Why over 90% of residential developments are ‘dead assets’

If there is any sector of the Nigerian economy where government’s action or inaction obstructs due process and retards growth, that sector is housing.

The housing market in the country is largely underdeveloped because government has failed to come up with a deliberate policy to grow the mortgage system which, elsewhere in the world, drives housing development and homeownership.

For a country of 160 million people, the housing stock in the country is estimated to be a little above 10 million units; homeownership is said to be only 10 percent as against 92 percent in Singapore, while the housing demand-supply gap is in the region of 16 million units.

Experts explain that the reason for this poor housing situation is, among other factors, that there is no functional mortgage system, adding that the slow growth of the sector is because of its relative newness such that many people don’t understand why they should save their money in mortgage banks.

The bigger challenge in the slow growth of the mortgage sector is that over 90 percent of the few residential developments are not covered by any form of mortgage.

“Of the 10.7 million housing units in Nigeria, 10 percent of which is self-built, only about 5 percent is in formal mortgage,” Ajila Dare, a mortgage originator and adviser, disclosed to BusinessDay.

Dare, who spoke in an interview with our correspondent, explained that effectively about 95 percent of home equity/savings in residential developments are ‘dead assets’, estimating that mortgage finance requirement for the country stands at between N15-20 trillion.

Many residential developments in Nigeria were built or bought without recourse to mortgage due to the many constraints that have to be overcome in securing the facility from mortgage institutions.

These constraints are regulatory, financial and operational, and Dare explained that ownership and management of land are encumbered by the administrative difficulties in issuance of Governor’s Consent.

He added that apart from poor land registry practices, compensation for land is based on ‘fair compensation’ which is based on diverse interpretations, noting that there is absence of an overarching legal and regulatory framework for the housing industry.

“Limited access to long-term funding; lengthy, rigid and ineffective foreclosure procedures; non-vibrancy of primary mortgage institutions and low level of participation in the National Housing Fund (NHF) are some of the financial constraints,” he said.

Operational costs, he said, manifest in high cost of housing developments such as building materials, land acquisition and transaction costs and reliance on expensive and conventional construction procedures, adding that inefficient land management and urban planning system also contribute to operational cost.

“Low level of infrastructure provision for housing units developed, skills shortage and insufficient capacity building are also part of the operational costs and should be addressed,” he advised.

Some experts argue that part of the reasons for the low mortgage facility for residential development is mortgage operators’ demand for equity contribution as prerequisite for mortgage loan.

Industry operators, however, say such contribution is necessary for a number of reasons including the need to protect depositors’ money; need to hedge against default; lack of sound database on Nigerians, among others. Equity contribution, they explain, is as fundamental to mortgage lending as regular flow of income.

Toyin Banjo, former managing director and chief executive officer of Cornerstone Mortgages (mortgage bankers), said that banks usually demand equity contribution from loan seekers because there are institutional and regulatory developments that are still lacking in the industry.

“We don’t have a sound database of Nigerians, the National ID Card is still a flop and foreclosure laws are still not strong,” he said, arguing that if the banks had all the above issues resolved, they would give people mortgage based on their credit rating.

Banjo added that as financial intermediators, it is the responsibility of mortgage banks to protect depositors’ money, stressing that for them to protect those deposits, they have to ask for something that would act as a back-up to the money they give out to borrowers.