LAND TENURE REFORM NEEDED FOR REAL ESTATE

C O N F I D E N T I A L SECTION 01 OF 04 LAGOS 000009

SIPDIS

DEPT PASS TO EX-IM KENNETH VRANICH AND BERT C. UBAMADU
DEPT OF TREASURY PASS TO LKOHLER
USDOC FOR 3317/ITA/OA/KBURRESS
STATE PASS OPIC FOR ZHAN AND MSTUCKART
STATE PASS TDA FOR NCABOT
STATE PASS USTR FOR ASST USTR SLISER

E.O. 12958: DECL: 01/03/2015
TAGS: EFIN ECON EIND KCOR EAID PGOV NI
SUBJECT: LAND TENURE REFORM NEEDED FOR REAL ESTATE
DEVELOPMENT

Classified By: Consul General Brian L. Browne for reasons 1.4(b)
and (d).


1. (SBU) Summary. The Nigerian housing/real estate sector is
cumbersome, costly, and has not been the catalyst for growth
and private sector activity that it should be. Primary
reasons for the inefficiency of this sector are that the laws
and regulations governing conveyance and registration of
title are antiquated and invite far too much government
interference in what are essentially private transactions.
Real estate experts state the 1978 Land Use Act (hereafter
LUA),impedes development, inflates land prices, increases
corruption, and promotes abuse by state governors using
"public interest" provisions within the LUA as a cover to
abridge the landed interests of political opponents. Without
major reform in land tenure and conveyance laws and the
mortgage industry, the construction and real estate sectors
will continue to be throttled by high costs, the vagaries of
politics, and will be unable to live up to their potential as
economic drivers as they are in other economies. End Summary.

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Background
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2. (SBU) The 1978 LUA was enacted by and, in part, was the
brainchild of then military Head of State Olusegun Obasanjo.
In theory, the statist LUA was intended to make land easily
available to all Nigerians while discouraging speculation.
To accomplish this, LUA vested control of land in the state
governments. Instead of stifling private profiteering as
envisioned, however, it has opened the door to official
corruption and the creation of additional layers of
government interference in land transactions. Under the LUA,
control and management of all land in the territory of each
state was vested in the Governor of that state. No person is
permitted to build or destroy any structure in an urban area
without a prior certificate, a right of occupancy or signed
license from the state. In practice, this means all
conveyances and building projects have to be approved by a
state governor or his authorized designee. Not only
dilatory, this makes each transaction dependent on the
goodwill of a highly politicized actor who is not in the
habit of rendering favors to neutrals not within his camp let
alone political opponents. The Governor also has authority
to revoke a Certificate of Occupancy (hereafter COP) at any
time for overriding "public interest" and, in the course of
Nigerian jurisprudence, a state governor has ample latitude
to define the public's interest and how it overrides that of
the private landowner.

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Governors' Abuse of Power, Bribery and Corruption
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3. (C) Most real estate experts have concluded the LUA
promotes corruption. Deputy Manager Mortgage Operations Uddy
Egbe of Union Homes, the largest Primary Mortgage Institute
in Nigeria, said state governors used the LUA to carry out
political vendettas under the guise of the "public interest"
provision found under the LUA. The LUA vested too much power
in state governors and there is no "checks and balances"
system to control gubernatorial caprice. A governor could at
any time demolish a home or residence claiming "public
interest", and individuals would be extremely limited in
their ability to legally challenge such actions. CEO First
Bank Nigeria Mortgages (FBN),Mohammed Santuraki, said state
governors revoked land rights of opponents and awarded them
to political allies on a daily basis.


4. (C) Union Homes Lekki Branch Manager, Ifeanyi Ozoh, added
that corruption also occurred during the title transfer
process. For example, if person X sells property to person Y
for naira 10 million, naira five million lower than the
market value of the property, person Y must pay title
registration fees amounting to 30% of total value of property
for naira 15 million instead of naira 10 million. In order
to reduce registration fees, person Y often will bribe
government officials to assess the property at lower than
market value, he said.

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Cumbersome Property Laws and Procedures
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5. (U) A person wishing to legally purchase land to build a
home must go through a gauntlet of cumbersome procedures.
First, the person must obtain a COP from the property owner,
agree on the terms of sale, and then have the owner assign
the land to the purchaser through a deed of assignment. In
order to avoid the misfortune of purchasing a COP from
someone who does not own the land in question, the buyer must
consult the State Bureau of Lands to confirm the seller's COP
is genuine, registered with the state, and not restricted by
earlier encumbrances. With the deed of assignment and
purchase receipt in hand, the new owner goes to the State
Bureau of Lands to obtain a Governor's Consent to the
transaction to legally transfer a title. This could take
months and a fair amount of footwork accompanied by ample
entreaties to recalcitrant bureaucrats. Once a Governor's
Consent is obtained, a person can begin building if no other
structure exists on the property.


6. (SBU) In practice, due to long delays obtaining a
Governor's Consent, people start building before obtaining
the Consent. In fact, most Nigerians eschew obtaining a
Governor's Consent to the transaction because of the costs.
Thus, many home builders have never perfected their interests
in property. While they may be de facto landowners in the
eyes of government and perhaps the courts, their legal status
may not be much better than that of a monied squatter.
Moreover, to obtain a mortgage loan, banks require borrowers
to have either a COP or a Governor's Consent. Consequently,
most home builders do not seek mortgage loans.

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Weak Mortgage Facilities High Interest Rates
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7. (SBU) Due to the inability to access mortgage loans, the
average well-off person builds a home or purchases property
through cash transactions. The person may rely on family and
friends to borrow money to pay the seller in one lump sum or
to complete a building in stages as funds become available.
This results in costly rounds of mobilizing and demobilizing
a contractor. Often, a home will take years to build and the
home owner will end up with a different contractor than the
one that started the project.


8. (SBU) While the GON has a National Housing Fund aimed at
providing low-income housing, there are insufficient funds to
meet demand. Under the Federal Ministry of Housing and Urban
Development's (FMHUD) national house financing scheme, the
mortgage interest rate is 6% for a period of up-to 25 years,
with the minimum requirement that a person should make naira
3,000 (USD 23) per month and contribute 2.5% of monthly
salary. Despite the low mortgage rate, most people do not
participate because of strict qualification requirements,
long delays, and overall distrust of government. Due to
years of mismanagement, corruption, and the FMHUD's inability
to force institutions and individuals to contribute to the
Housing Fund, the entire national house financing scheme
became a thing most Nigerians avoid, Santuraki complained.


9. (SBU) Egbe said "Nigeria does not have a fully developed
mortgage facility" because "there is no mortgage culture" and
"most people pay by cash" to purchase or build homes. High
commercial mortgage interest rates, over 20%, also are an
impediment. Ozoh said to afford a five-to-ten year mortgage
a person would need an annual income of, at least, naira 2
million (USD 14,925),thus eliminating 90% of the population.
Lack of available credit prevents the vast majority of
people from building or purchasing homes.


10. (SBU) Deputy Managing Director of GTBank, Bolaji Lawal
confirmed that interest rates for mortgages hovered around
20% and that their bank required 40% minimum equity down
payment for mortgage loans. The bank discouraged people from
applying for mortgage loans at GTBank and recommended they
consult Primary Mortgage Institutes (PMI) like Union Homes
instead. Kofo Majekodunmi, Deputy Managing Director of MBC
International Bank, said most banks in Nigeria did not offer
a mortgage facility and that even PMI's "only earn about 10%
of revenue from their mortgage business." Union Homes
Managing Director O. N. Chionuma concurred with Majekodunmi's
assessment. He estimated only one percent of the population
could meet their company's strict requirements for obtaining
a mortgage loan. First Bank Nigeria Mortgages CEO, Mohammed
Santuraki, said high interest rates and large down payment
requirements ensured that cash transactions for homes would
remain the "standard practice" for buying homes in Nigeria.

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Title Registration and Transfer Fees Too High
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11. (SBU) The high costs associated with title registration
including fees and multiple delays, also handicaps this
sector. Union Homes Legal Secretary, A.A. Daniel, said the
fee for obtaining a Governor's Consent was 16% of the capital
value of the property plus additional development levies such
as capital gains tax, stamp duty, and registration fees that
when combined amounted to 30% of the capital value of
property. In addition, long delays, bureaucratic hassles,
and inadequate record-keeping facilities hampered the
registration process. Santuraki said he chose not to
register his homes in Abuja and Lagos to avoid hassles and
registration fees.

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Rising Construction Costs
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12. (U) On the supply side, increased costs for raw materials
such as cement, led to a slow-down or halt in construction
and caused housing prices to rise. The cost for cement
between August 2004 to August 2005 rose by 16%, calculating
for inflation, according to industry experts. Warehousing,
transportation, and fuel cost increases also cut into the
profit margins of construction companies and real estate
developers.


13. (U) Frank Ugbodaga, CEO of Construction Management
Company Ganttworks Nigeria, said costs for raw materials
alone increased by 25% for his company since August 2004.
His company imported raw materials from Italy, Brazil, and
increasingly China because raw materials were unavailable
locally or of poor quality. Most customers preferred
imported products for tiles, bathroom sinks, and ceramic
products because local production quality was substandard.
Mansur Ahmed, Director General Nigerian Economic Summit Group
(NESG) told us Nigeria has abundant cement and limestone, but
that poor production capacity, management and infrastructure
prevented full exploitation. Nigeria had four or five cement
mills with eight to nine million-tons/per annum total
production capacity, but that currently only five to six
million-tons/per annum were produced, he said.

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Rising Infrastructure Costs
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14. (U) Inadequate infrastructure raised purchasing prices
for property. Diya Fatimilehin Estate Surveyors Founder,
Gboyega Fatimilehin, said the cost of building and
maintaining power supply, adequate roads, providing water
distribution systems, and routine maintenance work, easily
costs their company over naira 250 million (USD 1.87 million)
per year. These costs were pushed onto consumers, raising
the purchasing price for homes. Ganttworks Nigeria CEO
Ugbodaga said infrastructure costs increased for their
company by 15% since 2004. Ganttworks aimed to build estates
in areas where "sufficient infrastructure was already in
place" to reduce infrastructure costs. Nevertheless, even in
areas with relatively good roads and power supply,
infrastructure costs remained a "headache".

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Security Costs
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15. (U) Diya Fatimilehin Estate Surveyors Co-Partner,
Kolawole Diya, said security costs associated with protecting
property hampered real estate development. The fear of armed
robbery and violence not only increased security costs, but
prevented foreign investment from flowing into real estate.
"People are afraid for their safety" and until security
issues were addressed, Diya believed real estate development
would suffer. Many builders were wary of beginning
development projects in areas occupied by low-income
households because the security costs made such projects too
risky.

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Comment
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16. (SBU) The 1978 Land Use Act has had unintended negative
consequences on the housing, real estate, and mortgage
sectors. It has stymied real estate development, exacerbated
corruption, and has complicated and clouded the manner in
which an individual can purchase, perfect and convey private
property rights. It has led to artificial scarcity and
escalated land prices. The LUA vests too much power in state
governors, who often abuse this authority. This power to
control land perhaps is the single greatest impediment to the
protection of property rights and ownership. The onerous
process and exorbitant fees associated with obtaining a
Certificate of Occupancy or Governor's Consent have stopped
an immeasurable amount of economic activity over the years.


17. (SBU) Comment continued: Although the media, the
National Assembly (NA),and even President Obasanjo have
talked about amending the LUA, it is unlikely to occur any
time soon. Politicians and office holders will be
increasingly preoccupied with the 2007 election and less
inclined to venture into the nettle of land reform. Many
governors and politicians benefit from the current system.
It will take a strong effort to change this legal
superstructure. Until then, the Nigerian real estate/housing
sector will remain straitjacketed. End Comment.
BROWNE