Africa is a diverse continent, with roughly 1bn people, 54 countries and thousands of languages. Additionally, many of its economies are facing similar challenges. One of the most common obstacles African markets face is a shortage of affordable housing. Kenya has a housing gap of 2m homes, for example, and in Nigeria that figure is as high as 17m units. This is hardly unique to the continent, but with high GDP expansion, limited job creation, strong population growth and rapid urbanization, its acuity in African economies is pronounced.
There are upsides to these drivers, of course. By the year 2040, for example, the continent is expected to have the largest workforce in the world, and African cities and towns will see consumer spending exceed $2trn. But to foster and sustain high economic growth – and the positive factors that come with it – African markets will need to improve the fundamentals of its housing sectors. While the specific features of local real estate markets and regulatory regimes vary significantly across the continent, from Egypt to South Africa, chronic housing deficits, lack of funding and an affordability gap are common throughout the region.
Nonetheless, the situation is beginning to change. Policymakers are turning their attention to the problem and are developing both supply- and demand-side interventions to tackle one of the continent’s most pressing social and economic issues.
Demographic trends alone point to the pressing challenge of housing provision. While much of the world is experiencing a slowdown, or even a decrease in population growth, the rate of demographic expansion in Africa continues to increase.
By 2050 the population of the continent will have doubled, meaning that the region will have added 3.5m people per month. Indeed, Africa will contribute more than half of the world’s total population growth up to 2050 and more than three quarters of that growth up to 2100. The situation is not uniform across the continent. Some countries will see even greater population burdens. Nigeria, for example, which currently has roughly 180m people, could have the greatest population increase of any nation in the world up to 2050, according to certain projections.
The sheer numbers alone illustrate the challenges of housing provision. However, given that Africa already has the youngest population in the world, countries within the region are in for a prolonged period of demand for housing as graduates and young professionals contemplate household formation. This is already evident in a market such as Egypt, where there are almost 900,000 marriages per year, and as such a large pool of first time home seekers increasing the demand for residential units.
The demographic factors only partly explain the acuity of the housing deficit in Africa. Another and perhaps more salient factor, however, is the high level of urbanisation — something that has put an immense amount of pressure on existing infrastructure and housing stock. By the midpoint of this century Africa will be home to almost 25% of the world’s urban population. Yet, as of 2015, a third of sub-Saharan Africans living in towns and cities did not have access to electricity. The situation is particularly pressing in Nigeria, where 80% of the population uses kerosene, charcoal or wood for cooking. As this suggests, informality abounds, and almost 50% of the continent’s urban dwellers live in slums or informal housing.
Cairo is a good case in point. The Egyptian capital, which has an estimated population of 12m and as many as 20.5m people in the wider metropolitan area, has been struggling with a lack of affordable housing for several years. Across the country as a whole, the housing deficit stands at approximately 3m units, with the capital responsible for the largest share of this shortfall. “Private developers collectively provide about 20,000 units per year, but this barely scratches the surface of the housing gap,” Magued Sherif, managing director of Sixth of October Development and Investment Company, told OBG. Indeed, according to research by Colliers, a real estate services firm, Egypt needs as many as 100,000 units per year up to 2020 to meet demand. According to Colliers, more than half of Cairenes can afford a property in the $26,000 to $35,000 range, yet the bottom end of the formal real estate market tends to offer units starting from approximately $60,000, affordable only to 13% of Cairenes.
As a result, property and construction in Cairo is dominated by the informal sector. Informal housing in unplanned areas, known as ashwa’iyyat, increased by 2m units across the country between 2012 and 2014. During the same time period, the social housing project of the Ministry of Housing produced just 50,000 affordable units. The vast number of units being churned out by the informal sector illustrates the scope and scale of the potential housing market.
