HOUSING is fundamental to the socio-economic development of any society. Indeed, economic benefits derived from well-coordinated investments in housing are numerous. Experience from the developed world has shown that the problem of adequate housing, to a large extent, has been solved through the effective deployment of mortgage schemes in the system. Such mortgage schemes are fortified by capital market products that mobilise long-term funds.
The Nigerian mortgage market is characterised by excess demand due to lack of appropriate funds in terms of volume, tenor and rate. The type of funds required by the mortgage market is long-term, relatively cheap, affordable and in huge tranches. The only platform to source such compatible funds is the capital market. The interesting aspect is that it will also provide the much-needed derivatives for the capital market, drawing in the excess liquidity which is inefficiently held outside the formal financial system. This supports the main argument for the immediate introduction of Real Estate Investment Trusts, Mortgage Backed Securities and the re-activation of the bond market.
we shall attempt to discuss the major ways of sourcing funds for housing finance, from the capital market, the instruments traded in the market that can be used in the effective mobilisation of long-term funds for housing finance and real estate development. Thereafter, we shall examine how far Nigeria has fared in the utilisation of capital market instruments and lastly, the way forward in meeting the challenges of real estate development.
Ways of sourcing funds for housing finance and real estate development
Funds for housing finance and real estate development are currently sourced through borrowings from the money market and the capital market. Commercial banks lend short-term loans for housing finance and the prospective borrowers are expected to liquidate the principal and interest within the time frame as agreed, which is usually not more than 12 months.
The majority of housing corporations and agencies source their funds from commercial banks at high prevailing interest rates. The consequence of this is the high cost of housing and the substantial reliance on short-term credit to fund projects with long gestation periods. Specifically, both commercial and mass housing development, for instance, have till date been dependent on short-term debt financing, with such attendant problems as high interest rates, high default risk and threats/risks of foreclosure following non-repayment or servicing of debt facilities.
Expectedly, unsold housing stocks and exorbitant purchase prices of completed housing units, which are directly attributed to the high cost incurred in the construction of these houses, become common features of housing delivery, particularly in urban centers.
Related to the problem of housing delivery is also the issue of infrastructure provision in estate development, which has become another major challenge facing estate developers. While efforts are being made to provide roads, water and electricity to the estates, the practice has been to build such costs into serviced thereby making the houses so highly priced and unaffordable. In spite of this challenge, estate developers can only achieve meaningful housing delivery with the provision of these essential infrastructure facilities. As we all known, the provision of roads, water and electricity require huge capital outlays that are long-term in nature. Again, as with housing, the provision of these infrastructures within the housing estates is usually financed through short-term borrowings, mostly from banks, which is a funding mismatch and also further increases the purchase prices of the houses.
Financing real estate development, therefore, is clearly a long-term investment, with appreciation in property value and stream of rental income earned, increasing with the passage of time. Accordingly, the proper match for the finance of real estate development should be long term capital market funds, which provide good fit for the financing demands of housing development in the long-term, and more importantly, at low cost to ensure the affordability of the finished houses.
The capital market and the instruments for mobilising funds for housing scheme
The capital markets is that segment of the financial market where medium and long-term funds can be sourced by institutions, government and corporate entities to finance projects, such as housing. It has instruments traded in the market that can be used in the mobilisation of long-term funds for housing finance. These instruments are:
Bonds: This comes in form of long-term debt finance through the issuance of long-term bonds;
Real Estate Investment Trusts (REITs): This is by provision of cheap equity funds for housing and real estate development by pooling of investors monies through a trust administered fund;
Mutual Funds: This comes in form of unit trust schemes;
Mortgage-Backed-Securities: These are securities which are pooled and guaranteed through existing mortgage loans and re-issued to potential investors by financial/mortgage intermediaries.
It is necessary to discuss in details the ways in which the aforementioned instruments can be used in mobilising the required funds for funding of housing and real estate development in Nigeria.
REITs. A REITs is established as a vehicle for the investment of investors\’ monies, which have been collectively pooled into a fund to be managed by a professional fund manager registered with the Securities and Exchange Commission (SEC). It is administered on behalf of the investors by Corporate Trustees who are also registered with SEC.
REITs are specialised forms of investment trusts, which are invested mainly in the real estate sector and real estate related areas. They provide a platform whereby interested investors can subscribe to the fund and its portfolio of investment, thereby providing the investor with an opportunity to earn returns from investments in real estate and at the same time provide cheap equity funds, through the mass pooling of investors funds, for housing finance and real estate development.
Generally, when a fund is offered, a prospectus for a fund must include a statement about the investment objectives that the manager of the fund seeks to accomplish and the policies that the manager will follow to meet the investment objectives.
It is worthy to note that the investment objectives can only be changed by vote of the majority of the unit holders of the fund. The statement about investment policies indicates, in broad terms, the outlets in which the fund manager must invest.
