Structural Inefficiencies Perpetuating Strong, Uneven Growth

BMI View: Nigeria's residential and non-residential construction sector will maintain a healthy level of growth over the coming decade. Off the back of rapid GDP growth and significant domestic demand, we are forecasting 10% real growth in the sector for 2013. Growth will be premised in the strong performance of Nigeria's oil exports, a burgeoning middle-class and an incremental programme of structural reforms. However, numerous obstacles continue to weigh on our outlook. A severely underdeveloped credit market, chronically poor infrastructure, the high cost of building materials and an inhibitive land system have long hindered investment. If left unaddressed, the government will remain limited in their ability to capitalise on the potential offered by the country's burgeoning population.

As we have previously noted, the fundamentals are in place for Nigeria to develop a thriving housing market. Our country risk team's robust GDP growth outlook of 7.6% 2013, teemed with an anticipated consumer boom fuelled by an emerging middle class, lead us to believe that an increase in supply could be met with strong demand. Current estimates put the housing deficit at 16mn units, and home ownership levels are exceedingly low, with around 85% of the urban population living in rented accommodation.

According to Nigeria's National Bureau of Statistics, the country's real estate market contributed 1.64% of GDP in Q411, with the building industry as a whole representing 2% over the same period. We highlight that this is a relatively low base, especially given Nigeria's increasing urbanisation (Nigeria currently has the largest number of urban dwellers per capita in sub-Saharan Africa) and strong macro growth trajectory.

As such, we note that regardless of its potential as a stream of large-scale economic growth, we believe that Nigeria's residential and non-residential sector will trail infrastructure (where investment in hydrocarbon and resource extraction, energy and transport predominates) as a component of total construction value for the foreseeable future. Over our five-year forecast we forecast 9% real growth per annum in the infrastructure sector, and slower yet still robust 6.9% for the residential and non-residential construction industry.

Unspent Potential
Nigeria - BMI's Residential And Non-Residential Construction Forecast

Credit Dearth Curtailing Residential Growth

The largest bottleneck affecting the growth of the residential sector in Nigeria is the relatively underdeveloped housing finance market. According to 2008 World Bank estimates, Nigeria's mortgage market represented only a fraction - 0.39% - of GDP, a sum which pales in comparison to the developed country average of 40-90%. According to Housing Finance Africa, only 5% of the 13.7mn housing units in Nigeria are financed with a mortgage, with many instead reliant on borrowing from friends and family networks.

On one hand, this figure represents a vast opportunity - our country risk team are forecasting a turnaround for the banking sector in 2013, with real growth of 20% ( see our online service, October 12, 'Banking On The Mend, Despite Slow Pace') . Although this bodes well for an intensification of the consumer-driven construction spending that we noted last quarter ( see our online service, August 28, 'Housing Boom Threatened By Structural Weakness'), we believe that housing finance will continue to lag general trends in lending due to vast wealth inequalities, low financial literacy and strict lending criteria, thereby limiting the scope for a medium-term boom in low- to middle-class housing market. According to the Mortgage Bankers Association of Nigeria, the country's mortgage finance deficit stands at NGN20-NGN30tn.

Although we note a gradual improvement in the country's banking sector following a string of consolidations and recapitalisations, access to finance remains tight. Although most banks were forced to adopt the International Financial Reporting Standards in 2010, a largely unreformed lending system reliant upon primary mortgages institutions (PMIs), real estate developers and state housing corporations lacks the economies of scale and the timeframes to provide the type of secured loans required by consumers. The Central Bank of Nigeria has listed weak capital flows, a dearth of long-term funds, absence of mortgage refinancing and a secondary market, the high cost of credit, land titling issues, weak legal framework and an inefficient system of housing delivery and sales as the key factors affecting the market's development.

However, we are increasingly positive regarding the long run prospects for the mortgage lending industry. Initiatives have focused on reforming and recapitalising the country's 101 PMIs, with the changes scheduled to take effect by May 2013. Furthermore, the country's largest mortgage provider - the National Housing Fund - has improved its mechanism of taking mandatory salary contributions in exchange for lower interest housing loans. The NHF has also increased its funding for developers under its Estate Development Loan scheme. We are observing an increasing utilisation of capital markets, boding well for long-term lending. The NHF's FMBN arm issued NGN100bn in residential mortgage backed securities in 2008. This was followed by the public offering of Union Homes Savings and Loans Plc hybrid US$333mn Real Estate Investment Trust (REIT).

We also highlight the useful role that could be played by a deepening of the country's market for public-private partnerships (PPPs) in the social infrastructure sphere. Furthermore, Nigeria's pension funds provide a further untapped funding channel. Although small, the sector contains around US$16bn worth of long-term liquidity, of which the Pension Act allows 40% to be invested in REITs and mortgage-backed securities, according to Housing Finance Africa.

