Is the Nigerian Mortgage System really aiding home ownership?

Is the Nigerian Mortgage System really aiding home ownership?

Is the Nigerian Mortgage System really aiding home ownership?

17th May, 2022

2 minutes, 16 seconds read

All over the world, mortgage is known to be a viable method to owning a home, but several factors have made it difficult for most Nigerians to access mortgages. In developed countries, effective mortgage systems have aided many people to become homeowners but in Nigeria, there have not been many success stories recorded. We looked closely at mortgage models in Europe and America and found that a major enabler of their effective mortgage system is lower interest rates and longer repayment period.  

Two months ago, the U.S. Census Bureau announced a homeownership rate of 65.5% for the year 2021; and in England, the House of Commons stated that 65% of its population were homeowners as at the end of 2020. This is contained in its “Extending home ownership: Government initiatives” report. These countries have single digit Mortgage interest rates – 6% in the United States and about 4% in England. Kosovo, Romania, Hungary, Singapore and Croatia all have home ownership rates above 90% with mortgage interest rates falling below 5%.

These mortgage systems have proven to be very effective, giving opportunities to more  young people; millennials below age 30 to own homes. This is very important to note when you consider that generally, millennials all over the world are finding avenues to increase their incomes, encouraging the “gig economy”, innovations in tech and the benefits of remote work. In 2020, especially during the worldwide lockdowns, we read stories on Twitter about the increase in home ownership rates amongst millennials in countries like the US.

 When we looked at homeownership rates in Nigeria, we saw a sharp difference. According to the “Housing Snap Poll” data by NOIPolls (a Nigerian consultancy company) only 31% of Nigerians as at 2014 lived in their 'personal house' which they may have built, purchased or inherited. This has negatively impacted the purchasing power of the average Nigerian. While this is many years ago, it is arguably true that due to inflation and recession, more Nigerians are poorer today than they were in 2014, and this means that less people can afford to own houses.

But let's come back to the conversation. If mortgage systems have significantly aided homeownership in other climes, why is it different in Nigeria?

 

Reports say that “85% of people in Nigeria would consider a mortgage as an option for home ownership” but availability, affordability and access are a major problem. Interest rates typically from commercial mortgage providers range between 15% to 25% per annum and up to 30% in some situations. In a bid to provide some respite, FMBN Act 3 of 1992, established the National Housing Fund (NHF) with the sole aim of mobilizing funds for the provision of “affordable” residential houses for Nigerians. In its 5 years of operation, the NHF was only able to disburse to 5,938 beneficiaries. It is understandable that the NHF can only disburse as much as is available in the treasury, there is still a big gap to fill especially with the lingering housing deficit.

What are your thoughts on the issues of the Mortgage system in Nigeria? DO you have any stories or experiences with it? We would love to hear from you. Please send your comments/feedback to [email protected]

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14th June, 2022

4 minutes, 43 seconds read

Does the 10% recommended commission rate for Estate Agents really apply?

 If you have done real estate transactions in Nigeria, you may have noticed the variation in service fees that agents charge on successful deals. These variations are more noticeable in states that have big ticket transaction running into hundreds of millions and billions. One of the biggest contentions in the real estate market is the question of what constitutes appropriate agency commission on real estate transactions. What is the ideal fee? Is there an official document that sets the standard or scale for such service fees or is it at the discretion of the agent?  We spoke to some of the players in the industry and will share their views on these questions and more in this article.

Before we dive in, it is important to mention that the Nigerian Institution of Estate Surveyors & Valuers (NIESV), and The Estate Surveyors & Valuers Registration Board of Nigeria (ESVARBON) are the professional bodies established to regulate Estate Surveying and Valuation profession in Nigeria; of which “Real Estate Agency” is one of their services. The institution is recognized by the government under the enactment of the Estate Surveyors and Valuers (Registration Act) Decree No. 24 of 1975. You may use this link to read more about the laws establishing the NIESV/ESVARBON. For the purpose of this discussion, we will be reviewing the professional scale of charges set out by these bodies.

 Agency fee in Nigeria is 10% of Gross Rent Payable, or Gross Proceeds of Sale/Purchase.

In 2014, the NIESV set out to review the Institution's Professional Charges in line with contemporary realities in Nigeria and consistent with global best practice. Based on the revised scale of charges, an agent in Nigeria is expected to charge 10% commission on gross rent payable, or gross proceeds of sales on a property as the case may be. This is meant to be the standard practice, yet, if you are familiar with the industry, you will see that a 10% commission rate is not usually the case. The commission rate is often subject to negotiation between the parties.

