Nigeria's Developers Return to Basics After High-End

UNCLAS SECTION 01 OF 02 LAGOS 000253 SIPDIS STATE PASS USTR FOR LISER, AGAMA STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS STATE PASS TDA FOR DSHUSTER, MARIN STATE PASS EXIM FOR JRICHTER STATE PASS USAID FOR NFREEMAN, GBERTOLIN GABORONE PASS PDROUIN BAGHDAD PASS DMCCULLOUGH COMMERCE FOR KBURRESS, DHARRIS TREASURY FOR DPETERS, RABDULRAZAK E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD PGOV NI SUBJECT: Nigeria's Developers Return to Basics After High-End Housing Bubble Bursts ¶1. (U) Summary: The precipitous fall in high-end housing prices in Lagos over the past several months has prompted real estate developers to shift focus to medium and lower-end accommodations where demand is strong and, while margins tend to be less, prices have exhibited a steady climb. Executives from Pison Housing Company estimate a million Lagos residents qualify for housing loans sufficient to purchase a medium tier home, defined as a home valued between 5 million and 20 million naira (USD 34,000 to USD 136,000). Meanwhile, California-based American Building Systems is introducing new construction techniques that promise to dramatically reduce costs and building time. The lack of a developed mortgage market precludes many would-be homeowners from entering the market, but low-cost construction techniques and new financing vehicles offered by home builders provide two critical innovations that could help bridge that gap. End Summary. Affordable Housing Evades High-End Housing Bubble -------------- -------------- ¶2. (U) Pison Housing Company CEO Roland Igbinoba and senior partner Femi Osemwegie on May 5 told EconOff the price of high-end housing in Lagos had fallen 30 percent from its recent highs due to the global financial crunch. Local banks, suffering from the withdrawal of foreign lines of credit and losses on the local stock market, virtually ceased lending to developers and would-be home owners. Igbinoba characterized the decline as a bubble bursting, noting that high-end housing prices in recent years had climbed at a dizzying rate due to speculatio. The development advisory firm executives said prices were now more in line with fundamentals and saw indications that housing prices had in recent weeks begun to stabilize. ¶3. (U) Igbinoba reported the medium to low end of the housing market was continuing to grow at a steady pace, having evaded the speculative trading that undermined the top end of the market. Igbinoba, who recently completed a study of housing in Lagos State, defined low-end housing as that valued less than naira 5 million (USD 34,000) and medium-end housing as between naira 5 and 20 million (USD 136,000). With a current estimated affordable housing shortfall of 250,000 units and an ever-growing population, Igbinoba projected steady growth at this end of the market for at least the next decade. American Firm Introducing Lower-Cost Building Techniques -------------- -------------- ¶4. (U) Emmanuel Iwuoha, the Managing Director of American Building Systems (ABS),on May 28 told EconOff of his firm's attempts to introduce lower-cost steel-frame constQtion techniques into the Nigerian housing market. In a process licensed from Texas-based Nuconsteel, ABS molds coils of steel into roof, floor, and wall frames for buildings of all price levels. Iwuoha said the price of steel is at a ten-year low, meaning that even though the depreciating naira has elevated the price of imported steel, buildings erected with steel cost more than 10 percent less than those constructed with the more traditional wood and that savings reach as much as 30 percent for upper-end housing. Iwuoha said that his company's four molding machines and 20 employees intended to fabricate 400 units for a Lagos development complex within three months, with final erection and finishing taking another five months. Even though ABS operated on generators nearly constantly, Iwuoha said the molding machines did not consume much electricity and that ABS hoped to introduce the technique to other parts of Africa in the near future. ¶5. (U) Iwuoha gave EconOff a tour of a model three-bedroom house built with steel frames that would cost naira 4.5 million (USD 31,000) and expressed confidence that his company, formed in 2006, could build hundreds of such units across Nigeria. Iwuoha said ABS's low-cost frames had attracted the attention of the Minister of State for Housing, Grace Ekpewhre, who had recently visited the ABS factory. ABS has also submitted proposals to build low-income housing complexes to the Bayelsa and Rivers state governments. LAGOS 00000253 002.2 OF 002 Iwuoha reported that most government officials he has spoken to recognize the need to provide low-income housing and are supportive of ABS's approach. Financing Chief Constraint on Demand -------------- ¶6. (U) The Pison executives and Iwuoha report that the Nigerian financial sector's reluctance to enter the local housing market presented massive hurdles to satiating home demand. Low returns on mortgages as compared to other assets, plus the perception that home lending is risky discourages most banks from even creating mortgage lending units. Before the global financial crisis hit Nigeria, lenders had begun to make tentative steps into the mortgage market. The global loss of liquidity and domestic financial sector problems cut this development short, and Igbinoba estimates there are only about naira 30 billion (USD 20 million) of mortgages outstanding in Lagos. Mortgages that are issued are often given directly to a developer in the name of the would-be occupant, thus mitigating the bank's exposure. ¶7. (U) To overcome the deficit of formal mortgage lending in Nigeria, Osemwegie said Pison was working with the Central Bank of Nigeria (CBN),commercial banks, and microfinance institutions to secure mortgages for low-income housing. Osemwegie noted the success of microfinance banks across Nigeria and other parts of Africa, and assessed that lending for low-income housing was within the reach of many Nigerian microfinance firms. CBN regulations, however, preclude microfinance institutions from lending to home development. Pison is lobbying the CBN to repeal this regulation and, with commercial banks, to develop a secondary market onto which microcredit firms can sell their mortgages. ¶8. (U) Osemwegie also noted Pison's efforts to bring down housing costs to make it more affordable to greater numbers of Lagosians. Estimating that land constitutes about 70 percent of final home costs, Osemwegie said his firm was working with the Lagos State Government to develop tracts of state land at a reduced cost. Pison is also looking to purchase a U.S. construction company to bring world-class technology and skill to the Nigerian market. Along with exploring the use of prefabricated building techniques, Osemwegie hopes these steps will allow Pison to construct a new home every month, as opposed to construction sites that currently seem to languish. ¶9. (U) Comment: Expanding home ownership is probably the quickest way to deepening Nigeria's financial services sector and unleashing the full economic potential of the majority of Nigerians. Owning a home provides a powerful piece of collateral that Nigerians can literally take to the bank to secure financing for other productive endeavors, be it a new business or an education. The key to unlocking this virtuous cycle, however, is getting people into their own homes to begin with. Low-cost construction and new financing vehicles offered by ABS and Pison provide two critical innovations that could help bridge that gap. End comment. ¶10. (U) This cable has been cleared by Embassy Abuja. Blair