Home loans: A strong long-term outlook for the mortgage sector

Mortgages remain underdeveloped in Ghana, with the segment facing problems such as a lack of new housing supply, complications surrounding land ownership and a dearth of interest from banks due to issues such as the disconnect between the long-term nature of mortgage investments and Ghana’s mostly short-term banking deposit structure. A relatively marginal element of lending in Ghana, mortgage in 2011 represented just 1.6% of total credit to the private sector (around GHS137m, $81.2m), according to Bank of Ghana (BoG) figures. Only 2.5% of Ghanaians had a loan outstanding for the purchase of a home in 2011 according to research firm Findex, compared to 5.4% and 5.3% of sub-Saharan Africans and residents of middle-income countries, respectively.

“There is a lot of potential for mortgage schemes, as there is a fair amount of annual demand for housing in the country,” Kweku Bedu Addo, the CEO of Standard Chartered, told OBG. “But the emergence of a real mortgage market can only be accomplished with a lowering of interest rates.”

CHALLENGES TO DEVELOPMENT: Aside from a few banks such as HFC, Fidelity, Stanbic and non-bank financial institutions such as Ghana Home Loans (GHL), many lenders pay the segment limited attention, though some effectively offer overdrafts that are used to buy homes. “Apart from a few such as HFC, most banks aren’t interested in the mortgage sector and don’t market mortgages aggressively, as mortgages are long-term investments and they don’t want their money tied up for long periods,” said Sulemana Mohammed, a research analyst at Ecobank Capital.

Banks themselves lack the long-term funding to make mortgages viable, while high borrowing costs deter customers. “The biggest challenges are the current bank deposit structure, which is mostly short-term, and historically high interest rates, which put monthly payments on long-term loans out of reach for most people,” said Alhassan Andani, the managing director of Stanbic Bank. In the past, the fact that HFC was the only institution allowed to foreclose on properties, with recourse to lengthy court cases, discouraged other institutions from getting involved in the segment. This changed with the passage of the Home Mortgage Finance Act (HMFA), drafted with the help of the private sector funding arm of the World Bank, the International Finance Corporation (IFC), in 2008. In 2007 the IFC also launched a project to provide credit guarantees and advice regarding mortgages to banks in order to spur the sector’s development, though Kojo Addo-Kufuor, the chief operating officer of GHL, described IFC efforts in as unsuccessful.

Another challenge is a shortage of new housing, limiting the size of the market. “The government’s official statistics estimate that around 1.5m people need housing. Those eligible for a mortgage to buy a house, the effective demand, could be possibly half of that number – 750,000 people,” Addo-Kufuor told OBG. “However, housing supply is nowhere near that level of demand, with approximately 20,000 new units being built a year, partly as a result of a lack of construction finance for developers.”. According to the “Ghana Housing Profile”, the country needs 2m new units by 2020. The study was issued by the Ministry of Water Resources, Works and Housing, in cooperation with the UN Human Settlement Programme, in June 2012. A deal between the government and South Korean Firm STX Engineering and Construction, aimed at the housing shortage, collapsed in 2011; it envisaged the initial construction of 30,000 housing units at a cost of $1.5bn and the construction of 200,000 units over five years for around $10bn.

LAND OWNERSHIP: Issues surrounding land tenure can also prove problematic, especially in Accra. “A lot of people buy land intending to build a house on it and then find that they cannot register it as there are multiple claims of ownership on that same plot; such cases can end up in the court system and can last decades. The situation is made more complex by the fact that ongoing land litigations do not always show up in search results provided by the Lands Commission,” Addo-Kufuor told OBG, adding that his firm has a specialist team that conducts several searches, including a GPS survey, on each parcel of land before the loan is disbursed. “If the results from any of these searches raises doubt surrounding ownership of the land, we cancel the transaction”

MORTGAGE GROWTH: Nevertheless, interest in the mortgage lending segment is growing. In 2006, HFC was the only mortgage provider in the country, whereas now there are at least five. This is thanks in part to the market being made more attractive by the passage of the HMFA, and bankers becoming increasingly willing to recognise the long-term possibilities of the market. “The potential for mortgage business in Ghana is huge,” Andani told OBG. While many banks are wary of the segment, Addo-Kufuor also said it is natural to expect that more specialised non-bank financial institutions are likely to follow GHL into the housing finance market in coming years. “Ghanaian banks have not demonstrated much commitment to the mortgage product given its complexity and the propensity for title related fraud. Increased competition is more likely to come in the form of stand-alone firms that focus on home finance.”

GHL itself has expanded to become one of the largest mortgage players in the country – the firm may have had a market share of as much as 60% in 2010, while French development institution Proparco, which lent $7m in April 2012, describes the firm as the “market leader” in mortgages, attributing it a market share of “over 50%”. If accurate, such figures suggest GHL has had a major impact on segment development.

As at 2011, the company had already disbursed $80m of the $100m it has raised in long term financing – mostly from development financing institutions such as the US’s Overseas Private Investment Corporation, Dutch development bank FMO and the International Finance Corporation, the private sector arm of the World Bank – which it uses to offer mortgages denominated in US dollars, the majority of which are directed toward first-time buyers.

“There are obvious risks with dollar-denominated loans in Ghana; however, we have been through two cycles of exchange rate volatility. In 2006, the exchange rate was GHC0.95 to $1, compared to GHC2.1 to $1 in 2012. However, the quality of our portfolio has remained significantly unchanged with defaults below 4%. To date most of our customers buy houses to live in, rather than as an investment, and will do their utmost to hold onto their property regardless of currency movements,” Addo-Kufuor told OBG.

Lending in dollars also allows the country to charge significantly lower interest rates, of between 12% and 15% per annum over 15-year periods. Such rates compare favourably against the 30% annual rates that are the alternative the market can offer.

As of April 2012 GHC’s mortgage portfolio stood at around $65m compared, for example, to fellow major mortgage lender HFC Bank’s portfolio of GHS70.7m ($41.9m) at the end of 2011. The firm currently has just one branch but covers mortgages across all of Ghana. The firm has a range of development plans, including to start taking deposits in the near future, which it would use to replace their warehouse line (that is, borrowing short-term from local banks while they wait for development finance institution funding to come through) and thus lower costs, as well as moving into other African countries, offering mortgage-related products such as insurance, and expanding its financing beyond development finance institutions by looking at the local capital market and securitising parts of its portfolio. “The great restriction for attracting investment is size but once our portfolio nears the $100m mark we think it will become of interest to investors,” Addo-Kufuor told OBG.

NON-BANK LENDER: The emergence of a non-bank specialist mortgage lender has encouraged the regulatory landscape to develop, preparing the ground for other institutions. According to Addo-Kufuor, the BoG has worked closely with the firm to address the regulatory issues specific to that segment.

Addo-Kufuor told OBG, “The BoG has shown great interest in the segment. It realises that GHL is slightly different from other institutions it has working relationships with, and it has been has been proactive, cooperative and thorough in its dealing with us.”

New, large-scale developments are also boosting the prospects for the mortgage market. Cooperation between developers and issuers has bolstered the confidence in the viability of projects and improved the likelihood of financing. For example Renaissance Group, which is working on two major projects with a combined target resident population of 180,000, told the press in June 2012 that it has reached an agreement with a mortgage provider that will allow buyers to access 15-year mortgages worth GHS18,000 ($10,670). The two projects, Appolonia and King City, are located near Accra and Takoradi, respectively, and will both be built over a 10-year period. Together they represent investment of approximately $600m.