The benefits of real estate investment trust include the following:
It reduces investment risk through diversification;
It creates avenue for maturing intermediation;
It accelerates property development through pool of funds;
It provides hedge for inflation.
In accessing the investment value of RIETs, various criteria are used, which include but not limited to anticipated total return from the stocks estimated from the expected price changes and the prevailing dividend yield; management quality and corporate structure; anticipated growth in earnings per share and underlining asset values of the real estate and/or mortgages and other assets. The potential investors in REITs are individuals, pension funds, endowment funds, foundations, insurance companies, mutual funds etc.
Unit trust scheme
Investment in Unit Trust Scheme, otherwise known as mutual funds, is another veritable and potential source of housing finance. It is an open-end fund, which continually stands ready to sell new units to the public and to redeem its outstanding shares on demand at a price equal to an appropriate unity of the values of its portfolio, which is computed daily at the close of the market by the fund managerr. he unit price is actually based on its net asset value per unit, which is found by subtracting from market value of the portfolios the mutual funds liabilities and dividing by number of initial funds units outstanding. Unlike REITs, which solely invests in real estate, Unit Trust Schemes diversify investments in accordance with the provisions of the trust deed.
Another means of resolving the problem of housing finance, resulting from the problem of using short-term debt financing for long-term capital intensive housing development, is the use of long-term debt financing through the issuance of bonds in the capital market.
Such long-term mortgage bonds can be issued by mortgage or other corporate financing institutions and are usually backed by well-executed trust deed, usually registered with SEC.
In Nigeria, the bond market over the year has remained inactive, due to some identified market problems such as:
- lack of strong secondary market;
- unattractive coupon rate;
- poor government patronage; and,
- rating agencies.
With the recent efforts by SEC and Federal Government reforms, the Nigerian Bond market is picking up. Availability of large amounts of investible funds from the pensions sector and other financial sectors, which can be channeled into housing finance through the purchase of long-term bond, is expected to encourage further growth of the bond market.
MBS are special bonds in which interest and principal sums received from pooled mortgage loans are passed through to bond holders. They are created through the aggregation of mortgage loans with similar features (as to tenor, pricing, etc), into pools of securities for issuance to investors through the capital market. These certificates are available for trading in the capital market. In other words, MBS is a securitisation of existing mortgages as the underlying mortgage loans are repaid by the borrower, while the investors receive payments of interest and principal when due. In essence, what is traded is the right to receive the repayments on the mortgages without a transfer or assignment of title thereof. However, holders of the instruments expect periodic payments from the issuer of the MBS in spite of the status of repayment from the underlying mortgage loans.
In developed economies, there are three types of conventional Mortgage-Backed-Securities i.e.
- collateralised debt which is similar to conventional borrowing where real assets are pledged as collateral for debt;
- pass through obligations comprising direct equity interest in the underlying asset pool; and
- pay-through type which allows the reconfiguration of the payment stream of the underlying assets to appeal to a wider range of investors. Assets are conveyed to a special purpose vehicle which issues debt securities collateralised with the assets.
The benefits of MBS in the housing sector and the capital market include the following:
* provides more affordable housing to home buyers/builders because the volume, tenor, rates and payment, schedules are constant and with requirements of the mortgage market;
- it makes more capital available to low income home owners at competitive rates;
- it provides good liquidity and efficiency to mortgage loan funding;
- steady high return to investments;
- minimum risk, as risks associated with MBS is manageable via hedging
- offers wide range of options.
How far has Nigeria fared in the utilisation of these instruments in the capital market?
The Investments and Securities Act (ISA) No. 45 was enacted in 1999 and it charged SEC with enormous responsibilities of regulating and developing the capital market. Since the enactment of the Act, SEC has positioned itself to take up the challenges through sensitisation and creation of awareness to relevant stakeholders.
By the powers conferred on SEC in sections 8q and 125 of the ISA and Rules 240 of – 248 SEC Rules and Regulation, SEC has made tremendous efforts in the development and regulation of Unit Trust Schemes. As at date, SEC has registered 31 Unit Trust Schemes, which indeed have made positive impact on the market.
Moreover, SEC is not resting on its oars as currently, the existing rules on Unit Trust Schemes are being reviewed and fine-tuned in order to bring them in conformity with global standards.
On the other hand, REITs are yet to commence, in spite of the fact that the legal framework is in place i.e. Section 123(1) and Section 147 of the ISA. The Commission has made efforts in this area by holding several consultations, workshops and seminars with the relevant stakeholders of which this forum is one of them, for the take-off of REITs in our market. It is important to note that only operators can introduce new products as the commission restricts itself to ensuring that the conducive environment exists for the product. Interestingly, the commission is currently processing one application on REITs.
On the issue of Mortgage-Backed Securities (MBS), the enabling law (i.e. ISA 1999 – sections 32,204 264(2) and Rules 40(2) of SEC Rules and Regulations) and institutions are in place. While there is need for the fine-tuning of some legal provisions that will affect the issuance of MBS, the market is called upon to be aggressive in introducing MBS.
