Dunn Loren Merrifield: Nigeria’s housing problem presents opportunities

As Nigeria’s population grows, the country continues to experience a high degree of urbanisation, which is not commensurate to the level of investment in housing, say specialists at Dunn Loren Merrifield

Commuters sit on top of a train at a rail track in the Oshodi district of Lagos. While Nigeria's population rapidly expands, housing has run short - presenting an opportunity for investors
Commuters sit on top of a train at a rail track in the Oshodi district of Lagos. While Nigeria's population rapidly expands, housing has run short - presenting an opportunity for investors 

Nigeria is the most populous country in Africa, making it a huge consumer market (see Fig. 1). Invariably, Nigeria remains a key investment destination, further strengthened by the recent GDP rebasing exercise as the country surpassed South Africa to become the continent’s economic powerhouse. Despite higher growth rates and a larger GDP, Nigeria has a significant infrastructure deficit – necessary to accelerate inclusive growth and development.

While the country’s ‘new status’ of being the 27th-largest economy in the world and the biggest in Africa is encouraging, one of the key socio-economic challenges is its housing deficit. As the global population continues to dramatically rise and a significant percentage of urban growth is expected to occur in developing countries, it is unsurprising that there is a significant influx of people into cities in Nigeria, given the country’s strategic position within the region and its advantageous GDP figures.

This growth in urbanisation has outpaced the capacity to deliver adequate housing and urban infrastructure, resulting in a huge housing deficit in Nigeria. However, the problem remains real, and will need addressing if the country is to continue on its upward economic trajectory. Mrassociates recently spoke to Kate Isabota, an analyst at Lagos-based investment house , about Nigeria’s housing deficit and the opportunities that it may present investors.

Urbanisation of the land
The rapid rate at which Nigeria is becoming urbanised mirrors the way many other developing countries are experiencing a shift towards city living. According to research by the United Nations Population Fund (UNPF) and DLM, of the 7.2 billion people in the world, more than 50 percent currently live in urban areas. In the coming years, the proportion of people living in urban areas will largely come from developing nations, as those countries accelerate towards economic prosperity. In particular, cities like New Delhi and Mumbai in India, Karachi in Pakistan, and Lagos in Nigeria, are seeing the most rapid rates of annual population growth.

The consequence of this rush towards urban living is the distinct lack of adequate housing to cater for the large influx; with people now living in slums on the outskirts of cities. According to Isabota: “We are of the opinion that rural-to-urban migration, in addition to the increase in population growth, in the face of increasing poverty and income inequality aggravates the problem of housing deficit largely reflected in the formation of slums. The absolute number of slum dwellers in the world is currently estimated at about 1 billion and has been projected to grow to about two billion by 2030.This emphasises the need for intensive action by governments around the world, particularly through the development of a deep mortgage market to increase access to low-cost housing.”

Source: World Bank, DLM Research estimates
Source: World Bank, DLM Research estimates

In Nigeria, this problem is also evident, largely due to an estimated population of about 168 million people, which has been growing at an annual rate of around 2.8 percent. According to the Population Reference Bureau, Nigeria will have around 240 million citizens in 2025, and more than 440 million by 2050, which would make it the third most populous country in the world (see Fig. 2).

Isabota says that the population growth offers Nigeria some advantages, but also presents significant concerns. “While we agree that the large population size puts the country at a comparative advantage compared to smaller markets, particularly in terms of attracting investment, we also highlight that the significant increase in population relative to economic growth has placed higher pressures on existing infrastructure. The pressures on infrastructures can be seen in the rise in number of slum dwellers due to both high natural population growth and rural-to-urban migration. This is on the back of the premise that cities offer opportunities which hold the key to escaping rural poverty.”

Indeed, the number of Nigerians currently living below the poverty line has grown sharply over the last three decades, according to Isabota. “The fact that population growth significantly outstrips “real” economic growth is further buttressed by the proportion of Nigerians living in poverty, which has been on the increase. In our analysis, we observed that the population of the poor rose significantly from 26 percent in 1980 to 71 percent as at 2011.”

