INVESTMENT RESEARCH

Nigeria | 27 November 2015

Housing Sector Special Report

The first bricks in place for building
Chinwe Egwim Bridging the gap through mass housing
+234 1 279 8300 (ext 2276) Industry estimates suggest that about 100,000 new houses are built each
chinwe.egwim@fbnquest.com year in Nigeria, compared to estimated demand of 700,000 units. The deficit
nationally stands at 17 million units and the estimated cost of bridging this gap
is N59.5trn (US$300bn).
Gregory Kronsten
+44 7979 235 127 Punitive mortgage interest rates
+ 234 708 065 3174 The absence of a vibrant mortgage market and the burden of high interest
gregory.kronsten@fbnquest.com rates directly correlated with inflation are some key drivers of Nigerias housing
deficit. The average mortgage rate is currently over 20% although the
emergence of the Nigeria Mortgage Refinance Company raises hopes of a
reduction. The latest report from the National Bureau of Statistics (NBS) shows
headline inflation at 9.3% y/y in October.

CBNs recent circular an addition to building costs

Compared to many other countries, construction is expensive. The cost of
building a three bedroom apartment runs up to US$50,000, compared with
US$36,000 in South Africa and US$26,000 in India. Following the CBNs
recent circular in June excluding certain imported items (such as building
materials) from the official fx window, building costs are expected to rise even
further.

Boost expected from the new budget, new minister

Given the soft macro environment (weaker crude oil prices, twin devaluation of
the naira), we have seen a slowdown in housing supply in view of the
governments lower revenue profile. We are waiting for the 2016 budget but
the signals are that it will be expansionary. The new minister, Babatunde
Fashola, is likely to add considerable energy to the FGNs housing programme.

Opportunities for investors

We see the start of monetary easing next year although its impact will be
blunted by the disconnect. We do not expect the CBN to maintain its recent
policy of creating easy liquidity for long and see bond yields backing up above
the 14.00% level in the weeks ahead.

Real estate output (Nigeria, Nbn)

1,600
1,400
1,200
1,000
800
600
400
200
-
Q1/13

Q1/14
Q1/11

Q3/13

Q3/14

Q1/15

Q3/15
Q1/10

Q3/11

Q1/12

Q3/12
Q3/10

Source: National Bureau of Statistics (NBS), FBNQuest Research

FBN Capital Limited, operating under the brand name FBNQuest (a part of the FBN Holdings Group), does and seeks to do business with companies covered in its research reports. As a
result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as one factor in making their
investment decision. PLEASE SEE IMPORTANT DISCLOSURES BEGINNING ON PAGE 22.

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Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building
Failure to keep up with
population growth
Developed housing sector to
stimulate growth
Nigerias urban population
estimated at 80 million
Property the households
largest financial asset
27 November 2015
Overview
The provision of mass housing in Nigeria has been thwarted by several challenges
over the years. The underlying issue is the failure to keep pace with the teeming
population living in urban areas. The countrys housing deficit has been estimated at
17 million units and has grown rapidly, given the annual population growth rate of
3.2% according to the UN Population Fund, as well as rapid urbanization. The deficit
in Nigeria is very high in an international context. In Egypt the shortage is estimated
at 3.5 million units for a population of 82 million, and in South Africa at 2.5 million
housing units for 53 million inhabitants.
Globally there is a strong consensus that the development of the housing sector is
essential for stimulating economic growth. Housing construction is one of the
frequently used indices for gauging economic conditions in the US and elsewhere. For
instance, in Malaysia the housing and construction sectors are core contributors to
the countrys annual growth rate, which was estimated at 5.5% in 2014 by Bank
Negara (the central bank).
Selected countries and respective housing deficits (millions)
180
160
140
120
100
80
60
40
20
0
Ghana Kenya South Africa Egypt Nigeria
Housing deficit Population
Source: Department of Human Settlements (DHS), SA; Oxford Business Group; Shelter Afrique;
Ministry of Housing and Urban Communities, Egypt; Centre for Affordable Housing Finance in Africa;
FBNQuest Research
Based on the World Banks World Development Indicators for 2014, the urban
population in Nigeria amounted to 80 million and grew by 4.7% y/y. In 2011 it was
estimated by industry sources that 67% of Nigerias urban population were living in
sub-standard settlements. Although Lagos State, which is rightly regarded as Nigerias
commercial hub, has the smallest inland area, it is densely populated with an estimate
of 21 million residents. According to the state government, the housing gap within
the state is estimated at four million housing units. Reports have shown that 10% of
the deficit is located in Abuja. The two principal cities in Nigeria therefore account for
34% of the national deficit.
Data on housing construction is very patchy. However, according to industry reports,
the current total output in the formal sector is no more than 100,000 units per
year.
In the recent past, housing policies in most developing economies have been focused
on encouraging home ownership. The argument is that home ownership creates a
households single largest financial asset, fuels economic growth and results in the
accumulation of wealth.
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Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