Without decisive intervention, this situation is not going to improve. By 2050 African countries will have had to find accommodation in urban settlements for 900m new home seekers. The scale and size of this demand is unprecedented, the developed world having had over two and a half centuries to make the same accommodation. Given the dizzying pace of change, it is perhaps unsurprising that this urban transformation poses challenges to stability and growth across the continent. African urban centres have the second-highest inequality measurements in the world and are often home to unemployed youth. Indeed, some 75% of Africa’s urban population is under 35, yet youth unemployment is six times higher in the continent’s cities and towns than in rural areas.
Clearly then, the need for housing in the continent’s major markets is only likely to expand further. Addressing that, however, will require rethinking how affordable units are delivered, given that the current pipeline – whether for public or private projects – fails to keep up with demand.
The majority of developers and investors across Africa are focused on the top end of the market, for example. Private capital and investment funds are rarely directed towards the mass housing market and usually focus on the commercial real estate segment. Residential holdings comprise just 2.5% of listed property funds on the continent, compared to 25% in other developing markets and 15% in developed countries. Yet the need for capital is significant. Nigeria, for example, has a housing shortage estimated at 17m units with a funding requirement of $363bn.
This is perhaps unsurprising given that net annual returns in commercial and industrial real estate in Africa touch 20%, according to PwC. The issue of incentivising private sector involvement in mass housing provision is not confined to Africa. Across the globe large-scale volume business is often shunned in favour of high-margin, luxury residential and commercial property.
In the UK, for example, developers have made the point that they are unable to deliver affordable units while satisfying their desire for industry standard profit margins of 17% to 20%. In Africa, beyond the question of margins, there are impediments to building on the scale required to make low-income housing efficient and profitable for developers. From registration to pricing, land is a pressing challenge in many markets. Indeed, the ability to acquire on a scale that would make an affordable housing project viable is often constrained. According to a report by Resilient Africa, a Nigerian developer, South Africa accounted for almost 93% of large lot property transactions in 2014. Complex ownership patterns, such as traditional land ownership rights in countries like Côte d’Ivoire, which do not always reflect formal land registry rolls and inadequate local management of land, are key factors in the ability to obtain and build on sizeable plots in many jurisdictions.
To address this, a number of African markets have launched reforms looking to alleviate the bottleneck, incentivise private sector participation and simplify land registration.
In Côte d’Ivoire, for example, the government has moved aggressively to clarify ownership of land, particularly in peri-urban and rural areas. In 2013 the legislature extended a grace period for the codification of land transactions in rural areas until 2023, in a bid to encourage registration of land ownership outside of major urban areas. Similar efforts include a push to register tens of thousands of immigrants, who were previously undocumented and often settled in slums giving them the ability to own land of their own, as well as a move to survey and register all land that lacks a current title, which by some estimates ranges upwards of 90% of the country. Côte d’Ivoire has also managed to bring down the length of time it takes to register land to roughly 30 days, about half the length of time required on average in sub-Saharan Africa. “The government has taken a big step towards improving transparency by mapping the entire country and assigning price structures per sq metre of land, which is CFA2000 (€3) in urban centres, CFA1500 (€2.25) in the regions and CFA700 (€1.05) in rural areas,” Siriki Sangaré, CEO of OPES Holding, an Ivorian housing firm, and the president of the National Chamber of Builders and Developers of Côte d’Ivoire, told OBG.
“However, a change in the institutional framework that governs land acquisition is needed, since it has remained unchanged since 1960,” he added.
In 2007 Egypt was the first country in the region to establish a mortgage refinancing company. This brings liquidity to the mortgage sector through a secondary market and thus allows originators to produce more mortgages. The establishment of a refinancing company also reduces the cost of capital and allows mortgage firms to extend loan tenors, making mortgages more affordable to the end consumer. Following Egypt’s lead, countries such as Tanzania in 2010 and Nigeria in 2014 also developed their own mortgage refinancing companies.
Indeed, greater volumes and more affordable mortgages will be essential in meeting the continent’s housing needs. Marja Hoek-Smit, director of the International Housing Finance Programme at the Wharton School, University of Pennsylvania, told OBG in 2014 that Egypt’s large-scale home building targets “can only happen when we have mass mortgage finance”.
