Addressing the region’s shortage of affordable housing

In light of recent political and macroeconomic instability, housing has once again risen to the top of the policy agenda in many countries of North Africa and the Levant. Although the dynamics of local real estate markets and regulatory environments vary widely between Morocco in the west and Jordan in the east, persistent housing deficits, an affordability gap and under-funding are common across the region. However, governments are beginning to address the issue and are increasingly looking to demand-side interventions to improve the situation.

Demographics

Demographic trends in the region are putting pressure on the existing residential stock. The annual population growth rate remains strong, varying from 2.2% in Jordan to 1.5% in Morocco. Furthermore, the demographic structure of these countries will fuel demand for housing. The dependency ratio, or percentage of the non-working age population in the total population, is below 40% in each country in the region. This gives significant opportunities for growth, given the fiscal revenue generation potential and an expanding labour force, but it also places a burden on the housing supply, given that household formation is likely to be at a peak in the coming years. The demographic window of opportunity, as the UN calls it, is fast approaching. In Jordan and Egypt, this period when there will be a bulge in the labour force and subsequent demand for housing runs from 2020 to 2050.

In many ways, these countries look ill-prepared for this demographic phenomenon. The total housing deficit across the entire region stands at 3.5m units, according to Jones Lang LaSalle (JLL). Egypt has the most challenging situation with a current housing deficit of 1.5m units, according to JLL. Despite the scale of the problem, investment to address supply issues has been relatively limited. The GCC currently accounts for 87% of inbound real estate investment in the MENA region. Egypt is the only country outside of the Gulf region with a significant investment footprint, with $143bn worth of projects currently under construction or in the pipeline. “The Maghreb countries lag their regional peers in terms of project-driven economic stimulus, with the value of projects under way there typically below 20% of GDP,” according to a Citibank research. The findings are also a clear indictment of the underfunding of housing in the Maghreb and the Levant. The situation is similar when Africa is used for comparison. North Africa only accounted for 7% of construction projects on the continent in 2013, according to Deloitte. Moreover, of the projects taking place in the sub-region, only 14% are related to housing.

Costs & Margins

The housing issue is hampered by common problems of land availability and pricing and construction costs. In Jordan, for example, land constitutes 50% of the cost of development. In short, mass affordable housing does not provide attractive margins. The largest investor in the North Africa region’s construction industry is private domestic capital, accounting for 27% of funding. In regards to housing, this segment of the market is often focused on higher-income developments where the margins are greater. For example, UAE-based developer Emaar Properties has entered the property markets in Morocco, Jordan and Egypt. In its home market, where government land grants are offered to the government-backed developer, Emaar commands profit margins of 50% on its portfolio, which is confined to the upper-income segment of the market. With such target margins, it seems unlikely that private developers will meet the region’s affordable housing shortfall without incentives. The scale of the problem in North Africa and the Levant, however, requires serious intervention and is unlikely to be met by the market alone. This is clear in a country like Egypt where a gap between unit prices and the purchasing power of potential lower-income homeowners exists. “Affordability has been set at a level of income between LE1000 ($142) and LE2500 ($355) per month. In order to ensure that the units are affordable, they may require subsidising,” Ayman Sami, the Egypt country head for JLL, told OBG. In March 2014, however, the government agreed to a deal with Dubai-based construction firm Arabtec to build 1m housing units in the country at a cost of LE280bn ($40bn). The project, targeting lower-income families across 13 sites, is expected to be complete by 2020. The exact financial details of the development have not been revealed, but Arabtec has been granted land for the project.

Demand Side

There are also challenges on the demand side where the most important interventions are now occurring. The prime concern is the availability and costs of financing. EY has highlighted financing as one of the key reasons that MENA has fallen behind other regions. “Long-term fixed-rate lending for housing is not readily abundant. Some countries’ mortgage laws are still in development,” the company said in a 2012 report on affordable housing.

Indeed, the supply of housing is reliant on improvements in the demand-side environment. “Egypt wants to build one million houses, but that can only happen when we have mass mortgage finance,” Marja HoekSmit, director of the International Housing Finance Programme at the Wharton School, University of Pennsylvania, told OBG. Mortgage penetration across the region is low, ranging from 0.5% of GDP in Egypt to 13% of GDP in Morocco. These figures compare to a rate of 53% for the EU bloc and 81% in the UK.

One clear problem is the inability of mortgage loans to bridge the gap between spiralling residential unit costs and average income levels. In November 2014 Jawad Anani, president of the Economic and Social Council in Jordan, told the local press that the idea of home ownership for low- to middle-income earners is “far-fetched”. The story is similar in Egypt. “The mortgage market here is so small at LE4.5bn ($639m). It represents less than half a percent of GDP, which shows that there is still huge potential for growth. But as the majority of the population is in the low-income segment, the ability to formalise the prerequisites for lending or providing access to financing is limited,” Sami told OBG. In Egypt, 65% of the population cannot afford a property that is produced in the private sector, according to Hoek-Smit.