Home ownership in Nigeria as The low level of mortgage financing in Nigeria has made the rate of home ownership
low as 25% one of the lowest in Africa. The Federal Mortgage Bank of Nigeria (FMBN) puts the
rate at about 25% and therefore far behind Singapore, Indonesia, Kenya and South
Africa, for which home ownership is estimated at 90%, 84%, 73% and 56%
respectively. Separate industry reports reveal that about 90% of housing
developments in Nigeria are self-financed through personal savings over a period of
ten years or more (see figure 1 in appendix).

Rental accommodation for A study carried out last year by Abuja-based NOI Polls showed that 51% of Nigerians
51% of the population lived in rented accommodation and that 40% of this group are paying between
N20,000 and N100,000 (US$500) annually (see figure 2 in appendix). Through the
survey it was estimated that only 31% of Nigerians reside in fully-owned homes which
they have built, purchased or inherited. The results also indicated that 85% of people
would consider mortgage financing as an option for home ownership. The balance
surveyed lacked interest in this possibility due to their unstable income. It is clear
that both the government and private sector players need to be more dynamic in
tackling the gaping housing deficit.

Registration of property The cumbersome process of property registration poses a major roadblock to housing
cumbersome development and home ownership. The reworking of the Land Use Act could give a
boost to both the housing and mortgage industries. In its Doing Business 2015
survey, the World Bank Group ranks Nigeria as 185 out of 189 for its registering
property category. Additionally, the data suggest that in Lagos it takes as long as 77
days and 13 separate procedures to register property, compared to sub-Saharan
African averages of 57 days and 6.3 procedures.

Flaws in the Land Use Act The land administrative system is slow. It is expensive and difficult to gain land title,
and foreclosure laws are weak. The Land Use Act has not been successful in effecting
structural change in the land tenure system, or in making land easily available and
cheap for both the government and private developers.

All power to the state There is no private ownership of land per se. The maximum interest a person may
governors! hold in land is the right of use and occupancy. This statutory right of occupancy of
urban land is given by the state governors consent in the form of a written
certificate of occupancy (C of O). The registration process can consume 20.6% of
the value of the property according to the Doing Business 2015 survey.

Poor public records of Due to the cumbersome process, homeowners have little interest in registering real
ownership estate assets. The result has been inaccurate and incomplete records. According to
industry sources, no more than 3% of the land mass is registered. Both Abuja (FCT)
and Lagos State have started the upgrading and computerisation of their title
registration systems. The latter has also adopted some modifications to the Land Use
Act, implementing a much shorter process for land registration and instituting fast-
track court procedures designed to shorten claims involving mortgage transactions.
The cost and timeframe for registration vary from state to state, but remain high in
the majority of states.

As for foreclosure laws, a legal framework exists. However, it lacks clarity when it
comes to implementation, thereby encouraging informal practices. The absence of an
effective foreclosure law has been cited by many institutional investors as a core
reason for not investing in the housing sector. If credit risks are to be kept as low as

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Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

possible, lenders must be certain they have the means to seize and sell property used
to secure the loan if the borrower defaults.

Sharp decline in FGN budget While in our report we highlight the strides taken in the development of housing by
housing allocations the FGN, we would argue that it has not been treated as a priority sector. In 2013
the FGN allocated N30bn to the Ministry of Lands, Housing and Urban Development,
which represented 0.5% of the total budget. Funds allocated for capital expenditure
from the 2014 budget to housing and allied industries stood at N17.6bn, of which
N2bn was channeled towards mortgage institutions. In the 2015 budget only N1.7bn
was allocated for capital development.