The Bond Market in Nigeria, especially the Federal Government Bond segment, has experienced ups and downs over the years. The Federal Government pioneered issuance in the bond sector in the 1940s and became even more active in the period between 1961 and the middle 80s, being responsible for the bulk of issues raised up to 1986. However, the Federal Government backed out of the market between 1987 and 2002. Similarly, states and local governments patronage of the bond market was not encouraging before 1999 as the sector was completely inactive for about seven years. Interestingly, between 1999 and 2005, the bond market picked up to an appreciable level.
On the other hand, corporate bodies started raising funds through the corporate bond sector of the market 1981. Unfortunately, the amount raised has not been encouraging when compared to other instruments like equity. Indeed, in contrast to recent increase in the government segment of the Nigerian Bond Market, corporate bodies have virtually avoided the bond market in recent times with only 11 corporate debts issued since 1999.
Given the following situation, SEC has piloted the constitution of several committees like the committee on the Reactivation of Bond Market. There is also Bond Market Steering Committee chaired by the Minister of Finance. The Committee on Reactivation of Bond Market has since submitted its recommendations to various stakeholders and SEC is considering the recommendations.
The foregoing discussions and suggestions have indeed been proffered by experts at different fora for the development of a strong secondary mortgage market for housing finance/real estate development through the capital market. However, the following steps would be required to foster the growth of trust-administered schemes and consequently the successful implementation of the programme of mass housing delivery in Nigeria.
Review and amendment of statutes and laws governing property rights, foreclosures, sales, assignment and conveyance of properties
The existing laws in Nigeria in these areas should be fine-tuned to meet current realities and for easy implementation of the mortgage system.
Surveys conducted in India, Malaysia, Pakistan and Indonesia confirmed that this problem constrained mortgage finance in the region. Nigeria should therefore learn from this experience and provide adequate legislation to solve the problem.
The bottleneck associated with obtaining governors consent in assignment of land is a huge problem to our mortgage industry. It is suggested that the requirement of state governor\’s consent under the Land Use Act before a mortgage can be created, assigned or foreclosed should be dispensed with, at least when these arise from secrutisation of mortgages. The only official control recommended here in respect of mortgages should be in the form of registration of such mortgage whenever they are created, transferred or foreclosed. This can be done either in the state high courts or special Land Registry.
Foreclosure laws must be simplified to make recovery of foreclosed assets easy, as this will enhance the supply of housing investments and the demand for these instruments. It should be noted, however, that the relevant laws to look at with respect to streamlining/ assignment/ conveyance/sale of mortgages are the Land Use Act and the Conveyance Act.
Reduction of transaction costs
Transaction costs i.e. stamp duties, transfer/mortgage registration fees, taxes and fees to regulatory authorities should be minimal. This will, in the long run, help in reducing the cost of processing and in securing affordable housing.
Introduction of adequate mortgage underwriting system
Currently, there is non-existence or inadequate mortgage underwriting system in Nigeria. The nation\’s financial system must have a formalised mechanism for distinguishing poor credit risks from good credit risks through borrower screening.
Mortgage quality is greatly enhanced through sound mortgage underwriting. In the equity market, underwriting generates investors\’ confidence in the quality of the stock. The Insurance Act should, therefore, provide adequately for this sector. It is encouraging that the SEC now requires the rating of all debt instruments by Rating Agencies registered by it.
Strengthening of regulations through capacity building.
Regulators should strive to strengthen their technical capacity to supervise and regulate the mortgage and capital markets. In this respect, the Federal Mortgage Bank of Nigeria (FMBN), SEC, the NSE, and the Central Bank of Nigeria (CBN), should harmonise actions and programmes along this line. This will reduce systemic risk in the market.
Immediate passage of the amendment bill on the ISA 1999
The Amendment Bill on the ISA of 1999 is before the National Assembly and it is my suggestion that the National Assembly should act swiftly in passing the bill into law with all the amendments as recommended. From that point, a road map would have been drawn toward finding a lasting solution to the housing finance problems in Nigeria through the capital market.
There is an urgent demand for all stakeholders in the real estate and finance sectors to come together and take concerted effort to work out modalities that will position the capital market as a strong and viable channel for housing finance. That will ensure the delivery of decent and affordable housing to all Nigerians. The capital market still remains the most option in resolving the funding challenges that threaten housing delivery in the country. A number of lessons need to be learnt from the Asian financial crisis of the late 80s i.e.
- the need to develop the long-term domestic debt market;
- avoidance of instability in the market as consequences of financing long term projects with short-term borrowing;
- mortgage securitisation as one of the most conducive strategy that the secondary mortgage market could use to fund affordable housing through primary mortgage market.
All stakeholders in the housing and real estate related sectors are enjoined to explore the capital market option in financing and fast-tracking housing development/delivery in Nigeria, as the capital market remains the most viable option.