When we looked at global practice, we found that the recommended charge for real estate associations in the U.S and U.K falls below the 10% rate. For instance, agency commission in the United State is between 5-6% of the transaction value and usually varies depending on location. Commission on property transactions consummated in the San Francisco area attracts a 5.04% agency commission while those in Atlanta can charge as high as 5.98% . In the U.K, the fees are between 0.75% and 3.0%+VAT on transaction value.

After giving a close look at the agency fees set out by the NIESV and comparing it with the U.S and the U.K, a few things stood out.

10% Agency commission in Nigeria is high, and this is giving too much room for negotiation.

Generally speaking, commissions on real estate transactions are usually negotiable anywhere in the world, what makes the big difference is the negotiation window. In the US, the agency commission range is between 0.75% and 3.0%+VAT which is quite wider than the 5-6% range in the U.S. This allows agents to negotiate within this range, and the final fee depends largely on the value of the transaction. For transactions exceeding £500,000, agents are most times willing to accept commission closer to the lower end of the scale. If an agent for instance agrees to charge a 1% fee on a £500,000 deal, the commission would fall around £5,000.

Bringing this home, we found that irrespective of the recommended 10% agency fee in Nigeria is 10%, the actual commission that agents achieve in practice can range from 0.5% to as much as 20% of the transaction value. Agents can charge as much as 20% commission on rental transactions of less than ₦1 Million value. On the other hand, it is quite difficult for sellers to pay up to 10% fee on sales transactions, especially if the value of the property runs into hundreds of Millions and above.

We spoke to Chibuzor Arukwe who is an Associate member of the NIESV/Deputy Head of Valuation at Diya Fatimilehin & Co, a leading Estate Surveying firm in Lagos. He mentioned that transaction fees are now dependent on the negotiation power of the parties involved in the transaction. Speaking on the impact, Chibuzor mentioned that other Agents are willing to collect lower fees on transactions and this is making the competition even tougher.

This 10% commission cap is not realistic across all transaction types and this is making compliance much more difficult.

While setting a 10% standard rate can sound reasonable considering the unique economic realities in Nigeria, this high rate is opening room for negotiations and concessions beyond reasonable boundaries. A seller who is disposing of a property worth ₦1 Billion naira will most likely never agree to pay a 10% (₦100 Million) commission to the Agent. On the other hand, most Agents will argue that a 10% (₦50,000) fee is sufficient to compensate for the troubles associated with renting out a ₦500,000 rental property. What this does is that it throws open a wide window for negotiation between the parties, and without a negotiation ceiling set by authorities, the process ends up creating a loser vs winner situation. Speaking on this, Chibuzor also noted that the 10% cap is giving leverage to quacks to penetrate the market. He described quacks as unlicensed individuals who are operating as one man businesses. According to him, they have minimal expenses and no administrative costs to bear and therefore can afford to take almost anything as agency commission on transactions. 

Unlike in the U.S and the U.K where the negotiation window is very well defined with relatively high levels of compliance, Nigeria’s high agency commission rate has opened room for foul play among practitioners in the field. The market has become very competitive, which has forced a number of agents to cut on their revenue in a bid to secure briefs. Picking a page from the practice in the advanced world, agency commission should at least be a range, to start with. Where this exists, it is easier to have a guided negotiation. Much more work is needed in regulating Agency practice in Nigeria, and developing a more flexible scale of charges is one.

We will be happy to hear your thoughts. Follow us on LinkedIn to join the conversation and across all social media platforms, to access insights on the Nigerian real estate market. You can also send your comments and feedback to [email protected] We would love to keep in touch. 


7th June, 2022

4 minutes, 3 seconds read

The requirements of the NHS is making mortgage access more difficult for millennials.

In our previous article on the Nigerian Mortgage System, we looked at some of the Mortgage systems in Europe and established that the low interest rates and long repayment periods are major success factors to their homeownership statistics with a growing ratio of millennial homeowners. Conversely, the relative growth rate in Nigeria is not as rapid due to low accessibility and affordability of commercial mortgage facilities.