Despite the enthusiasm of stakeholders during FGN-led discussions on the housing

and urban development sector last year, the 2015 budget allocation suffered a major
setback.

FGN budget: capital allocations for lands & housing (N bn)

35
30
25
20
15
10
5
0
2011 2012 2013 2014 2015

Source: Federal Ministry of Finance; FBNQuest Research

Fiscal policy: waiting for the adjustment

High hopes of an The new administration has indicated that the 2016 budget will be expansionary. FGN
expansionary 2016 budget spending was projected in this years budget at N4.5trn (US$22.5bn) but could well
fall as much as 25% short of target. Official and semi=official comments suggest
that the total could rise as high as N8trn (US$40bn) in the 2016 budget. Whether
disbursements reach this high level will depend on the success of the new
administrations plans for additional revenue generation and recoveries.

Financing requirement put as If this is the case, we hope that the housing sector will be a substantial beneficiary.
high as N60trn The FMBN has estimated that N59.5trn (US$300bn) is required to bridge the
housing gap. The figure was computed on a conservative cost of construction
estimate for one unit of N3.5m.

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Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

FGNs vision and policies

Past Nigerian governments developed policies to tackle the national housing deficit.
Despite the good intentions, however, their efforts have been characterised by
planning inconsistencies and weak organisational structures, which have often
reflected political instability.

Reshaping of the FMBN The 1991 national housing policy was designed to ensure that all Nigerians either
under Obasanjo II owned, or had access to decent housing at affordable prices by promoting private-
sector driven housing programmes,. However, it performed poorly in achieving set
goals, and was reviewed. The Obasanjo-led administration launched its housing and
urban development programme in 2004. The FMBN was restructured into a FGN-
sponsored enterprise, focused on secondary mortgage and capital market activities.

Within major reforms for Its functions were expanded from social housing on-lending from the National
the industry Housing Fund (NHF) to include commercial on-lending for housing, commercial
mortgage refinancing, mortgage purchasing and mortgage-backed securitisation. In
addition, it finances mortgages created by Primary Mortgage Institutions (PMIs)
under the NHF Scheme and gives loans to real estate developers. The revised policy
sought multiple reforms within the employees housing scheme, the Land Use Act, the
Mortgage Institutions Act and the Federal Housing Authority Act.

Mandatory employers The NHF, established in 1992, is a federal government scheme set up to provide
subs to the FMBN affordable housing and effective financing of housing development for low-income
earners. The NHF Act requires every employer to deduct 2.5% of all employees' basic
monthly salaries and remit the same to the FMBN, which has the primary
responsibility to manage the fund.

The FMBN disburses funds to accredited PMIs, which are responsible for releasing
funds to beneficiaries. The maximum amount obtainable from the NHF was N5m but
has since been increased to N15m repayable over a maximum of 30 years at the rate
of 6% interest.

Enter the NMRC with In January 2014 the FGN launched the Nigeria Mortgage Refinance Company (NMRC)
some World Bank funds to provide a new lease of life for the mortgage sector. It is expected to take a lead
role in proposing changes for mortgage lending and in standardising mortgage lending
practices. The World Bank approved a US$300m loan for the company, the bulk of
which will take the form of Tier 2 capital to underpin the NMRCs bond issuance.
Phased issuance is intended to boost significantly both its resources and liquidity for
purchases of bundled mortgage products from the PMIs and other players.

The Mortgage Banking Association of Nigeria estimates that the intervention of the
refinancing company could cut average lending rates to about 13% from the current
average above 20%. A core objective of the NMRC is to stimulate demand by making
housing finance more affordable for Nigerian citizens. One method is through a rent-
to-own model to allow middle-income participants to rent a home over 15-20 years
and own the property at the end of that period.

The expectation is this would result in a trickledown effect by increasing job

opportunities (particularly in construction) for low-income earners to move
eventually into the middle-income bracket (N1.5m minimum annual salary). In China,

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 Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

this logic was responsible for moving 400 million people out of the low-income
bracket.

