Since it has traditionally had a limited real estate market, few developers, residents or investors up to now have viewed housing in Ghana as a worthy asset. However, with the start of oil production in late 2010 and bold plans for gas-fed industrial growth and diversification, things may be beginning to move in the sector.

Trends in demography, income and availability of retail credit also point to increased demand for residential housing over the next decade. Ghana’s move towards middle-income status should also create significant opportunities in the commercial real estate segment, suggesting that although challenges and limitations remain, the market for both investors and developers is broadening markedly.

TRACK RECORD: Real estate services accounted for 1.78% of Ghana’s GDP in 2010, according to the Ghana Statistical Service, and the country continues to record a limited amount of real estate transactions.

According to the Ghana Investment Promotion Centre, residential real estate transactions have averaged an annual rate of 85,000 over the past decade, with an estimated value of $1.7bn. This compares to levels of around 320,000 transactions per year in the South African market in the decade to 2011, according to Just Property Group, a South African real estate brokerage, management and consultancy firm.

Nonetheless, the signs in Ghana are positive, suggesting that the country can begin to bridge the gap to one of Africa’s leading property markets over the next decade. As a most basic indicator of demand, Ghana’s robust population growth suggests substantial opportunity for new housing units. The population has increased from 22.9m in 2008 to 24.7m in 2010 and has jumped by 30.4% since the last census in 2000, according to the Ghana Statistical Service.

Furthermore, the current demographic structure suggests that housing unit requirements will grow at a level above this rate, spurred by a disproportionately youthful population (38.3% below the age of 15 in 2010) and a falling mean household size (that stood at four in 2008, according to the Ghana Statistical Service). With the urban population rising from 43.8% of the overall populace in 2000 to 50% in 2010, according to the UN Department for Economic and Social Affairs, the future demand for modern housing stock in Ghana’s cities should increase dramatically.

HOUSING DEFICIT: According to the Ghana Investment Promotion Centre, this points to a residential property demand of 100,000 units per year, an accumulated shortfall of 250,000 units and a current annual supply gap of 30,000 units. However, this assessment, published in October 2011, falls far short of the estimate of the Ministry of Water Resources, Works and Housing, with the deputy minister, Hanna Louisa Bisiw, reiterating in May 2012 the government’s deficit estimate of 1.5m units. Indeed, the Ghana Housing Profile, drawn up by the UN Human Settlement Programme ( UNHabitat) in conjunction with the Ministry of Water Resources, Works and Housing, forecasts that the country will need another 2m housing units by 2020.

However, these figures could be misleading. The Ghana Housing Profile estimates that 90% of the housing stock is provided by the informal sector, suggesting that the scope for private developers to build with some profit margin is limited to a small demographic. According to Alexander Tweneboa, the president of the Ghana Real Estate Developers Association ( GREDA), “The effective supply from the private sector is really quite low. If you include the top end of the market, you are looking at 2500 to 5000 units a year.”

Using assumptions that 80% of the population in Ghana earns less than GHS1000 ($593) a month and will spend one-third of this income on housing, the highest house price that the top end of this cohort can afford is GHS36,000 ($21,344), on a straight line basis without interest and fees. This figure is well below the cost at which the private sector can build homes for profit. What developers can produce with interest rates, construction costs and land costs at the low end of the private sector market costs around $30,000.

With a mandated daily minimum wage of GHS3.10 ($1.84) in 2010, according to the Ghana Statistical Service, representing the bottom end of the formal sector, the prospects for developers to tap into much of this pent-up demographic and residual demand remains limited. According to Tweneboa, “The undersupply in the market now is at a social housing level. The private sector is building and selling to make some margin. The deficit in housing is 1.8m units, but 99.9% of this deficit is at the social housing level.”

The government’s attempts to involve the private sector in the development of low-cost housing projects have, thus far, not met with much success. In 2009 it was announced that the government had struck a deal estimated at $10bn with the South Korean firm STX to provide 200,000 housing units in the country by 2015. However, after almost 12 months of uncertainty, in which delays were attributed to “boardroom wrangling” at STX, late President John Atta-Mills announced in January 2012 that the government was looking at alternatives. In April 2012 the minister of employment and social welfare, Enoch Teye Mensah, revealed government plans to repossess the 15 sites handed over to STX. Part of the deal signed with STX was recently awarded to South Africa’s Guma Holding.