Unemployment and housing shortages
As Nigeria’s population grows, so too does the number of people out of work. DLM says that while the economy grew by around seven percent between 2008 and 2011, unemployment rose significantly during the same period. All of this amounts to heightened pressure on the infrastructure of cities like Lagos, and shows the need for improved infrastructural development. “We highlight that the increase in urban growth has its attendant costs as more individuals compete for limited resources which inadvertently exacerbates unemployment, poverty and increases the housing deficit. Consequently, we expect to see an increased pressure on resources, particularly in Lagos, the commercial hub of the West African sub region, as well as Abuja and Port Harcourt. This underpins our argument for pro-growth policies to be maintained by governments to ensure urban sustainability,” says Isabota.

DLM confirms this sentiment: “Recent statistics show that Nigeria has an estimated housing deficit of about 17 million housing units. As at 2012, it was estimated that about 42 percent of its population were not living in “proper housing”. This is particularly reflected in fast-growing cities, as the high demand for housing is met by low investment on mass housing.”

With home-ownership at about 25 percent, the percentage of homes owned by their occupants in Nigeria still remains low in comparison with some developing countries, such as South Africa, Brazil and India, who all have rates upwards of 70 percent. DLM says that the reason for the low level of home-ownership is the lack of funding available to Nigerians.

“Generally, this is attributed to the fact that a large percentage of housing units is self-financed through personal savings for periods of about five to ten years. We hold the view that the non-availability of long-term funding to aid low income earners in accessing affordable formal housing has driven the growth in housing deficit in recent times. This is equally exacerbated by the high interest rate obtainable on available long term financing options, which makes mortgage an unattractive funding option for the average Nigerian worker.”

With reportedly an average of 20,000 mortgages issued in Nigeria, the market only accounts for 0.55 percent of GDP, compared to 73 percent in the US, 81 percent in the UK, 32 percent in South Africa and 5.5 percent in Brazil. DLM feel that to create effective demand for housing, it is critical to develop a strong and efficient mortgage market to provide affordable housing finance. The strengthening of the primary mortgage market creates avenues for a greater pool of funds, so primary mortgage institutions can then originate more mortgages. In addition, the intensity of housing activity is directly a function of mortgage rates. This underpins the argument for lower interest rates in a bid to aid housing affordability.

Source: World Bank, DLM Research estimates
Source: World Bank, DLM Research estimates

Delivering on the deficit
DLM suggests that the cost of financing the shortfall of housing would be about NGN85trn ($5.48bn), and the best way of getting this finance will be through foreign direct investment (FDI) and public private partnerships (PPP). “This translates to a yearly investment of about NGN 5trn, 1.83 percent higher than the current size of the national budget – NGN 4.91trn estimated for 2014. The country requires additional provision of about a million housing units per annum for the next 17 years to substantially reduce the deficit. Sole reliance on government revenues is insufficient to fund these infrastructural needs; this supports the argument for an efficient capital market to aid active private sector participation. With the wide housing gap in the country and the significant funding required, increased PPPs accompanied by FDI may just be the way forward.”

To this end, DLM is upbeat about the commencement of operations of the Nigerian Mortgage Refinance Company (NMRC); a PPP arrangement with the key role of providing funding to banks so that they can provide more mortgages to individuals with longer tenors at a more sustainable interest rate than what is currently obtainable within the domestic mortgage market. The idea is to refinance portfolios of mortgage lending institutions by raising long-term funds from both the domestic capital market and foreign markets.

The NMRC was promoted by several multi-lateral agencies, government agencies and private sector companies. The multi-laterals include the World Bank/IFC, while the government agencies include Nigeria’s Ministry of Finance, the Central Bank and the sovereign wealth fund, among others. In addition, the private sector companies include three commercial banks and 17 mortgage banks.

Housing delivery is a critical part of the country’s infrastructure base, which has the potential to accelerate economic development, says DLM. By boosting housing supply, other industries will in turn see an upswing in business. “We believe that the housing sector has the potential to be one of Nigeria’s key economic drivers. Growth in the nation’s housing sector would directly impact on the construction sector through increased demand for building materials, thereby generating employment.”

Ultimately, this will not only improve the standards of living of the population, but drive economic growth for a country with huge potential. “We hold the view that the impact of housing investment in an economy is more ‘economic’ than ‘social’ in nature. While the provision of adequate housing leads to an improvement in the standard of living of the populace, it is also a major driver of job creation, poverty reduction and increased business activities, which would have a multiplier effect on the economy.”



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