Retrospective view on nigeria mrc


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Retrospective view on nigeria mrc

  1. 1. CDL Research 1 August 5, 2013 Mortgage Refinancing Report Are the odds against the proposed Nigeria Mortgage Refinance Company (MRC)? Overview: The housing deficit in Nigeria is largely estimated to be around 16-18m units and grows by about 2m units yearly; with the worth of this shortfall valued at about N25 trillion. The twin issues of finance and the Land Use Act - an obnoxious statute from the military regime which vests ultimate title for lands on the state governments represent major constraints to meeting the housing needs of Nigeria. In tackling the issue of finance, the Central Bank of Nigeria (CBN) recently released a framework for the establishment of a Mortgage Refinance Company (MRC). The MRC is being established to provide short-term liquidity and/or medium- to long-term funding or guarantees to housing finance lenders. It is expected to increase annual mortgage origination in Nigeria to 200,000 from the current average of 20,000 mortgages within the next few years, representing an increase of 900%. Mortgage Market in Africa: The mortgage market in Africa is relatively small which has led to pent up demand that could serve as a major growth driver for housing in the continent. The performance of mortgage market in Africa has been strongly linked to the performance of the various economies. South Africa is the biggest economy in Africa and equally has the most decent (size and structure) mortgage system. Mortgage accounts for 26% of South African s GDP while it accounts for a meagre 1% of Nigeria s GDP (See Chart 1). 0.50% 1% 1.1% 2.5% 12% 19.6% 26.4% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% Mortgage as a % of GDP Source: Centre for Africa Housing Finance 2012 1.7% 4.4% 8.5% 18.5% 24.0% 37.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% UK USA South Africa Uganda Nigeria Ghana Mortgage Rates in selected countries Sources: Independent sources Housing Deficit: 16- 18m units The deficit is estimated to grow by 2m units yearly Shortfall valued at N25 trillion Ayowole Adelegan +234-1-277-8200-3
  2. 2. CDL Research 2 August 5, 2013 Mortgage Refinancing Report Nigeria which is sub-Sahara Africa s largest economy after South Africa has struggled to deliver housing to the population because of the high prices of the homes in the market. This constricts demand for housing in the country while also exposing mortgage finance institutions (MFIs) to increased risk of default as mortgages are priced at unhealthy double digit rates. Across the continent home financing has become largely accessible by mainly the upper class and the upper middle class. This can be traced in large part to the preference of the mortgage lenders for mainly corporate clients while individuals are left to access mortgage finance at exploitative rates (See Chart 2). World View of Mortgage Financing: The gap created by housing is pertinent to many countries and has formed the basis of adoption of a number of models in meeting this need. The models include Securitization of cash flow (Freddie Mac in the United State), Portfolio Lender (Nationwide Building Society in the United Kingdom) and Mortgage Refinancing Facility (Tanzania Mortgage Refinancing Company). A diagrammatic representation of the models is given below: Cash Flow Securitization Model: Cash Cash Cash Mortgage Mortgage Mortgage Source: Economic Research Forum (ERF) Portfolio Lender Model: Cash Cash Deposit Mortgage Cash Debt Source: Economic Research Forum (ERF) Borrower Mortgage Banker Freddie Mac Capital Market Borrower Nationwide Building Society Deposit Market Capital Market
  3. 3. CDL Research 3 August 5, 2013 Mortgage Refinancing Report Refinancing Facility Model: Cash Cash Deposit Mortgage Cash Cash Collaterized debt Deposit Source: Economic Research Forum Estimating the Impact: The capital market is positioned as a common terminator of the activities of the models under review. The development of the capital market has become one of the foremost impacts of a well-developed mortgage system. Increased housing needs and the presence of a well-established system of meeting the housing needs create a huge capital gap. The mechanism of the capital market provides an important opportunity in closing this gap and to a huge extent has led to the development of the fundamentals associated with countries with strong mortgage systems (See chart 3). In addition, growth in the mortgage/housing sector vis-à-vis construction is a vital means of generating employment and has played pivotal role in enhancing productivity of the populace in countries with a sound mortgage model (See chart 4). Despite a relatively strong mortgage system in South Africa compared to other African countries, the rate of unemployment is quite contradictory which may suggest the impact of other underlying factors on the economy. $0.015b $0.056b $0.61b $3.01b $18.7b 14,000 2,014,000 4,014,000 6,014,000 8,014,000 10,014,000 12,014,000 14,014,000 16,014,000 18,014,000 20,014,000 Kenya Nigeria South Africa UK United States USDMillions Stock Market Capitalization Source: World Bank 2012 7.6% 7.7% 10.7% 11.0% 23.9% 25.2% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Unemployment Rate % Sources: Independent Sources 3 4 Borrower Bank or Savings Loans Deposit Market TMRC Capital Market