While this has undoubtedly dented the government’s social housing policy, it may be to the benefit of the country in the long term. Indeed, the government has seemingly already rethought its strategy, announcing at the launch of the Ghana Housing Policy in June 2012 plans to use the private sector as the main driver of low-cost housing construction with the government as the facilitator. Specific policies to implement this strategy include accessing funds from Shelter-Afrique, a pan-African financial institution dedicated to financing housing and related infrastructure at low interest rates to support low-income housing; providing a land bank for affordable housing, some of which will be made available to private investors, and increasing the local material component in housing construction.

Although this strategy is in its infancy, suggestions of measures to tackle the problems of financing and land availability may make private developers begin to reassess the potential profitability in this volume-driven segment. Furthermore, with strong economic growth forecasts, the income statistics for the country – and thus the property ownership potential of the populace – are likely to improve. The commencement of commercial oil production is expected to act as a catalyst for significant growth over the coming years. In 2011 Ghana’s GDP grew at the rate of 14.5% and is expected to remain above 8% in 2012, according to the IMF.

This has led to predictions that the country will achieve middle-income status this decade, with Kodwo Ewusi, the former director of the Institute of Statistical, Social and Economic Research, telling the First Annual Economics Conference at the Kwame Nkrumah University of Science and Technology that he expected Ghana to have a real per capita income of $4800 by 2015 as a result of the oil find.

HOME LOANS: While most developers agree that the lowest rung of the property ladder in the privately developed market starts around the $30,000 mark, some argue that increased social mobility is already bringing this into the range of many young urban dwellers. Kojo Addo-Kufuor, the chief operating officer of Ghana Home Loans, told OBG there is plenty of demand for units priced in this range and upwards. “The demand side is strong and it’s not going away. We have a future middle class graduating out of tertiary institutions. Do they have purchasing power? Increasingly so,” he said. To illustrate the point, to access a Ghana Home Loan of $30,000, with monthly repayments of $340.84 over 20 years at a rate of 12.5%, a borrower would need a monthly net income of GHS1533.79 ($909). Addo-Kufuor argues that a significant proportion of graduates with five years’ work experience could comfortably achieve this income, either by themselves or as joint applicants with their spouses.

Mortgage penetration in Ghana has reached around 8% in 2012, according to GMX Consulting, compared to 13.5% in Africa for the five years to 2009, according to HFC Bank. A robust regulatory environment has encouraged the proliferation of mortgage providers. The Bank of Ghana places a cap of 40% of monthly salary against total loan repayments for consumers, while the introduction of a credit reference bureau, XDSD ata, in 2007 has created a more transparent environment for banks to assess creditworthiness. In March 2012 Dun & Bradstreet opened Ghana’s second credit bureau, further improving the environment for retail lending. “There is significant potential for the development of mortgage finance schemes. But the market also has to become more transparent, as there are limited ways of making someone pay a loan or a mortgage”, said Ian Morris, managing director of Trasacco Valley, a luxury housing developer in Accra.

Addo-Kufuor said, “We have a default rate well below 5%. The reason for this is that a lot of our customers are first-time buyers, rather than speculative buyers or big investment buyers who are likely to walk away from a property when the going gets tough.” However, there are still challenges. According to the Ghana Association of Bankers, the non-performing loan ratio in the country increased from 16.2% in December 2009 to 17.6% in December 2010. While the mortgage component of this is unclear, the general level of default is likely to hamper the further expansion of retail credit and the cost of borrowing. The regulations have also been tightened in other ways to provide greater legal assurances to lenders. Faith in the process of foreclosure, for example, seems to have grown since the introduction of the Home Mortgage Finance Act 2008. Under the legislation, clearer procedures for the seizure of properties in default are laid out.

The market, however, is not completely enticing for the lender or borrower. The average terms for their dollar loans are a 12-13.5% interest rate, a loan-to-value ratio of up to 80%, a repayment period of up to 20 years and a maximum loan size of $300,000 (although it had gone as high as $700,000 previously). While the repayment period and loan size are both encouraging for bolstering property demand, requirements to find a 20% down payment, the interest rate and the volatility of the currency remain something of a deterrent.

According to Carlo Matta, the CEO of Laurus Development Partners, a joint venture with private equity firm Actis focusing on property development in West Africa, “The conditions for credit approval and interest rates need to change in order for the housing market to really take off. Currently, if you want to buy a $70,000 home, you need a household monthly income of $3500 to apply for bank credit. The percentage of people in Ghana that make that amount of money is quite small.”

The problem with the need for a 20% deposit on property may begin to change as Ghana Home Loans, among others, are now looking to introduce deposit insurance, which would effectively mean buyers only have to find up to 10% of the price up front. However, the weak currency and high interest rates remain issues.

