Orchestrating a disaster – the Nigerian Mortgage Market

A bit of name-dropping to start this article; my friend Feyi Fawehinmi, sent a note to my inbox this morning (21 Jun 2010). And I responded immediately, “Is this a joke?” The note was a link to an article published on the 234next website. For those interested, this is the link El Dorado For those who are not very keen on following links, I’ll reproduce the story – in part – here.

“Buoyed by the immense appeal of its debut project on the Eldorado Villa in the Magodo G.R.A, Afribank Estate Company, scion of the Afribank Nigeria Plc, is about to replicate the exquisite brand in Ikoyi, while Ikeja and Lekki are quick on the heels for Eldorado Villas Three and Four respectively, as they are to commence soon.
Eldorado Villas Three will be located at 19, Onikoyi (formerly Turnbull) Road, off Alexander Avenue, in the premium district of Ikoyi. The estate will be located in a parcel of land measuring 1800square metres. Meanwhile, site preparation has started in earnest, kick-starting the project.
The Managing Director/Chief Executive Officer of Afribank Estate Company Limited, Charles Njoku, stated that the company is seeking to develop a “state of the art” residential scheme within the shores of Ikoyi, with facilities that meet international standard.”

The last paragraph reads: “Each unit has a price tag of N300 million. A down payment of 50 percent secures a unit.”

The price tag got me amused and the conclusion that the property can only be afforded by the kleptocrats who govern the nation seemed to be an appropriate one. But I could not help but wonder how we manage as a nation to continue to display learning disabilities – collectively and individually. We are barely out of one financial mess in the capital markets sector and it seems some politicians and incompetent financiers are hell-bent on recreating another disaster.

Please bear with my whilst I run you, my reader, through a crash course in mortgage financing and property markets.

From a buyer’s perspective, a N300million property which requires a 25% upfront payment would leave N225million to be financed later. Assuming a mortgage is taken at 12% for 25 years, this would mean mortgage payments of N2.37million per month for 300 months. Over the life of the mortgage, the total interest to be paid would be approximately N486 million, this is in addition to the principal of N225million.

The story then gets very interesting from here. From a lender’s point, international prudential yardsticks (which have been flouted to the detriment of the lenders – ask the US market makers), recommend that mortgage payments take no more than 25% of your income. If this is adhered to strictly, the only individual who can take up this property is one who earns at least N9.5million per month or one who has the cash to buy it outright.

The question then is, “who fits the profile above?” Assuming there are no corrupt officials and politicians in Nigeria, there are very few people, who are willing and able to buy or mortgage properties with this price tag. Those who can, are typically mid-career high earning professionals who do not have 25 years left to earn the level of income they may be earning now. So the question remains – “who buys these types of properties?”
From an aggregated perspective, the failure of market operators in the capital market to effectively address the buyer’s profile, led ultimately to the implosion of the Nigerian capital market in 2008.

In advanced financial markets, there is what I would call a stratified buyers’ pyramid. At the base of this pyramid sits users of the financial product, be it derivatives, properties or metal. In this case, talking about properties, these would be the owner-occupier (whether industrial, commercial or residential). These provide stability as they are unlikely to let go of their mortgages or properties in the event of a downturn. The issue that many mortgage institutions and “professional property developers” in Nigeria are failing to address is “how many owner-occupiers would buy a $2million property”?

At the next tier in the pyramid are the long-term institutional investors – pension funds, professional fund managers who are regulated (not the Cayman Islands hedge funds of this world) and the likes. These, by the sheer size of their portfolios provide additional stability, but due to profit objectives and other risk management objectives they face, may rebalance their portfolios, selling off assets that do not meet their holding criteria. Sadly in the Nigerian market, these institutions do not have the long-term funds to commit to properties. The absence of long-term quantum funds in the economy, (apologies to George Soros), severely impede the growth of such institutional investors.

At the top of the pyramid sits flighty investors – scalpers, money launderers (they are unavoidable) and all shades of speculators. In more stable climes, these are comparatively insignificant (held in check by all sorts of restraints) and they do not by themselves have the ability to destabilize the investment system. The Nigerian story is however the outright obverse of this. With a lot of looted money running through the system, there is no end to the seeming might of flighty investors – politicians, legislooters, klepto-business executives and their hangers-on. But their very flighty nature implies they do not take a long-term view of any asset, with properties – like shares – being used as a medium of storage or laundering money until it can be taken to some offshore haven.

So invariably in Nigeria, there is an inverted pyramid. The danger of this, apart from the demands on the law of physics to keep a pyramid balanced on its pinnacle, is even further accentuated by the fact that Nigeria is essentially a mono-product economy. What happens to the price of crude oil happens to Nigeria. So where short-sighted property development drives like the El Dorado villas mushroom and crude oil prices collapse, we are left facing the same crisis like the one that decimated the capital market.

So whilst indeed there might be a gap in the housing needs of the country, El Dorado is definitely not the solution; or else we might just be orchestrating another round of disaster in the Nigerian financial markets.