However, the underdevelopment of mortgage markets in the region is not simply a result of limited purchasing power among potential homeowners. “One of the reasons it is hard to grow the mortgage sector in the region is because so many people are informally employed,” said Hoek-Smit. The issue of informality is not just related to income and employment. “In Cairo, only 25% of properties have a registered title. This makes the mortgage market focus almost exclusively on new construction. So the mortgage market is intimately tied to the new construction pipeline,” said Hoek-Smit. This creates a chicken-and-egg scenario in which supply is premised on targetable demand, but this potential demand is also muted, as it is restricted to new builds. The government has, therefore, taken steps to address the registration issue. In 2004, registration fees were slashed from 12% to 3% and subsequently capped at LE2000 ($284). The process was also expedited, with the time needed to register reduced from about 12-18 months to around three months.

The problem of informality leads to opacity and a difficulty in assessing risk. This is evident in terms of credit information. Private credit bureau coverage in Egypt has been increasing steadily, climbing from 4.7% of the adult population in January 2008 to 19.6% at the end of 2013, according to the World Bank. However, this figure is still low and leads to questions of how banks price risk and bring down the cost of financing. While the banking sector is relatively well covered, with provisioning coverage of 99% and a capital adequacy ratio of 13.4% in the second quarter of 2013, a non-performing loan ratio across all sectors of 9.5% will inevitably impact the pricing of, and appetite for, lending.

Legal Framework For Mortgages

As this suggests, the whole infrastructure for a successful mortgage market is still in its infancy in the region. The Egyptian mortgage law, for example, was introduced in 2001, but the first default case was not heard until 2006, and by July 2008 there had been only five foreclosure cases. “Once the court ruled according to the book of the law and lenders could repossess a house in a reasonable time, the mortgage market picked up. But then you had the crisis,” said Hoek-Smit. While Egypt is a regional latecomer in terms of implementing the legal framework for house financing (although well ahead of a market like Saudi Arabia), countries throughout the region are still attempting to iron out inefficiencies in their market-driven lending systems.

The move to a market-based system in which originators have full faith will take time. The infancy of the markets across the region is reflected in the mortgage terms currently on offer from private lenders. Although the difficult macroeconomic environment in many markets influences these terms, they are also the consequence of a lack of availability of long-term funding for the banking sector and the risk burden for primary lenders. With the exception of Morocco, where loan to values can reach 100%, maturities can exceed 25 years and a substantial majority of interest rates are fixed in a range from 4% to 6%, the cost of borrowing has excluded many lower- and middle-income residents from the property ladder throughout the region.

Secondary Market

Across the region, governments have tried to improve this situation by implementing the framework for a secondary mortgage market. Indeed, refinancing institutions that can access capital markets are key to providing low-cost, long-term funding to primary lenders, reducing their liquidity and interest rate risk and allowing them to offer competitive fixed-rate mortgages. In both Jordan and Algeria, refinancing structures were created in the 1990s. The Mortgage Refinance Company, established in the late 1990s, offers both securitisation without transfer of assets and true sale securitisation to primary lenders in Algeria. However, by 2008, the institution had only refinanced $100m of mortgage loans. “You have to have a primary market that works well, otherwise the secondary market can’t do much,” said Hoek-Smit.

Egypt introduced a refinancing company in 2006. By the end of 2012, the Egyptian Mortgage Refinance Company (EMRC) refinanced 15% of all outstanding mortgages, or LE550m ($78.1m) worth of loans. Although the institution does not buy portfolios, meaning that the risk essentially remains with the originator of the loan, the EMRC has given a boost to the mortgage sector. Between 2006 and 2011, the number of mortgage firms in the market increased from two to 12, while the market-based mortgage loan portfolio grew from LE300m ($42.6m) to LE4.5bn ($639m). The EMRC still has some way to go to support the security of the sector. Given the political and economic situation in the country, the company has yet to go to the capital markets to draw in long-term funding and support the liquidity of the local mortgage industry.

Subsidy Programmes

Nonetheless, Egypt has taken significant steps to build robust mortgage market infrastructure. The government is now looking to improve the affordable housing situation by introducing subsidies on the demand side. In February 2014, the Central Bank of Egypt introduced a stimulus package linked to the mortgage market. It has injected LE10bn ($1.4bn) into the commercial banking system to be used for mortgage lending. The allocation will be lent at low rates for 20 years. Commercial banks will then lend to customers at a rate of 7% over 20 years for low-income units and 8% over 20 years for mid-income properties. Hoek-Smit says this programme can fund 120,000 subsidies linked to the mortgage market in two years. Furthermore, while impediments to lending persist, such as a strict payment-to-income ratio of 25% for mortgage loans, this subsidy will allow mortgage lenders to finance down into the 20th income percentile, according to Hoek-Smit.

While countries across the region have enacted programmes to support the supply of affordable housing, including tax incentives for developers, it is these demand-side interventions that are likely to become increasingly important in the coming years. Such moves will help increase the size of the targetable market for developers, strengthen financing operations and lead to a greater formalisation of the property sector.