Most of the lowest-rate mortgages (and in many cases the fixed-rate mortgages) are offered in dollars because of the depreciation of the cedi. In June 2012 the cedi was trading at 1.9325 to the dollar, according to Bloomberg, the lowest level since Bloomberg began compiling data in 1993. The currency has depreciated 16% in the year to June, a situation that has led to the increasing dollarisation of the Ghanaian economy. Such a trend has affected the ability of Ghanaians paid in local currency to get on the property ladder, with an article in the Daily Graphic in June 2012 stating that the depreciating cedi has led to a massive cancellation for homes in the $20,000-30,000 range as house prices have become much more expensive in cedi terms.

Addo-Kufuor argues that mortgage payments have held despite drastic cedi depreciation against the dollar. Nonetheless, the company is now exploring the possibility of introducing a fixed-rate cedi mortgage of up to 7.5 years. This would undoubtedly encourage greater uptake among the population, as they could access a 15-year local currency mortgage with only one change of interest rate allowed. This means that the firm would offer a 15-year mortgage but as the longest fixed rate they can offer is 7.5 years, the terms of the loan would be renegotiated halfway through.

INTEREST RATES: Despite such plans, high interest rates, which averaged 25.93% for commercial bank lending across all sectors in December 2011, continues to be a challenge. Concerns over macroeconomic instability including public indebtedness are driving interest rates that have a profound impact over both supply and demand in the property segment. While companies such as Ghana Home Loans are able to offer fixed-rate dollar mortgage loans, mitigating some of the risk of the variable rate in an uncertain economic climate, the cost of borrowing continues to have a limiting effect on demand. For both end-users and investors, a mortgage interest rate in the 12-13% range brings into question the viability of purchasing property.

In the high-end segment, this may be of little consequence. Nana Kwame Bediako, president and CEO of at Petronia City, a mixed-use development under planning in Takoradi, said, “At the higher end of the market, most people are cash buyers.” However, these rates significantly inflate the cost of property for middle-income consumers who require loans to finance purchases. Such rates limit the potential of property as an investment vehicle. For example, in the buy-to-let market, the attraction of strong rental yields is diminished by a high cost of borrowing and the potential for better returns elsewhere. While Kwaku Asante-Boateng, the CEO of Real Concepts, the sole agents for seafront gated community La Beach Towers, argues that investors leasing to the expatriate market could expect gross yields of between 10% and 13.5% on long-term rentals, the high cost of borrowing diminishes the benefits of these returns. The availability and cost of funds is also having an impact on the supply side, affecting the availability of funds for developers, the cost of development and consequently house prices in the primary market. Bank of Ghana figures show that the average lending rate to the construction industry by commercial banks in December 2011 was 25.93%. “The interest rates are having a big impact. They make the developer’s margins very small,” Tweneboa said.

The ability to access funding is also hindering the supply of units by the private sector. While credit to the construction industry increased by some 24.9% to GHS751.64m ($445.6m) in 2011, according to the Bank of Ghana, several developers have complained about the inability to borrow for construction. According to Karim Ibrahim, the managing director of developer Dream Realty, “It is very difficult to get financing. You cannot borrow against land and banks want to see some of the project sold before they will consider lending. I think banks will begin to offer financing to developers in the longer term, but they currently don’t have experience of structuring loans for these clients.”

LAND ISSUES: Land availability and pricing remain a major concern. Land prices have increased dramatically in the past three or four years. There is plenty of vacant land, but the problem is its ownership: uncertain land titles, inheritance laws and the system of chiefs – where the a local chief usually owns the land, rather than the government. There are several levels of chiefs, which has created a complex and opaque process for the purchase and transfer of land. Despite these difficulties prices have still been increasing significantly. Ibrahim estimates that prime land in Accra is now in the range of $4.9m per ha and that prices have increased fourfold since 2008. In the airport area, land can sell for $6.2m-7.4m per ha, compared to $4.4m-2m 12 months ago. However, for international developers, land is not a significant burden on the cost of development. Ibrahim argues that land would be well under 30% of the overall project cost, saying, “In some places, if you can build vertically, land is still cheap.”

DEVELOPER BUSINESS MODEL: Most developers remain bullish about the prospects in the middle- and upper-market segments. Asante-Boateng told OBG, “For middle-income housing, the current and future situation is very promising. When you’re supplying two- or three-bedroom properties, you don’t even have to wait three months for a purchaser.” However, he also concedes that the upper income segment is a tight market with expected margins of little more than 4% on the smallest flats (170 sq metres) priced at $550,000.