The Federal Government in 1994 had instituted the Federal Mortgage Bank of Nigeria as the apex Mortgage institution in Nigeria and through the National Housing Fund (NHF) charged it to mobilise funds for the provision of “affordable” residential houses for Nigerians. While the macroeconomic indices are a major culprit for declining purchasing power in Nigeria, the questions then arise – Is NHF fulfilling affordable homeownership? How many young working Nigerians/Millennials stand a chance to benefit? Does the NHF generate sufficient funding to galvanise its key objective? What is the forecasted funding demand of Nigerians compared to the maximum funds possible from the 4 sources, is there a projected deficit or surplus? How accessible are these funds? What criteria determine eligibility? What flexibilities are built into the system to make the NHF easier and faster to access than the typical financing options?

The NHF act instituted that funding will be generated from –

●       Mandatory contribution of 2.5% of monthly income of Nigerians earning N3000 and above per annum

●       Investments from Commercial banks/Merchant banks - 10% of loan and advance portfolios at a 1% premium on interest payable on current accounts held by banks

●       Investment from Insurance companies - 20% and 40% of Non-Life and Life insurance respectively

●   Contributions from the Federal Government

Obviously, every earning/working Nigerian earns above N3,000 annually. With a minimum wage of N30,000 monthly, 40 % of which is estimated as basic salary, it is assumed that the NHF annual mandatory contribution should be a minimum of N3,600 per contributor. According to the WorldBank, Nigeria’s labour force in 2021 was estimated at 64.4 million people. If NHF gets a minimum of N3,600 from 64.4 million Nigerians, it will have generated a minimum of N232 billion annually from 1 of its 4 sources of funding.

Commercial banks in Nigeria lent out ₦18.9 trillion in May 2020 and typically lend an average of ₦15 trillion MoM according to the June 2020 monetary policy communique of the Central Bank of Nigeria. If 10% of N15 trillion is invested at a 1.1% rate of return per month (1% + current account maintenance charge of N1 per mille), it brings to about ₦198 billion potential annual contribution to the NHF from commercial banks alone. While details of investments from insurance companies and the government are sketchy, from the information above there is a potential minimum funding pool of +N430 billion annually.

Compared with these forecasts, the actual annual realised contribution is much less than 20%. The Managing Director of FMBN reported that the total contribution realised between 2017 and 2021 was an average of N54 billion annually between 2017 and 2021, a significant improvement on the N232 billion that was mobilised from NHF contributors over a 25-year period at an average of N9.28 billion annually. In 2019, the Central Bank of Nigeria reported that an estimate of N21 trillion is required to fund Nigeria's Housing Deficit of 20 million homes. This was based on a population estimation of 200 million. With Nigeria’s growing population and inflation, this estimate will have grown geometrically. In a nutshell, the funding gap is very clear.

The funding requirement is far bigger than the funding supply. What this implies is that the National Housing Fund does not have a sufficient fund pool to provide affordable housing funds to meet everyone’s need. Of course, as with other economic resources, scarcity brings about the need for prioritisation and choice. The NHF has put in place a set of criteria/ requirements for loan application which are:

  1. The applicant must show proof of deducted monthly contributions remitted to FMBN promptly (At least 6 months contributions should be made).
  2. The applicant's Passbook is expected to be updated by an employer and is transferable from one employment to the other.
  3. The applicant’s yearly statement of cumulative contributions plus accrued interest. (The higher your contribution volume, the higher the probability of being considered).
  4. Application must be through an accredited Primary Mortgage Bank (PMB).
  5. The applicant must provide satisfactory evidence of regular income.

Looking closely at these requirements, young Millennials in Nigeria have a much lower chance of accessing funding for homeownership compared to developed countries. The requirement of income regularity and updated passbooks put younger people at a disadvantage. There have been reports where employers had deducted contributions from staff salaries but not remitted to the NHF. Also, contribution volume as a basis of consideration (which naturally favours the older people who have worked longer) makes it even more difficult and further difficult for the growing portion of millennials who are self-employed, working freelance in the informal sector or in startups.

With the economic status of the country, many millennials are unemployed and hence are unable to fulfil the eligibility requirements. According to data from the Nigerian Bureau of Statistics, 13.9 million Nigerian youths were unemployed by the end of 2020.     

Overall, the NHF framework provides a very efficient vehicle that can help Nigeria close the housing deficit. The success of this however is consequent on some policy shifts through continuous consultative process to inculcate changes in demographics, income scales, economic indices and industry trends. We can learn from thriving Mortgage Systems like the examples in Europe and America on inclusion for their young people.

We would love to hear from you. Please send your comments/feedback to [email protected]