  4. 4. CDL Research 4 August 5, 2013 Mortgage Refinancing Report A retrospective view on the Nigeria MRC: The MRC is being set up to support mortgage originators such as Primary Mortgage Banks (PMBs) and Deposit Money Banks (DMBs) to increase mortgage lending by refinancing their mortgage loan portfolios. Its main focus is to act as intermediary between originators of mortgage loans and the capital market who are typically looking for long-dated high quality securities. The operations of the MRC are expected to enhance the development of the secondary mortgage market which till date remains largely untapped. Already the World Bank has committed $300 million of zero interest fund to the project while other local investors have equally shown optimism. Recently Resort Savings and Loans, a primary mortgage lender says it would commit N200 million to the proposed MRC. The implication of these commitments and other interests is increased funding to the mortgage/housing sector. Our prognosis also indicates there will be a need to access funds from the capital market if the PMBs and DMBs can pull together more mortgage originations. To a large extent, this may help to deal with one of the twin issues confronting a viable mortgage system in Nigeria. We think the impact of the existing land use act may constrict potential gains that would accrue from the establishment of the mortgage refinancing mechanism. The Nigerian Land Use Decree of 1978 nationalised all land in the country and notionally handed over its administration to committees constituted at state and local government level and these constitute a huge constraint to business (See Chart 5). This limitation would have to be removed if the level of investments desired in the housing sector is to be attained. Source: World Bank 2012 0 50 100 150 200 Senegal Angola Nigeria South Africa Namibia 122 184 82 23 39 20.3 3.2 20.8 5.6 13.7 6 7 13 6 7 Registering a property No of Days Cost(% of property) Nos of procedures
  5. 5. CDL Research 5 August 5, 2013 Mortgage Refinancing Report Furthermore, there will be a need for institutional and regulatory checks on the operations of the DMBs and PMBs and their relationships with the Nigerian MRC. The MRC is being positioned to serve as an off-taker of the loans disbursed by the mortgage lenders. There is a tendency for DMBs & PMBs to create low quality mortgage risk assets and expect same to be offset by the MRC which may lead to the US-styled mortgage bust that resulted in what has been described as the worst economic crash since the 1930s depression. The global economy is yet to fully recover from this subprime mortgage crisis. It is equally being anticipated that interest rate on mortgage from lenders to home owners (borrowers) will be cut by 50% from the present 24% to 12%. However, we think this may not necessarily translate to affordable housing for the huge low-income population that are the most affected in Nigeria s housing problems. Also, there have been no comprehensive plans on what would happen to the entities traditionally entrusted to coordinate mortgage activities in Nigeria. These are the Federal Housing Authority (FHA), National Housing Fund (NHF) and Federal Mortgage Bank of Nigeria (FMBN). We think a clear blue-print has to be established on the operations of the three entities. Lastly, the operation of the MRC is set to increase activities in the Nigerian capital markets. We anticipate an increase in the number of Real Estate Investment Trusts (REIT) traded on the Nigerian bourse from the three names which are Union Homes, Skye Shelter Fund and UPDC Plc. REITs are pooled capital of investors used to purchase and manage income property and/or mortgage loans. In addition to REITs, we anticipate the increased creation of financial derivatives as mortgage-funding needs increase and the market deepens. The proposed N60 billion bond to be issued by MRC confirms our expectation of the impact of the MRC on the Nigerian bond market. Barring any predatory and hawkish tendencies of Nigerian entrepreneurs, we expect a considerable success of the MRC in Nigeria. MRC could open a new vista in the Nigerian capital market Land Use Act: The Achilles Heels of housing in Nigeria World Bank commits $300m of zero interest fund to the Nigeria MRC
  6. 6. CDL Research 6 August 5, 2013 Mortgage Refinancing Report Notes: CBN: Mortgage Refinancing Company (MRC) Draft World Bank Ease of Doing Business 2012 Nigerian Stock Exchange
  7. 7. CDL Research 7 August 5, 2013 Mortgage Refinancing Report Important Risk Warnings and Disclaimers Consolidated Discounts Limited (CDL) is regulated by the Central Bank of Nigeria. USE OF THIS PUBLICATION FOR THE PURPOSE OF MAKING INVESTMENT DECISION EXPOSES YOU TO RISK OF LOSS. Reception of this publication does not make you a client or provide you with the protection afforded to clients of CDL. All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility can be accepted by CDL Research or the Consolidated Discounts Limited Group, their agents or employees, for any errors or for any loss arising from use of this publication or the information contained herein. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of CDL Research and the Consolidated Discounts Limited Group. © CDL 2013. All rights reserved. Consolidated Discounts Limited 67..Marina Lagos Nigeria