The first NMRC bond issuance In Q3 2015 the NMRC issued an N8bn 15-year fixed rate bond with a coupon of
of many planned 14.9% under a N140bn medium-term note programme. Proceeds are to be deployed
for mortgage refinancing. Separately, the company has reportedly unveiled plans to
raise N440bn (US$2.2bn) from the sale of bonds to expand access to housing funds.
We gather that the new NMRC bond will be included in the FMDQ-Bloomberg E-
Bond Trading System to assist in providing issuers, investors, dealers, regulators and
the general public with the relevant information for improved price discovery and
transparency.

Rapid disbursements to three In the same quarter, the NMRC disbursed N1bn to Imperial Homes Mortgage Bank
mortgage banks (formerly GTHomes Limited), making it the first mortgage bank to be refinanced by
the company. The NMRC has since disbursed N250m to Trustbond Mortgage Bank
and N437m to SunTrust Savings & Loans. The company has given a rate of 15.5% to
these mortgage banks and expects to push rates still lower.

Over the next five years, the NMRC hopes to increase mortgage loans as a
percentage of Nigerias GDP to 2% from the presently very low 0.5% (see figure 3 in
appendix).

Competing claims of the Among the achievements listed in its Transformation agenda at a glance report, the
politicians immediate past government, headed by Goodluck Jonathan, included the
establishment of the NMRC and its ability to fund up to 200,000 affordable
mortgages within five years. Additionally, the completion of 61,000 affordable
housing units across the six geopolitical zones was mentioned.

We recall that during the election campaign the victorious APC outlined in its manifesto
a plan to build one million housing units during its first term. We hope that it will be
driven by a market-supported model of the type that has recorded success in other
countries such as China.

Key players in the industry

Domestic public

Federal Mortgage Bank Nigeria

A number of FMBN loan The FMBN disburses funds to accredited PMIs, and has developed products such as
products
the estate development loan (EDL) and the cooperative housing development loan
(CHDL). The EDL has an interest rate of 10%, with a maximum repayment period of
24 months for private developers, state housing corporations and housing
cooperatives. It is designed to encourage large scale production of residential homes
for sale at affordable prices.

One tailored for cooperative The CHDL is intended to enable cooperative societies to develop plots of land for
societies allocation to their members. The title of the parcels of land is held by the societies,
which act as facilitators on behalf of their members in the loan transaction as well as
the construction of housing units.

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 Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

The loans are disbursed in three tranches covering the sub-structure (foundations),
super-structure, and finishing. Housing units must fall within a target selling price not
exceeding N5m (US$25,000). For eligibility, the cooperatives must have been in
existence for a minimum of twelve months with consistency of membership
payments.

Nigeria Sovereign Investment Authority

A sovereign wealth fund The authority commenced operations in October 2012 with an initial allocation of
with limited firepower US$1bn in seed capital. As provided for by the NSIA Act, its investments are made
through three distinct funds, namely the Future Generations Fund, the Nigeria
Infrastructure Fund (NIF) and the Stabilisation Fund. Due to the scope of this report,
we focus on the NIF, which has a solely domestic investment remit and receives 40%
of funds under management.

Yet an investor in the In accordance with the NSIA Act, a five-year rolling infrastructure investment plan is
NMRC developed annually to stimulate the growth and diversification of the Nigerian
economy and attract foreign investment. Five focus areas were selected, namely the
power, road infrastructure, housing, commercial real estate (office buildings and
malls), and hospitality sub-sectors. The authority recognises housing as one of the
fastest growing and profitable sectors of the economy, and invested N1.6bn through
the NIF last year in the NMRC.

Central Bank of Nigeria

CBN both facilitator and The CBN used to set banks credit allocations. These stipulated a minimum 5% of
regulator total credit to the housing and construction sector, subsequently increased to 13%.
However, the mandatory allocations were scrapped in 1993 within a broader
liberalisation of the financial sector. The CBN is developing a financing policy to
attract private funding from multilateral agencies and banks for infrastructure
development, including housing. Currently not many banks provide mortgage products
because of the unfavourable land laws and the shortage of long-term funding in the
market.

Recently, the local media reported that the Federal Housing Authority Mortgage Bank,
a subsidiary of the Federal Housing Authority, is at risk of being sanctioned by the
CBN. The Mortgage Banks safety and soundness as well as its compliance with
regulatory and supervisory guidance have been rated very low by CBN.