The Central Bank hope that these changes will have a heating effect on the market, catalysing mortgage issuers, decreasing interest rates, improving access for low-income buyers and encouraging FDI - all facilitating exponential growth in Nigeria's housing stock. We highlight that, although these moves represent steps in the right direction, we are more bearish, believing that more thorough legal and institutional reforms are needed to be taken before the market can begin to compete with regional mortgage lending leaders, such as South Africa.

Strong Potential, High Risks

Adding to the risk inherent in an inefficient institutional structure, a pertaining lack of infrastructure will mean that the cost of new projects remains high. Adding to the physical costs of construction is the fact that overpopulation is limiting the scope for greenfield builds. In the cases of Makoko and Abonema waterfronts in Rivers and Lagos States, shanty towns located close to vital utilities were forcibly demolished, leaving tens of thousands homeless. We believe that as Nigeria's economic hubs continue to develop, we will see an intensification of such efforts from government bodies, with the actions increasing both the political and economic costs of construction and working to slow implementation of projects.

In addition, Nigeria is experiencing significant inflationary pressure on land and building materials despite a vast increase in domestic output of cement - so much so that the government has frequently taken measures to regulate the price of the vital input. Such considerations will continue to raise the cost of affordable housing construction, dissuading investors and eroding the profitability of construction ventures over the medium term. However, an upside to our forecast is offered by the potential for cement prices to fall in the face of a large expansionary programme under way in the country ( see our online service, November 5, 'Dangote Cement: Bigger, Stonger, Riskier').

Today: Cameroon, Tomorrow: The World
Dangote Cement - Cement Production Plants

Positive Outlook

Despite these downsides, we believe that Nigeria's strong fundamentals will facilitate a stream of projects in the sector throughout 2013. Growth will remain consistently strong, especially within major cities such as Lagos, Abuja and Port Harcourt. Lagos is currently one of the world's fastest growing cities - the 2010 UN-Habitat report believes that it will be the largest city in the whole of Africa by 2015. The 2012 budget for the Ministry of Land s, Housing and Urban Development came in at NGN24.9bn, and we expect 2013's spending to reflect similar patterns.

According to the Lagos State Governor Babatunde Fashola, the city has put in place a new mortgage scheme targeted at first time buyers, named LAGOSHOMS. The municipality stepped up its mortgage market over 2011, with a number of regulations - including the Lagos Mortgage and Property Law 2010, the 2011 Tenancy Law, and the 2011 Housing Arbitration Rules - aimed at protecting the rights of mortgagor and mortgagee. The city also created a Mortgage in the High Court, which adjudicates on issues relating to foreclosure.

In attempting to kick-start the low-end market, The Ministry of Housing also created a department to supervise real estate transactions and sponsored 886 new low-cost housing units across the state, in Gbagada, Epe, Ikorodu, Ikeja, Mushin, Lekki and Badagry. The move coincides with an announcement by the Nigerian Federal Government of plans to build 1mn affordable housing units annually - providing a major upside risk to our forecast ( see our online service, June 22,'Nigeria Plans Homes For All') .

An announcement by private estate developers Mubel Company that they will construct 1,000 units in Buachi State represents a spate of builds aimed at civil servants. Government infrastructure will continue to add to the total value of the industry, with builds backed by sovereign funds largely free from the funding pressures that apply to the private residential market as a whole.

However, aside from government-back builds, we note that construction in urban areas will be driven by demand for high-end property. Such builds are being provided by Nigeria's limited number of private developers, who are unable to access funding from capital markets and rely on high-interest bank loans. In this area, real estate agents have reported an increasing mismatch in supply and demand, with developers receiving higher than market price fees for high-end property, yet being unable to shift homes aimed at lower-income buyers.

More Reform Needed
BMI Project Finance Ratings by Phase. Scores out of 100.

As evidenced by BMI's risk/reward ratings, which ranks Nigeria seventh amongst Sub-Saharan African countries in terms of risk/rewards payoffs, infrastructure projects will continue to face the pitfalls of corruption, clientelism and a lack of transparency in the tendering process. Recently, the President of Construction and Civil Engineering Senior Staff Association (CCESSA), Augustine Etafo, accused the government of withholding around NGN1bn (US$636mn) in money owed to developers. Without reforms to the Land Use Act, the risk of affordable residential developments could be used as private milch cows for local governors (thereby bypassing the lower income segment of the market) and their networks remains high. Saying this, we are observing an incremental improvement in governance, and believe that the pro-reform government will continue in this vein.

This article is tagged to:
Sector: Infrastructure
Geography: Nigeria

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