The highest demand may be for three-bedroom apartments at the middle-income level, with their loan size averaging $60,000 on properties costing $80, 000-100,000. Nonetheless, the market remains difficult across all segments. Addo-Kufuor told OBG, “The supply side is definitely a problem. Units are not being built in the hundreds of thousands, not even in the tens of thousands. This means prices are creeping steadily upwards. If a major developer could deliver 10, 000-15,000 units a year, they could reduce the demand pressure and also provide some benchmark pricing.” With the supply-demand dynamics somewhat out of kilter, there has been significant price pressure in the market. Tweneboa said, “Prices generally increase by 15-20% annually and unless there are unforeseen problems, I can’t see this changing in the medium term.”

While such price appreciation should support the development of the secondary market, there has been limited resale activity in Ghana thus far. The current tax regime, which imposes no capital gains tax on the resale of property and allows for the full repatriation of profits, favours property investment and as economic activity in the country increases and supply options inch upwards, resale activity may begin to increase. “After two or three years, I strongly believe we may see a secondary market,” said Asante-Boateng. “I think on our project, when it’s done, some customers may resell and make good money with solid returns.”

With rental prices ranging from $4000 up to $6800 per month for three-bedroom apartments at the high end of the market, investors could be looking at gross yields of as much as 13.5% on long-term rentals, with figures increasing for shorter-term contracts. However, given the high interest rate, such an equation is still not very attractive for investors.

OUTSIDE ACCRA: As such, private developers are increasingly looking beyond the residential market in Accra for returns, with the city of Takoradi, which is rapidly becoming a centre for the country’s nascent oil and gas sector, catching the eye. Asante-Boateng said, “In the longer term, we’re looking at the Western Region because of the oil. Takoradi is where most of the attention will be shifting, with interest in golf and hotel resorts there. We’re looking at holiday homes and investors in the oil business.”

Moscow-based Renaissance Group has launched plans to build two new cities in Ghana over the next 10 years. Appolonia City will be located less than 30 km from the capital and accommodate up to 88,000 people. The second development, King City, will be built in North Asaka, close to Takoradi Port, and will house an estimated population of 90,000. Another firm that has already begun to investigate opportunities in the Takoradi market is Petronia City Development, with plans to build a large-scale mixed-use project similar to the $2.6bn Energy City in Qatar. Petronia City Development believes both the expected demand and the conditions for building make Takoradi an attractive option.

Land prices in Takoradi are in the range of $200,000 per acre. Although this represents a steep increase from the pre-oil-discovery days when land sold for $123,500 per ha, such prices are as little as a 10th of the cost of land in Accra. While Bediako estimates that residential unit sales prices will be 20-25% lower than Accra, the rationale for building in Takoradi looks strong. The only doubts remaining are over the extent of demand. The Ministry of Energy has said the oil sector has, thus far, created 1500 jobs, suggesting that in the short-term oil production has not been a game changer for property demand. However, given the plans for downstream activity and industrial diversification the demand could build in the coming years.

OFFICE SPACE: Takoradi and the oil find should also offer opportunities for office space. Across the country, the undersupply of grade-A space combined with a rapidly expanding economy is likely to present opportunities for commercial office developments. According to Ibrahim of Dream Realty, owners of the Octagon, a building that will bring 48,000 sq metres of office space to downtown Accra by the summer of 2014, “There is a lack of office buildings in town. The available capacity is old and not sufficient in terms of amenities. Ghana is in an interesting phase because it’s developing fast. When business started opening up, the price of land and rent was cheap, but in the last two or three years these prices have escalated dramatically.”

In the limited purpose-built grade-A market, Ibrahim estimates that the highest rental rates for short-term grade-A space in Accra are $37 per sq metre per month, although he said for large tenant spaces in dedicated office buildings such as the Octagon, the market will take rates of $25 per sq metre per month, a figure in line with estimates by Broll, the South African real estate broker. Given the lack of commercial office space in the capital, the prospects for developers look good. Although Dream Realty hopes to sell much of its commercial space, Ibrahim argues that rental yields of 10% are easily achievable and that at a rental rate of $30 per sq metre, there would be a five-year return on investment for a project such as the Octagon.

OUTLOOK: Although significant challenges remain for developers, investors and end-users, the strong projected growth of the Ghanaian economy bodes well for all segments of the sector. Addo-Kufuor said, “If the economy manages to survive this recent slide in the cedi, then we stand by our prediction of the emergence of a robust middle class. We started our business on the basis that the economy, even before the discovery of oil, was moving in the right direction. We believe this even now more than ever. We still expect Ghana to become a middle-income country in every respect.” If Ghana can iron out the shorter-term economic problems of currency depreciation and the concomitant high interest rate, the country’s long-term economic prospects and those of its citizens should spur a dramatic increase in the country’s real estate activity.