The importance of Housing finance in the housing delivery value chain is critical. Indeed, finance is needed for both the demand and the supply of housing. On the demand side, the availability of and access to housing finance is a significant determinant in a household’s decision to acquire, build, or rent a house. Similarly, on the supply side, developers need financing to build the mass housing projects that are needed to address the continent’s housing deficit. Housing finance, being an essential part of financial systems, also contributes to the development and deepening of financial markets and the financial sector as a whole. A number of countries have successfully developed capital markets with significant volumes coming from the refinancing of mortgage debt. However, the development of housing finance on the continent has not kept pace with the backlog in housing demand.

Challenges

The supply of housing to meet the demand in Africa faces numerous constraints, including poor targeting and insufficient scale. There are only a handful of developers on the continent capable of delivering more than 500 units at any one time. The difficulty to access long term affordable housing finance, both on the demand side and on the supply side is a major constraint. This lead the developers and investors to focus on the top end of the market, despite the demand being in the middle to lower end of the market. There are also constraints across the entire housing value chain, from institutional weaknesses, macroeconomic instabilities, to adverse legal and regulatory environments. The result of all this is an inefficient collateralization of housing assets and a significant shortage of long-term finance sources.

Functioning mortgage markets exist in only a few African countries, such as Morocco, Tunisia, Namibia and South Africa, where the mortgage loans as a percentage of the GDP is 18%, 9.2%, 19% and 34% respectively. In Nigeria, Cameroun, Egypt, Côte d’Ivoire, Ghana and Tanzania for instance, housing finance amounts to less than 1% of GDP. This is in comparison to a number of North American and European countries where mortgage loans are often over 40% of GDP. In the absence of well-developed mortgage markets, housing in Africa is either self-financed (by equity accrued through many years of savings or through incremental house building), or directly financed between individuals and community structures. In 2017, analysis by the World Bank suggests that only 5.2% of African households took out a formal loan to purchase a home. The African Development Bank estimates that only 6.7% of households can afford a house at an average starting price of USD 28,000.

The few banks that provide mortgaged have traditionally served the middle and high-income segment of the population. The perceived high credit risk, high transaction costs and the lack of competition in the banking sector in most African countries has resulted in extremely high interest rate and short tenures (less than 10 years) for mortgages in many African countries. CAHF estimated in 2016 that less than 10% of households in Africa could afford a mortgage on the cheapest newly built house. State-owned housing banks still play a prominent role in the housing finance market in Africa, but many have performed poorly and failed to meet housing policy objectives³. As a result, governments began to adopt policies that encourage private lending while maintaining a level playing field for all lenders.

Opportunities

Mortgage markets across Africa are only likely to grow if they are affordable, which will not only increase access to adequate shelter, but can have a significant impact on economic development. If 3 per cent of the African population was able to access mortgages, this would contribute US$300 billion to the African economy. African governments and lenders will need to place greater emphasis on domestic resource mobilisation by tapping into local sources of long-term finance, such as institutional investors.

Furthermore, the development and better capitalisation of Mortgage liquidity facilities (MLF), already present in Egypt, Algeria, Tanzania, Nigeria and in the West African Economic and Monetary Union (WAEMU) can play an important role. MLFs play a vital role in building domestic capital markets, especially in developing countries where mortgage markets are still small. MLFs serve as intermediaries between primary mortgage banks and the bond market. They have the capability and financial strength to raise medium- and long-term funds in capital markets through bonds issuance.

The demand for Housing Microfinance (HMF) is also important. HMF consists of financial services and loans to low-income households for home construction, home improvements, home expansion, and land acquisition which is well suited to the incremental housing development approach that is characteristic of Africa’s housing market. It is estimated that between 15 and 40 percent of microfinance loans are now diverted toward housing purposes. A characteristic feature of HMF loans is their short maturity, usually ranging from three months to three years. However, interest rates are high, sometimes above 30 percent on borrowed capital.  MFIs that add HMF to their suite of products could (1) increase their scale of operations and profitability, (2) reduce client dropout rates and decrease the overall risk portfolio, as housing loans tend to outperform other loans, (3) provide additional repayment incentives and resources to proven clients, and (4) gain access to affordable government funds that have been earmarked for housing (Goldberg and Motta 2003).

Residential Real Estate Investment Trusts (REITs) have emerged as an innovation in housing finance that has the potential to increase housing delivery as well as access to housing finance products. A REIT is a tax-efficient investment vehicle designed to aggregate diverse sources of funding (from international and institutional investors through to households), and target them into a real estate portfolio that extends beyond the limitations of individual projects.  REITs have been implemented since the early 90s in few African Countries (Ghana, Nigeria, Tanzania, and in a bigger scale in South Africa) and despite the limited capital available has shown promising results. In Tanzania, Watumishi Housing Company (WHC-REIT) was established in 2014 and was licensed by the Capital Market and Security Authority (CMSA) in 2015, thus becoming the first fully-fledged REIT to be established in Tanzania and East Africa. The WHC-REIT aims to mobilise funding for the development of low-middle income housing, both for sale and for rent. The target house price is between US$ 10 000 and US$ 40 000. 133 The first phase of development, launched in December 2015, consists of 1 500 units spread across 11 regions. WHC-REIT’s property portfolio currently sits at around US$ 40 million, with 100% of this in residential real estate.

Section 2: Highlights of our Activities

MFW4A’s objective is to support the expansion of housing finance in Africa. We will assist our members to identify and develop housing finance interventions, investments, and strategies that contribute to the development of the affordable housing sector on the continent. Our approach is to complement existing initiatives (i.e. Centre for Affordable Housing Finance) by linking & integrating housing finance to the broader financial sector ecosystem. Our focus is on : (i) identifying emerging challenges, opportunities and solutions through research and knowledge dissemination; (ii) partnerships and advocacy by drawing on our existing networks (i.e. African Pension Funds Network); (iii) facilitating investments, market intervention support by leveraging high-level forums; and (iv) strengthening capacities of housing finance actors.