Infrastructure Bank of Nigeria (IB)

Infrastructure Bank and The IB (formerly the Urban Development Bank of Nigeria) also has a role in the mass
the land swap policy housing programme, particularly in Abuja. Majority owned by the private sector yet
with shareholdings in the hands of the three tiers of government, it focuses on
funding commercially viable projects which offer a strong developmental impact.
Mass housing and district development fall under this category. Commercial space
and the luxury arm of real estate are also included. Currently, the bank is working on
a residential estate project to provide housing units for public employees in
immigration, customs, prison services and the civil defense corps.

The land swap policy introduced in Abuja last year is expected to grant greenfield
A model adopted in many
countries land to competent real estate practitioners, who will in turn provide infrastructure
such as roads and electricity.

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Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

The policy is expected to attract investment from both local and offshore parties as
well as generate more jobs. It has been widely accepted for urban development and
adopted in the past by European countries. The IB serves as the transaction advisor
for land in Abuja under this swap project.

Domestic private

Commercial banks
Not many commercial We have already noted how the CBN set banks sectoral lending thresholds until the
banks in mortgage space liberalisation of the industry in 1993. Most banks will not provide mortgage products,
being discouraged by unfavourable land laws, the shortage of long-term funds to
facilitate the provision of mortgage products, prohibitive interest rates and the lack
of a fully functioning credit bureau system.

However, amid ongoing efforts to deepen the industry, some banks have created
mortgage related subsidiaries such as Union Homes and UBA Homes, which compete
directly with PMIs in the provision of real estate services.

A few brave banks Stanbic IBTC, Diamond Bank and First Bank are the three leading mortgage providers.
With Stanbic, mortgage lending to the private sector as a share of its total loan book
has declined steadily over the past three years, to just 2.0% in 2014. While Diamond
Bank and FBN Holdings do not provide the same level of detail on their mortgage
lending as Stanbic, we believe the proportion of their loan books that this represents
is also less than 5%. (also see figure 4 in appendix)

Stanbic IBTC mortgage lending/total lending (%)

2014

2013

2012

2011

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%

Source: Company data; FBNQuest Research

Real estate investment trusts (REITs)

The emergence of REITs in In Nigerias capital markets today, there is growing interest in REITs. The structure
Nigeria has been adopted across the globe. Singapore, Germany and Hong Kong are three
prominent examples. The trusts gather capital from investors to develop, purchase
and manage real estate assets.

They take two forms. The equity REITs generate rental income from their investment
properties, while the mortgage REITs loan money for mortgages to owners of real
estate and invest in mortgage backed securities.

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Skye Bank the first to kick In 2007 Skye Bank launched a closed end trust, the Skye Shelter Fund (SSF). The
off in 2007 first REIT listed locally on the NSE, it sought to acquire and develop a variety of
properties primarily in Lagos, Abuja and Port Harcourt. Others include the UPDC REIT
and the Union Homes REIT.

The potential exists for the Nigerian real estate market to take off through much
larger inflows of capital into REITs from both local and offshore investors. Currently,
the trusts are highly regulated by Nigerias Securities and Exchange Commission
(SEC).

UPDC the next to float UPDC floated a N30bn (US$150m) REIT in 2013, offering by way of initial public
offering three billion units at N10 each. Its agenda is to develop property assets
including: Metro Gardens (Lekki) and Victoria Mall Plaza (Victoria Island) in Lagos;
Emerald Court and Metro City (Apo) in Abuja; and Emerald Court and the Nigeria
Airforce Foundation Estate in Port Harcourt.

For the 19 month period which ended in December 2014, the UPDC REIT distributed
N2.33bn to its unit holders. This represented 90% of received income.

External Players

UN Habitat
A proposal for the FGN Earlier this year, the UN Human Settlements Programme (UNHabitat) proposed a
from UN Habitat seven-point housing and urban agenda. If adopted by the new administration it
could assist in transforming Nigerian cities into functional, productive, and safe areas
for residents.

And a programme already The agenda places emphasis on the proper enforcement of legislative and planning
in place on the ground rules, which would improve access to land and thereby lead to rapid housing and
industrial expansion. It also proposes that the FGN, in partnership with
state governments, should invest in the development of an integrated land registry
system.

UN Habitat already has under its belt a socio-economic and urban renewal
programme for Ondo State. Its primary focus is to provide participating cities with
the capacity to improve urban policies and strategies that would improve land
management, facilitate the supply of serviced urban land and strengthen the
availability and accessibility of urban data for planning and budgeting.

