Family Homes Funds, a Federal Government housing initiative intended to support the development of up to 500,000 Homes targeted at people on low income over the next 5 years has stated that the fund has designed innovative schemes that will help deliver affordable housing in Nigerian and increase the housing options in the market.
While speaking with Housing News, the Managing Director of Family Homes Funds (FHF), Mr Femi Adewole stated that the most transformative thing they can do is to introduce a formal rental system into the market.
He said, ‘’Nigeria is an economy where a significant percent of the population are in the informal sector. So regardless of some of the actions and initiatives that were taken, it will always be very difficult for them to access mortgages and in fact they may not earn enough to access mortgages. Their income profile is not stable enough to support a mortgage system. Therefore you need to think out of the box. And I think our view is that establishing a rental housing fund provides a very low level for people to enter into housing, and from there exercise an option to buy if they so wish. But if they so wish too, they can remain as tenants.
‘’Secondly, we have to be mindful of an important issue in our demographics, that a significant proportion of Nigeria’s population are quite young and mostly below 30. They are very mobile. They are not interested in tying themselves down in on place. They are seeking opportunities everywhere. Therefore, a rental housing programme provides them with that flexibility in terms of their housing choice and we must cater for them. That is our objective. And this is how it is going to work. We are looking to establish primarily with private sector organizations and also partner with housing corporations to establish what we call rental housing management companies. We will provide financing for these companies to buy completed housing from developers in bulk. Then let it to the individuals. The individuals are paying their rents from that rental stream which repays back the financing that the fund gives them. The benefit of this is that it opens up the supply of housing. The major reason why we don’t have developers doing big numbers of housing is because when they build them, they don’t have buyers. And a lot of them are building, hoping that when it is completed they can get somebody who will come forward to buy. We will remove that because even before they put a brick on the ground, there is a buying agreement that a company will buy it for whatever sum had been agreed on. So the developers are certain of their exit. That will promote the supply. You will begin to see more professionals and more competitive development companies building houses.’’
The second reason for the Rental Housing according to him is to boost the capital market.
‘’You find that we have these asset management companies that has tens of thousands of tenants. In some countries, some have as many as a million. These tenant are everyday paying rents. That is a lot of money. And that cash flow is very attractive to the pension funds and banks. It is attractive to them because the houses if well built, will have a minimum of 50 years life. The loans that is used to buy the houses typically should be paid out in about 15 years.
‘’So between year 16 and year 30, you have thousands of houses that have no loan on them but people are still paying rents. And by the way, the rents keep going up each year because you are inflating the rents by inflation. It doesn’t stay still for 15 years. So it is a tried and tested model. And it is not new because actually, 8 out of 10 people interviewed are tenants.
‘’The only problem is that they are tenants to a private landlord who can kick them out anytime. He can also increase the rent whenever he feels like. They have no security at all.
‘’But we are offering a better product, better security, and increasing supply and deepening the capital market. So, for me this is a very big part of what we do. We haven’t started yet because you need a certain amount of financing to be able to feed that fund. And this is why I insist we allow things to mature. It takes time to build trust with a 20 year money. Because that is the kind of money that we need for the rental housing fund. Your organization has to be solid. You have to have good processes in place; good corporate governance before somebody can trust you with low cost capital for 20 years,’’ he said.
Speaking on the Help-To-Buy scheme, he said it is a different thing and that they have made more progress on it because they are financing it with their own capital and have also gotten some support from development partners like the African Development Bank and the World Bank.
Typically, the processes of buying a home in Nigeria are tough and includes the option of either accessing the National Housing Fund loan which can take up to 2 years, or commercial mortgages whose interest rates can sometimes be as high as 23 percent; and most of them can’t go beyond 10 years. The third option would be to pay for a home in cash, which is really difficult and sometimes not a wise economic decision.
So, the Help-To-Buy Scheme according to Adewole is intended to ease this situation and bring something in the middle.
‘’So how does it work? We probably can’t do anything about the rate of interests that the commercial banks are charging because that is based on a lot of wider macro-economic issues. So, what we can do is to reduce the amount of money that people need to borrow form the banks. So rather than borrow 80 or 90 percent of the cost of the house, if they borrowed 50 percent, that brings it to about 30 to 40 percent reduction in the actual physical cash that they pay out. So that is what brought help-to-buy in.
‘’If you are buying a N5 million house, we expect you to have a 10 percent deposit. We think that is good fiscal responsibility that the buyer has a skin in the game. The second is that we will give you a deferred payments loan for up to 40 percent of the cost of the house. So that makes 50. The balance 50 you will borrow from a commercial bank where there is availability because our 40 percent has addressed the issue of the affordability. So we are left with availability and that essentially is what the help-to-buy is.
‘’For our 40 percent loan, you have a moratorium on interest and principal for 5 years, and after 5 years until year 6, the interest on our loan starts graduating. It starts from about 3 percent and goes up each year to 3.75 to 4 percent and on for 20 years. The reason for that payment structure is to align with what we model to be the increase in the buyers’ income, because that is not how mortgages are usually structured. So as his income is going up, what he is also paying is going up so that his affordability is maintained. So that is really what we have done.
‘’When you now take the cost of this as against the other two products the blended cost of the help-to-buy with the commercial mortgage as at today with the partners we are working with it comes to about 8.5 percent because on 50 percent, they are paying 17 percent loan on half of the cost of the house. On our 40 percent, they are paying 0 percent and of course on the 10 percent is their equity, which is also 0 percent. So when you blend it, the average cost of that whole financing comes to about 88.5 percent.
‘’But what is the issue with it? Is it as cheap as the national housing fund? No. the national housing fund is 6 years 6 percent, and this one is about 8 percent. But is it available now? The answer is yes. And that is important for the supply side for a developer because there is nothing that can kill a developer than when he has spent money to build the house particularly when he has borrowed money and when the houses are completed you have to wait for 2 years until the buyers gets their national housing fund loan. By that time the interest has eaten up the viability of the project.
‘’But with the home loans assistance help-to-own some of the targets we are working to is that within a month of completion of the project people are able to move into their homes because the loan is originated right away. That helps the developer because he can get his cash quickly and repay any loan, so we won’t have all these empty houses lying around
‘’It is not as cheap as national housing fund, it is at 200 percent bases point slightly more expensive. I did a calculation of the N5 million house, and it means that it will cost you about N1700 per month more. So you have to ask yourself as a buyer, am I prepared to pay N1700 per month more to move in today or I am happy to wait for 18 months to get a cheaper loan. This is now a tenants’ choice. Like I said, it is like a market, it is good to have alternatives
‘’When you take help to buy, there is nothing stopping you from refinancing your loan with national housing fund down the line. It may not be as cheap as national housing fund, but it is available.
‘’We are really trying to create a middle ground. The initial feedback we are getting is that this is going to be a spectacular success. So, we will push it alongside the rental housing. We are not pretending that it is the solution to the mortgage system, it is just another contribution to the market,’’ he said.
By Ojonugwa Felix Ugboja