documents o. Provision of basic infrastructure p. Guaranteed exit strategy for development partners like bankable offtakers guarantee q.Availability of quality and cost effective building materials from local sources r. Skilled manpower in building 8. Existing Financing Arrangements for Affordable Housing Affordable housing finance can be categorized into two types and these are construction finance and mortgage finance. Existing Institutions for Housing Finance a Federal Mortgage Bank of Nigeria b. Federal Government Staff Housing Loans Board c. Nigeria Mortgage Refinance Company e. Family Homes Fund f. Commercial Banks a. Federal Mortgage Bank of Nigeria The organization offers mortgage to contributors at 6% interest rate but the institution has not been able to meet a fraction of the demands from its customers due to inadequate funding of the institution and lack of affordability by offtakers. Funding must be improved if the organization is to perform its role diligently. b. Federal Government Staff Housing Loans Board (FGSHLB) offers housing loan at 3% interest rate to public servants but it depends solely on annual budgetary allocation which is grossly inadequate. The organization’s effectiveness should be enhanced by improved allocation of funds. c. Nigeria Mortgage Refinance Company NMRC was established to refinance mortgages. There must be mortgages before they can be refinanced and unless efforts are made to deepen the mortgage market the organization may not be as impactful as it should. d. Family Homes Fund Family Homes Fund is new and yet to make considerable impact. One can only hope that the fund will be directed to deepen mortgages in the system as a way of stimulating construction of new houses by private developers. e. Commercial Banks currently offer construction and mortgage finance at interest rates over 20%. This is not sustainable as many would be beneficiaries of affordable will not patronize the commercial banks at this rate. 5. Recommendations for Innovative Financing of Affordable Housing in Nigeria In order to further deepen financing for affordable housing in a sustainable manner the following measures are hereby recommended: a. National Assembly should Enact a bill on Nigeria Affordable and Social Housing (NASH) Fund making the fund a first charge on the Consolidated Revenue Fund and impose levies on corporations and financial to contribute to the fund. Inspiration can be drawn from TETFUND Act. b. Establish Special Purpose Vehicle to facilitate investment of Pension Fund in affordable housing c. Subsidise Cost of land allocation for Affordable housing d. Provide enabling environment for injection of funds from bilateral and multilateral institutions and individuals. For example Shelter Afrique, Africa Development Bank, Chinese Africa Development Fund and Nigerians in Diaspora can provide funding for the development of Affordable housing in Nigeria. e. Partnerships with private developers for building technology, construction finance, and expertise with incentives to build affordable housing based on predetermined designs and negotiated price bandwidth. f. Infrastructure development through collaborative approach and strategic partnerships. g. Organise offtakers into housing cooperatives and encourage savings towards equity contribution as with Saccos in Kenya h. CBN should implement special intervention for mortgage and construction finance to be made available across financial institutions at single digit interest rate as was done in other sectors of the economy like aviation and agricultural sectors. Similar policy was adopted in 2006 during the sale of government properties. I. Establish Nigeria Affordable and Social Housing (NASH) Programme or Nigeria Integrated Social Housing (NISH) Agency since Federal Housing Authority operates outside the affordability of majority of Nigerians. Otherwise, Federal Housing Authority should be compelled to provide affordable housing within the price bandwidth of low and medium income Nigerians. j. Strategic partnerships among stakeholders in form of Public Private Partnerships k. Restructure Housing Finance System in Nigeria for greater efficiency l. Subsidies, waivers and tax credits where necessary should be considered by governments for stakeholders to drive down cost of affordable housing. j. Government should liberalise access to land for affordable housing. Land which is a major factor in housing development entrusted to governments should be allocated at little or no cost for affordable housing programmes directly to well organized housing cooperatives. This can be recovered in form of tenement rate of developed houses. k. Processes and cost of obtaining land titles should also be streamlined to facilitate access to funding for housing projects. Lack of land title has been a major impediment in the delivery of affordable housing. l. policy initiatives directing banks, capital market, insurance, pension administrators, and other financial institutions to offer preferential rates and innovative financial instruments for housing construction and mortgage finance. j. Facilitate injection of foreign capital into the housing sector by offering sovereign guarantees, facilitate hedging against exposure to foreign exchange fluctuations, and ensure ease of repatriation. k. Standardize mortgage originations and recovery for offtakers in the formal and informal sectors. l. Collate Data and statistics of offtakers and potential beneficiaries of affordable housing for planning purposes m. Provide rent to own options for those without mortgage eligibility to acquire their houses. n. Equity financing should complement debt financing as a source of funding affordable housing. Mr S K Y Adelakun recently retired as Permanent Secretary (CSO) and Chairman Federal Integrated Staff Housing (FISH) Programme in the Office of Head of the Civil Service of the Federation