Shelter Afrique
Funding made available by This pan-African institution finances housing and real estate development for its
Shelter member countries. The African Development Bank is its major shareholder. Last year,
we were informed that the equivalent of US$200m had been set aside for the sole
purpose of supporting Nigerias real estate market and would be disbursed in three
possible ways.

Following earlier bond The first is financing the construction of affordable housing units. The second, tilted
issues in Kenya towards the demand side, is disbursing to selected PMIs for on-lending to potential
off-takers. The third is a private-public partnership with state governments and
credible developers. Additionally, Shelter Afrique has announced plans to float a
US$100m bond in the market this year. It has previously raised finance through

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Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

bonds in Kenya and through the Abidjan-based West Africa Securities Exchange
(BRVM).

A working partnership with Earlier this year, it was announced that Shelter Afrique had partnered with Lafarge
Lafarge Africa to construct housing units for low-income earners. An earlier Lafarge
programme, tagged Ile Irorun, provided housing for over 6,000 households with an
average of six family members.

At the Abuja Housing Show 2015, Lafarge Groups CEO outlined plans to supply
access to affordable housing for 300,000 people in Nigeria by 2020. He mentioned
two ongoing projects, one for 500 housing units in Abuja in conjunction with the
FGN and the other, also of 500 units but prefabricated, in Kano State.

Developments on the ground

Cement and construction
Listed companies in As elsewhere, the majority of large-scale construction projects in Nigeria have been
construction undertaken by the government although the role of the private sector is now
increasing. The contributions of publicly quoted companies such as Julius Berger,
Costain West Africa and G Cappa are prominent.

Rapid output growth of the The construction sector expanded by 13% in 2014 and contributed 4% to GDP.
sector in 2014 Additionally, the cement segment posted growth of 39%. Basic metal, iron & steel
goods, and wood products, which are both included among other building materials
by the NBS, grew by 16% and 13% respectively last year. They contributed 2% and
3% to manufacturing output in 2014.The performance of the cement segment tends
to be closely linked to that of construction, both of which generally track a countrys
GDP growth trends.

A modest decline in cement Excluding 2004 when cement consumption declined marginally (by -1.2% y/y) to 8.1
consumption, however million metric tonnes (mmt), 2014 was the softest year in a decade. Cement
consumption declined by 0.5% y/y in 2014. Provisional data shows that unit volume
declined marginally to 21.0 mmt in 2014 from 21.1 mmt sold the previous year.

GDP and construction sector growth in Nigeria (% chg; y/y)

35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
Q1/12

Q3/12

Q4/12

Q2/13

Q2/14
Q1/13

Q1/14

Q2/15
Q2/12

Q3/13

Q4/13

Q3/14

Q4/14

Q1/15

Q3/15

GDP Construction

Source: NBS; FBNQuest Research

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A likely link to the electoral Although the time series data is inadequate to draw definite conclusions, a review of
cycle historical data indicates that cement consumption tends to be relatively weak in the
run-up to elections.
Cement consumption in Nigeria and y/y growth Cement sector growth in Nigeria (% chg y/y)

24.0 23.0% 45

20.0 40
18.0%
35
16.0
13.0% 30
12.0 25
8.0% 20
8.0
15
3.0%
4.0
10
0.0 -2.0% 5
2013
2011

2012
2003

2007

2010
2004

2006

2009

2014E
2005

2008

Q1/13
Q1/11

Q2/12

Q3/13
Q4/13
Q1/14

Q3/14
Q4/14
Q1/15
Q3/11
Q4/11
Q1/12

Q3/15
Q3/12
Q4/12

Q2/13

Q2/14
Q2/11

Q2/15
Consumption (mmt) LHA Y/y growth (%) RHA

Source: CEMAN, Dangote Cement, FBNQuest Research estimates Source: NBS; FBNQuest Research

Issues with fuel supplies In 2014 fuel sufficiency issues, particularly disruptions to gas supplies and shortages
of low-pour-fuel-oil (LPFO), resulted in lower utilisation rates than the prior year for
Dangote Cement, the sectors largest manufacturer with a 61% market share.

