Cablegate: Progress in the Nigerian Housing Sector

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PP RUEHMA RUEHPA
DE RUEHUJA #3172/01 3451607
ZNR UUUUU ZZH
P 111607Z DEC 06
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 8028
INFO RUEHOS/AMCONSUL LAGOS PRIORITY 5715
RUEHCD/AMCONSUL CIUDAD JUAREZ 0003
RUEHZK/ECOWAS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASH DC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 ABUJA 003172

SIPDIS

SIPDIS

DEPARTMENT PASS TO USTR AND OPIC (ERB)
TREASURY FOR LUKAS KOHLER/DAN PETERS
USDOC FOR 3317/ITA/OA/KBURRESS
USDOC FOR 3130/USFC/OIO/ANESA/DHARRIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV NI
SUBJECT: PROGRESS IN THE NIGERIAN HOUSING SECTOR

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1. Summary: During a recent visit of an Overseas Private
Investment Corporation (OPIC) team to Nigeria, government officials
(GON) estimated that the housing deficit is between 14-16 million
housing units, with an even larger financing gap of approximately 44
trillion naira. Nigeria's housing needs are enormous and the GON is
seeking private sector funding from local and international players.
President Obasanjo's administration has made progress by proposing
and implementing housing reforms aimed at creating an environment to
close these massive gaps. Reforms address several key areas - land
tenure and titling, foreclosure, and securitization, but the
National Assembly (NA) has yet to pass the bills. Experts note that
opportunities abound in the housing sector, however, the absence of
a legal framework capacity in secondary mortgage market operations,
and the looming uncertainty regarding the forthcoming general
elections is preventing the flow of foreign investment into the
sector. End Summary.

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OPIC ASSESSMENT TEAM
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2. In November, Debra Erb, Cindy Shepard, Jim Williams, and Anthony
Ieronimo, OPIC representatives visited Abuja to analysis areas of
opportunity within the Nigerian housing sector. OPIC met with
policy makers and private sector experts from the Federal Mortgage
Bank of Nigeria (FMBN), Securities and Exchange Commission (SEC) and
Investment Banking and Trust Company (IBTC).

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GOVERNMENT HOUSING LEGISLATION MOVING FORWARD
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3. Tanimu Yakubu, Managing Director of the FMBN, reported that the
housing deficit in Nigeria is between 14-16 million housing units,
with an even larger financing gap of approximately 44 trillion
naira. According to Yakubu, housing finance accounts for a "dismal"
0.38 percent of Nigeria's Gross Domestic Product (GDP). He
contended that it is capable of contributing more than 40 percent to
GDP. Yakubu said the housing gap is so large that it is virtually
impossible for the GON and private sector to narrow. He encouraged
foreign investment in the sector because the returns would be high.
He noted that investment opportunities existed in housing estate
development; primary mortgage financing; secondary mortgage and
capital market mortgage operations; and building materials
production.

4. Yakubu underscored that the GON is putting into place the
enabling legal framework to encourage investment in the housing
sector. He said that the GON discovered that no appreciable
progress was possible if foreclosure and securitization laws were
not enacted. Nine bills have been sent to the NA for passage to
codify the housing sector reforms. Included in the nine bills are
the National Housing Trust Fund Act, the FMBN Act, and foreclosure
and securitization reforms. Yakubu commented that the NA will
expedite passage of the foreclosure and securitization bills.

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FMBN REFORMS
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5. Yakubu said that the FMBN will float a 100 billion naira
mortgage-backed bond in the local capital market either before the
end of the year or by early 2007. The proceeds from this bond will
be used to finance additional housing. One indirect benefit of this
mortgaged backed bond would be civil servants whose government
issued housing is being phased out. In place of issued housing
would be an allotment that civil servants would be encouraged to
utilize for housing purchases. . He lamented that the absence of
mortgage insurance has delayed the bond floating, but encouraged
OPIC to consider investing in mortgage insurance.

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LAND USE ACT AND OTHER MAJOR OBSTACLES TO MORTGAGES
--------------------------------------------- ------

6. Yakubu explained that the Land Use Act of 1978 is a major
obstacle to creating mortgages in Nigeria. (NOTE: The Act vests all
land in the government, and requires a state governor's approval
before land transactions can be concluded. END NOTE) He said the
Act is embedded in the constitution and it would be difficult but
not impossible to amend. Amendment would require a two-thirds
majority in the NA and in each of the 36 state houses of assembly
for approval.