In general terms, mortgage penetration rates in Africa have some way to go to reach global averages. Mortgage values to GDP range from 28% in Angola to 0.07% in Senegal. However, only five countries on the continent (Angola, South Africa, Cape Verde, Namibia and Mauritius) have a rate exceeding 10%. This compares to rates of 80% in the UK and 77% in the US.
However, while the scale of mortgage rollout remains a challenge, things are beginning to change and financing is beginning to become more accessible and compelling in certain markets. For example, in Morocco, Egypt, Algeria, Ghana and South Africa the average mortgage interest rate is below 10%, while in all of those countries, with the exception of Ghana, the average loan tenor is at 20 years or above. As mortgages become more affordable across the continent, uptake will grow.
The Nigerian government has also made efforts to address financing concerns, and the affordability conundrum, via a public route. The National Housing Fund (NHF), managed by the Federal Mortgage Bank of Nigeria, issues subsidised loans of up to N15m (€67,890) with an interest rate of 2%. Contributions to the fund are made at 2.5% of salary for workers earning N3000 (€13.6) and above per month. As of March 2016 the NHF had raised N191.9bn (€868.5m) from 4.1m contributors and disbursed N5.9bn (€26.7m) to 118,284 borrowers. While this mechanism provides a start for improving the financing environment, it does not fully address the affordability issue.
The NHF’s minimum loan of N5m (€22,630) requires a 10% equity payment of N500,000 (€2263) and monthly repayments of N12,500 (€56). This is out of reach for most home seekers in the country. More than half of Nigerians live on less than a dollar a day, while a significant amount receive the minimum wage of N18,000 (€81.5) per month. For such potential borrowers in Nigeria the down payment alone would take almost nine years of salary savings.
The Nigerian government is taking a more direct approach, with an emphasis on supply side interventions. The government set a target of building 1m homes per year. In 2016 it aimed to construct 250,000 housing units at a cost of N40bn (€181m). State governments were tasked with building an additional 250,000 units, while the private sector was expected to construct a further 500,000. There are also regional efforts afoot to expand affordable housing stock. For example, in May 2015 the International Finance Corporation announced the launch of a new project to support home building in multiple African countries. Developed in conjunction with CITIC Construction, a Chinese firm, the project will provide long-term funding opportunities to local developers. The goal of the $300m project, which is being rolled out through an investment vehicle called CITICC (Africa), is to support the development of 30,000 homes by 2020.
Such projects point to the viability of housing provision for low-income earners through a number of supply- and demand-side interventions. However, it is South Africa that really illustrates the possibilities for affordable housing once the regulation is in place and the will of the public and private sector is present. Almost a fifth of households in the country still live in informal settlements, while the housing deficit in the country could be as high as 2.5m units, which has prompted private equity investors to explore potential opportunities in the segment. International Housing Solutions, a private equity investor, launched their first fund for the affordable housing segment in 2007. This fund financed over 28,000 units in South Africa and achieved returns totalling R1.8bn (€114.5m). Consequently, the investor launched its second fund targeting affordable housing in 2014. Phatisa, a Mauritius-base fund manager, launched its 10-year pan-Africa Housing Fund in 2013, raising $41m. The fund targets affordable and middle-class housing in markets in Eastern and Southern Africa by providing risk capital for developers with land on a joint venture basis.
Such endeavours should provide a fillip for affordable housing across the continent and could set a benchmark for funds looking to enter the affordable housing segment in other markets within Africa. The introduction of private capital into the affordable housing market on a bigger scale will be critical in meeting demand over the coming years. However, it will not be the only solution. Given the current housing deficits across the continent, and the rapid pace of demographic and urban growth, markets will require multiple innovative interventions to meet housing requirements. These will include government-supported home building programmes, better regulatory environments as they touch land registration and credit information, and improved access to finance and microfinance.