Economic Update

22 Jul, 2010

The Nigerian real estate market was characterised by a focus on high-end projects until the third quarter of 2008, when lending dried up and demand plummeted. The subsequent credit crisis hit the industry hard, but it also encouraged investors to enter the neglected affordable housing segment, with the private sector working alongside the Federal Housing Authority (FHA) to combat a nationwide housing deficit.

The FHA has announced that a four-year federal project to build 100,000 housing units will commence in February 2010. Around $2.38m in contracts will be awarded, largely through public-private partnership (PPP) contracts.

“The message is finally getting home that government, no matter how well endowed or benevolent, cannot underscore the wisdom of working with the private sector,” local press reported Grace Ekpiwhre, the minister of state for works, housing and urban development, as saying. “For one thing, it frees public funds that could now be deployed for other areas of need.”

The lobby group Real Estate Developers Association (REDAN) has also pledged to construct 400,000 units, starting with 10,000 in the capital Abuja by February. While some of the funding for the project has already been secured from local banks, REDAN is also campaigning abroad for foreign direct investment.

The efforts of the FHA and REDAN are laudable, but still fall short of what is needed to resolve the housing crisis. According to the World Bank, 720,000 new houses per annum must be built for 20 years to meet demand, which is increasing at 20% annually in urban centres such as Lagos. African Independent Television has reported that the FHA only built 30,000 homes between 1973 and 2006, while the real estate sector accounted for less than 2% of GDP in 2009, according to the National Bureau of Statistics.

Homeownership is also limited (estimated at 20-25%) due to a weak system of mortgage lending, especially to low-income clients. In November 2009, the Federal Mortgage Bank said it was in discussions to increase its capital base to N1trn ($6.6bn), which would enable it to bring the homeownership rate up to 80%.

Freeing up more land is also a crucial component of bridging the housing supply gap. A Land Reform Commission Bill is now before the National Assembly to reverse the antiquated Land Use Act of 1978, which effectively gave state governments control of “all land comprised of in their territory”. Backed by President Umaru Yar’Adua, the legislation will remove land from the authority of state governors, making it available for purchase by developers, who will in turn be able to charge lower prices for their units.

“At the end of the day, we intend to make the houses available for the common man, which is why a two-bedroom house will cost as low as N2.5m ($16,594),” said FHA managing director Terver Gemade, as reported by local press.

Unfortunately, increasing private sector participation in the real estate sector still faces a number of hurdles, particularly for those developers entering the affordable housing market. Challenges can range from a lack of infrastructure to heavy taxes for businesses. The World Bank’s “Doing Business in 2010” report ranked Nigeria 153rd out of 180 countries for ease of obtaining licensing for construction, an 18-step procedure that takes nearly a year.

Previous governments have notably failed in their mass housing schemes. The Shehu Shagari administration 1979 Policy on Affordable Housing “was unable to meet the nation’s housing needs because it was based on the unsustainable tenet that houses will be provided by government,” according to a report by the US embassy in Abuja in 2007.

In this respect, the FHA’s decision to involve the private sector is a huge step in the right direction, though it will need to increase the number of homes on order if any significant headway is to be made in solving Nigeria’s housing situation.