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7. Yakubu surmised that Nigerian public attitudes are possibly a
bigger problem than the Act. He cited the example of the ongoing
land reforms in the Federal Capital Territory (FCT). The FCT in
Abuja has led the nation in demolition of illegal structures and
computerization of the land registry. FCT Minister el-Rufai's
actions have led to a boom in housing construction. Yakubu reported
that the FCT accounts for over 60 percent of total new housing
development nationwide. He juxtaposed this situation in the FCT
with recent history when there was widespread land racketeering and
other illegal dealings. He contended that if the FCT's action could
be replicated in other parts of the country, housing development and
mortgages could increase before the amendment of the Act.

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NEEDED FORECLOSURE REFORMS
--------------------------

8. Yakubu noted that the absence of a foreclosure law discourages
mortgages. He said most Nigerian judges typically support tenants
in disputes with owners and that these judgments would continue
without a regulatory framework for foreclosures. Yakubu supported
the FCT's suggestion to the Chief Justice of the Nigerian Supreme
Court to create special courts in Abuja for foreclosure cases to
expedite decisions, and provide more balanced decisions. Yakubu
suggested that U.S. expertise in foreclosure laws would be valuable
to Nigerian judges and study trips to the U.S would be encouraged.

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SECURITIES AND EXCHANGE COMMISSION REFORMS
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9. Musa Al-Faki, Director General of the SEC, reported that capital
market reforms are ongoing and the development of a secondary
mortgage market is in the offing. He said that there is
inter-agency collaboration between the SEC, FMBN, and the Central
Bank of Nigeria (CBN), aimed at creating a secondary mortgage
market. The SEC has agreed to concessions on listing and other
capital market fees to encourage interested operators. He also
mentioned that some capital market operators have expressed interest
in establishing real estate investment trusts (REITs), although a
legal framework is awaiting final approval by the Minister of
Finance. Al-Faki underscored that Nigerian regulators lacked
expertise regarding derivatives, securitization, and newer capital
market instruments. He suggested study tours for SEC staff to meet
with regulators in other jurisdictions where such instruments are
actively traded.

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MAJOR IMPROVEMENTS TO PENSION FUNDS
-----------------------------------

10. Gbitse Barrow, IBTC Head Pension Manager in Abuja, said that
the Pension Act of 2004 has led to dramatic changes in pension
administration. At the end of October 2006, total pension assets in
the country were 600 billion naira with 70 billion naira from
federal government workers. Barrow commented that this is a total
departure from the former system when government pensions were not
properly funded. Also, he said that the pension funds are liquid
and looking for more financial instruments for investments.
Although pension funds are expected to be sources of long term
funds, he said, the administrators of these pension funds have to be
careful that the instruments they invest in have minimal downside
risks.

11. Barrow contended that Nigerian pension fund liquidity and the
guidelines for investment as stipulated in the Pension Act should be
amended to allow for investment in mortgage-backed-securities. He
opined that pension funds will invest in mortgage backed securities
if the returns are reasonable. However, he suggested that because
mortgage backed securities are new to Nigerian financial markets it
would be better to first concentrate on increasing the awareness
among the investing public and build the capacity of financial
market operators.

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COMMENT
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12. Experts agree that the average Nigerian seeks home ownership,
but current housing sector conditions make it difficult. The
majority of commercials banks only lend for short periods and at
very high interest rates, constricting the pool of applicants. The
FMBN's program offering long term loans at lower rates than
commercial banks has been successful, but cannot satisfy demand. As

ABUJA 00003172 003.2 OF 003

a result, most Nigerians pay rent, with the majority of landlords
requiring one, two and sometimes three years of rent as an advance.
This large source of funds could be better mobilized and utilized to
secure loans for long term financing.

13. There are real areas of opportunity in the housing sector, and
if several proposed bills pass the NA before the April 2007
elections, the housing sector could be poised for a revolution.
Most policy makers remain upbeat that the bills will be passed soon.

CAMPBELL

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