Equally, on the demand side, massive capacity additions of about 23.8mmt by the
major cement manufacturers (led by Dangote Cement) since 2010 have significantly
bridged the supply-demand gap and resulted in a slowdown in consumption growth.

Fx driven cement price Given its sizable market share, Dangote Cement drove the direction of market prices
rises in 2014. After four reviews, prices increased by about 18% to US$172 per tonne
(excluding VAT) over the year. According to management, the moves were prompted
by the devaluation of the naira (following the downward trend in oil prices). It
disclosed that about 60% of its costs were influenced by the naira exchange rate.

Some issues with A topical issue has been the controversy surrounding the 42.5 cement grade,
standards and grades launched by Dangote Cement in Q1 2014. Despite protests by other cement
producers, in May 2014 the Standards Organisation of Nigeria (SON) revised the
national standards for cement with different strength grades for different building
purposes. According to SON, the 32.5 cement grade which was being utilised prior to
the launch would be used only for basic work such as plastering.

Rapid fall-off in In the 2015 federal budget, total funds allocated for capital expenditure were slashed
government demand to N700bn when compared to the N1.55trn allocated in the 2014 document. In
reality, the decline is likely to prove much steeper. FGN capital spending in H1 2015
amounted to just N38bn, compared with N354bn in the year-earlier period.

The 2016 budget to the Given that the governments capital expenditure accounts for about 50% of cement
rescue? demand in the country, demand has surely slowed. We also expect the squeeze on
household wallets to have a negative impact on private housing as well as the

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government segment. We have noted above that the 2016 budget is set to be
expansionary and that the housing industry should be one of its beneficiaries.

Related potential for paint Another element of the construction and building industry to highlight is the paint
and coatings and coatings segment. Due to the size of the domestic market and some government
success in stimulating private and public involvement in development projects, Nigeria
presents great opportunities for industrial paints and coatings manufacturers.

Based on industry reports, the oil and gas industry is the biggest contributor to
growth in the paint and coatings market. On the NSE, Chemical and Allied Products
(CAP) is by far the dominant name in the space, with market capitalisation of
N26.6bn (US$134m).

Abuja hub
Industry reports estimate population growth in Abuja (FCT) at 14% per annum. This is
primarily driven by intercity migration and the lure of government employment. The
boost to consumption expenditure naturally includes the housing sector.

Development of new mass Over the past two years, a number of mass housing estates have been developed in
housing estates emerging districts such as Kuje, Kubwa and Lugbe. Additionally, a budding middle-
class group drives sales for comfort housing in areas such as Gwarinpa and Jabi. The
luxury accommodation market attracts public office holders and government
contractors. Some of the developments by the FHA in Abuja are shown in the table
below.

High construction costs, as Challenges still linger in Abujas real estate industry. There are funding constraints for
elsewhere property developers due to the paucity of long term funds and high interest rates.
Construction costs are high and some building materials not available locally (see
figure 5 in appendix).
Reports have shown that 10% of Nigerias housing deficit is located in Abuja, which
points to a figure of 1.7 million units. On the basis of the FMBNs estimate of
construction costs (N3.5m per unit), the funding gap for the FCT amounts to
N5.95trn (US$29.9bn).

FCTA in partnership with a In 2013 the FCT Administration (FCTA) approved the construction of 5,000 low
US NGO cost housing units and a 4.6 hectares (ha) land area located in Mamusa district was
released for this project. In conjunction with Millard Fuller Foundation, a US non-
profit organization, the FCTA has set a target to deliver these housing units by 2016.
Low-income earners are the primary beneficiary of this project.

Abuja within a national In 2014 the FCT minister allocated three districts for a workers housing scheme that
plan for 600,000 units would eventually cut across the country. Nationally, it is designed to produce
600,000 housing units for Nigerian workers at a construction cost of US$6bn (see
figure 6 in appendix). Prospective occupants will deposit 10% of the cost of the
housing unit while the annual interest rate is set at 2% of the total cost of the
property. Payment can be spread across five to fifteen years.

Abuja is the pilot state for this scheme, with 5,000 housing units due to be delivered
in the first instance. The second phase of the scheme would include housing units in
Port Harcourt city, Imo State and Adamawa State.

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Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

FHA mass housing units built per district of Abuja

Location Area (Ha) