BEYOND BRICKS AND MORTAR: ALGERIA'S HOUSING CRISIS

UNCLAS SECTION 01 OF 04 ALGIERS 000385

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN SOCI PGOV AG
SUBJECT: BEYOND BRICKS AND MORTAR: ALGERIA'S HOUSING CRISIS


1. (SBU) SUMMARY: A housing shortage across Algeria is one of
the worst economic problems facing the country. To help ease
the shortage, in 2004 President Bouteflika launched an
ambitious plan to build more than one million new housing
units by the end of 2009. The program has fallen far short
of expectations. The USD 9 billion effort aimed to increase
the housing stock to seven million units and reduce the
average household occupancy rate from seven persons per unit
to five. At the end of 2007, the Minister of Housing
declared that 43 percent of the target number of homes had
been completed. Our contacts believe this figure is far too
optimistic, however, and that in reality fewer than 20
percent of the planned housing units have been built. The
government's housing plan is plagued by inefficiencies
related to poorly managed housing subsidies and inadequate
regulations covering land development and property titles.
The spiraling costs of building materials is also crippling
construction projects as contractors find they cannot operate
within the low fixed-price per square meter demanded by the
government. The government now finds itself forced to
subsidize the markets for some building materials.
Complicating matters further, existing housing stock is not
fully utilized because of issues of affordability and a lack
of mortgage financing. USG proposals to assist the Algerians
to address their housing problem have so far gained little
traction. END SUMMARY.

THE ORIGINS OF ALGERIA'S HOUSING CRISIS
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2. (U) Algeria has faced a housing shortage since the 1980s.
Years of terrorism in the 1990s caused a spike in
rural-to-urban migration and a subsequent demand for urban
housing for which the federal and local governments were not
prepared. With no clear economic vision, lackluster regional
development policies and inadequate urban planning models,
the largely state-run construction sector could not keep up
with the flow of people to the cities, and limited mortgage
capacity made private financing of new home construction
nearly impossible. As a result, generations of families, or
multiple families, found themselves trapped in the same
apartment, waiting for their chance to get on a list for a
new home.

THE REAL PROBLEM: LACK OF AFFORDABLE HOUSING
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3. (SBU) Analysts estimate that housing prices have more than
doubled during the past three years. Property prices are
inflated because the national government continues to own
most of the land in Algeria, and the process by which
developers or individuals can obtain clear title to property
is cumbersome and sometimes less than trustworthy. The
highly publicized effort to remedy the perceived housing
shortage belies the fact that between 700,000 and one million
housing units (ironically, the same number of units targeted
in the president's housing initiative) are unoccupied at any
given time, according to press reports quoting the current
and former ministers of housing and the chief loan officer
for the state-run CNEP Banque, which issues most mortgages in
Algeria. The home vacancy rate is due largely to leasing
constraints and the shaky title system. Banks will not
accept a mortgage application unless clear title is proved at
the outset. During a period in the late 1980s and early
1990s, opposition party leaders in many local governments
handed out large numbers of "temporary deeds" to properties
that were never expropriated, and these temporary deeds were
never reconciled against the original land titles. As a
result, today multiple claims often exist on the same lots,
and banks will not finance their sale.


4. (SBU) Supply is also constrained and prices are squeezed
upward because the transfer of government-built housing is
both severely restricted and poorly monitored. Stories
abound of middle-class families who manage to acquire and
sell multiple government-subsidized apartments in spite of
transfer restrictions. Eviction laws favorable to tenants
also prompt some landlords to leave units vacant rather than
rent to families who cannot guarantee their incomes over

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time. It is common, for example, for landlords to demand a
full year's rent in advance of occupancy, something most
Algerians cannot afford. Some landlords choose to keep
properites vacant in hopes of finding an expatriate or a
foreign company that will offer top price and a long-term
commitment. These constraints affect commercial space as
well as residential. We were told by a major international
oil company last year that the average price for a square
meter of office space in the Hydra district of Algiers was
equivalent to office space on the Champs Elysees in Paris.
For this reason, and to some extent because of security
concerns, many leading corporations are housed in villas
around Algiers rather than traditional office buildings,
which further restricts housing supply.


5. (SBU) Additionally, in widely published comments made at a
conference on organized crime in early March, Ahmed Remili,
Assistant Director of Criminology at the National Criminology
and Criminality Institute (INCC),noted that land speculation
as a means to launder money from contraband sales and other
illegal activities has restricted in-fill property supply and
has consequently added significantly to the cost of housing.
The "Mafia du Foncier," or Real Estate Mafia, is also
legendary in Algeria: criminal or quasi-criminal elements are
believed to control large swaths of the limited number of
privately held parcels across the country, and collude to
keep land values high.


6. (SBU) Large-scale private development projects announced
recently by Gulf investors will do little to ease the housing
shortage, since the proposed developments cater to the
wealthy rather than the majority of the population that is
searching for affordable urban housing. Since 2003,
Algerians have had greater access to mortgages, but the cost
of housing puts most Algerians out of the market. We
calculate the home price-to-income ratio (total home price
over annual household income) for Algeria to be about 13. By
comparison, according to the Overseas Private Investment
Corporation (OPIC),the ratio for neighboring Morocco is 9.2,
and 5 for Tunisia. (The U.S. Department of Housing and Urban
Development reported in 2006 that the home price-to-income
ratio for the United States was 3. In 2005 San Francisco
topped the U.S. market at 12.6, below our estimate of
Algeria's average.) High unemployment and underemployment,
along with the ever-rising cost of living, have also been
steadily eroding most Algerians' ability to secure an
affordable mortgage. Mortgage lending represents about 10
percent of the credit portfolios of Algeria's banks and,
according to a 2005 World Bank study, housing finance makes
up less than one-half of one percent of Algeria's GDP,
whereas housing credits represent over four percent of
Morocco's GDP and six percent of Tunisia's.

BRICKS AND MORTAR: THE GOVERNMENT'S PLAN FALLS SHORT
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7. (SBU) Housing Ministry Director of Housing Programs and
Real Estate Development Mohammed Tahar Boukhari told us on
February 20 that the ministry delivered 650,000 completed
housing units between 1999 and 2004. He said that the
government then determined that there was an immediate need
for an additional 1.2 to 1.3 million new units across Algeria
to reduce overcrowding and reach a national target of five
occupants per home, down from an average of seven. The
housing program ultimately developed consists of six
categories of housing, each with a different level of
government subsidy. For example, 25 percent of the units
will be deemed "social" housing, where the government will
remain the owner of the property and occupancy will be
completely subsidized, while ten percent will be on a
purchase-to-lease plan (AADL) where tenants will be given
financial assistance to assume title to the property over
time.


8. (SBU) In terms of construction market share, Mr. Boukhari
told us that private Algerian developers have access to 95
percent of the new-housing market. He said that contracts
for some 80,000 units of the government's five-year project
have been awarded to foreign firms, most notably Chinese,

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Egyptian, Lebanese and Turkish companies. He added that out
of 25,000 private Algerian construction firms, only 1,000
have the required qualifications for these projects.


9. (SBU) Recently the housing ministry claimed publicly that
it completed 43 percent of the planned units between 2005 and
2007, and that this accounted for 65 percent of the five-year
program's budget. But an executive with Egypt-based Orascom
Construction Industries told us in early March that based on
his study of government construction tenders and his
conversations with industry players, the completion rate was
actually only 12 to 17 percent. An Algiers-based
international housing consultant told us on March 12 that the
completion rate was no more than 20 percent. They said that
the fixed price per square meter that the government demands
is too low for profitability. Projects are often turned over
to successive developers after the contract is awarded
because no company can make the project profitable given the
price ceilings. Thus, few of the large-scale projects have
actually been completed, although many have been started.
According to the two men, a lack of capacity and experience
among Algerian firms has further slowed the pace of
construction.


10. (SBU) Our contacts explained that attracting developers,
particularly foreign companies, has been a challenge because
the fixed price per square meter required in the government's
tenders is far too low to absorb the skyrocketing costs of
raw materials and labor. This has been front page news in
the last ten days, as several leading Algerian newspapers
have reported at length about the spikes in prices for
building materials, especially wood, cement and iron. On
March 26, the Arabic-language daily paper Echourouk el-Youmi
reported that the price of construction iron had more than
doubled in the last few months, causing the government to
begin subsidizing the iron market. Echourouk also reported
that the cost of building new apartments had jumped by 30,000
dinars, or about USD 4,500, due to the escalating costs of
building materials. The paper said that both private and
publicly-owned construction companies have asked the
government to raise the price per square meter from the
current range of 22,000-26,000 dinars (USD 335 to USD 396) to
at least 34,000 dinars (USD 518) in order to reflect the
current cost of materials.

REFORM EFFORT: NEW LAND TITLES, NEW TOWNS
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11. (U) The government is now looking at developing the
housing market and industry by improving the legal frameworks
for land transfer and mortgage lending. Finance Minister
Karim Djoudi recently created a committee composed of
officials in charge of budget, land and tax administration,
as well as officials from the Ministry of Housing, the
National Housing Fund (CNL) and commercial banks. The
committee is charged with assessing current government
housing policies in order to recommend and implement new
measures that will remove housing barriers. In addition, the
government recently trained more than 3,000 land
administration agents who will be tasked with regularizing
property deeds and titles. The Director of Architecture and
Urban Planning at the Ministry of Housing recently told us
that the government is also piloting a regional development
project aimed at creating 12 new cities, five in the environs
of Algiers, to ease crowding caused by urban migration.

COMMENT: MIXED MESSAGES ON PRIORITIES IN HOUSING
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12. (SBU) Algeria's housing crisis is not simply a matter of
construction or mortgage capacity. Issues of land use
planning, development policies, title regulations, and
subsidy programs all drive up the cost of housing, making
affordability a more important issue than either housing
supply or mortgage availability. New housing stock should
help ease prices, but without a proper regulatory framework
and consumer-driven mortgage practices, the number of vacant
units will rise along with new apartment towers. We have
tried to help by offering Department of Treasury programming

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in the area of mortgage lending and credit risk assessment
and management, but the U.S. subprime crisis and concerns
over security have kept a HUD team from coming to Algiers.
We have also received mixed messages from the Algerians over
the priority it places on housing issues. During a recent
visit, Treasury DAS Larry McDonald was told by the Minister
of Finance that one of U.S. Treasury's resident advisors in
Algeria should help his agency expand mortgage lending in
Algeria. As soon as the minister left the room, an official
with the national Treasurer's office told McDonald to ignore
the housing issue and focus on debt management. Such mixed
signals highlight the the general lack of vision within the
Algerian government regarding the course of economic reform
here, and make our efforts to provide effective programming
all the more challenging.
DAUGHTON