To address the shortage of affordable housing in Lagos, there must be significant attention paid to the issues of social, economic and demographic change and their implications on the future demand of affordable housing. For instance, the relationship between socio-demographic influences which may affect the future scale and nature of the demand for affordable housing must be considered.
One of the overriding issues which have a major impact on the demand for affordable housing in Lagos is the growth of non-traditional households. This growth has correspondingly translated to increased levels of household formations, which, particularly in Lagos, can be attributed to an increase in never-married adults and one person households – a significant shift from the traditional norm. When these groups form new independent households there is even more demand for more accommodation to house the increased number of household units.
Sadly, a large majority of this group are unlikely to benefit from the mortgage market, and as such their lack of housing equity resulting from their inability to save for a deposit will continue to prevent them from getting on the property ladder. Hence, renting privately, and in most cases in undesirable locations, is now the norm for those who cannot afford to buy. Despite the state government’s efforts to help homebuyers, the majority of these efforts have been geared towards multiple bedroom homes. As such, the number of households buying with mortgages will continue to fall as a result of the lack of variety of options and the inability of potential buyers to come up with the requisite deposit of around 40% for the multiple bedroom homes. Given that house purchases have historically been a major factor in driving wealth accumulation in the lower and middle classes, the inability of this group to get on the property ladder may limit this avenue to social mobility in the future.
This significant decline in first time buyer activity has flowed through to lower rates of home ownership and is particularly acute for the younger age groups (25-35 year olds). To address this shortfall, the Lagos State Governor made a valid point regarding the targeted segment during his election campaign. He acknowledged that it was difficult for a winner of a three-bedroom flat under the Lagos State Home Ownership Mortgage Scheme (LOMS) to make an initial payment of about NGN5 million towards a property valued at NGN10 million before spreading out the balance through monthly payments. He also noted that it was unnecessary for a bachelor or spinster to own a three-bedroom flat, stressing that it was better for those in this category to get studio apartments and upgrade to more spacious accommodation when they get married and start having children.
For instance a new three bedroom apartment in Yaba, costs about NGN40 million and will require a deposit of about 40% to secure a mortgage. With a deposit of NGN16 million, and at an interest rate of 18% over a 15-year period, a typical graduate will need to work for about 10 years to come up with the deposit required to buy a home, assuming they start to save upon leaving university, of which most are unable to do. As such, the majority of people on ordinary incomes have no choice but to face a lifetime of expensive, unstable private renting, unless they are lucky enough to have help from their families.
On the other hand, a studio apartment of about 30m² at a good location should cost about NGN10 million to NGN12 million. This is obviously a very attractive choice for young professionals as they are more likely to afford the required deposit. This reduces the barrier to home ownership as it provides an avenue to get onto the property ladder quickly, with the aim of moving to larger accommodation in the future. The equity from the studio apartment could also serve as a deposit for a larger family house in the future. This is perhaps a good way of reducing the home ownership challenge in Lagos, as more people will have disposable income to invest in other types of properties in the future.
If this is such an attractive business proposition, then why are developers shying away from this niche market? One reason could be the purchasing power and risk profile of the target group. However, this risk can be managed as this target segment, with the help of their employers and family, can easily raise the required deposit of about NGN4 million for a studio apartment of NGN10 million to access the property ladder.
A second challenge for investors is the cost of funding as financing banks might not be familiar with this particular asset class. However, this can be overcome with more success stories that developers can use to prove that there is a demand for this asset class.
Other challenges include land prices and planning policy frameworks which are endemic problems developers face in increasing the supply of housing in Lagos. When you include the ever increasing cost of construction into this mix, then it becomes difficult for developers to meet their profit margins by targeting this asset class. Nonetheless, developers who can come up with creative solutions would have identified a largely untapped market to target.
One option for developers is to partner with the state government where the public sector is providing the land at a reasonable price and the developers are mandated to ensure that a certain proportion of the development scheme is allocated to studio apartments. The state government can also add value by easing the bottlenecks in getting planning approval for developers interested in building studio apartments for the target market. This will serve as an incentive to promote the development of studio apartments.
While the spotlight has generally been on mortgage institutions to provide more creative ways of lending to cater for the large gap between salaries and house prices, the public sector in conjunction with private developers should be more creative in arresting this crisis. It is evident that it is a false economy for developers to keep building three bedroom apartments. Instead, a studio apartment in a good location will better serve the need of this largely untapped segment of the population.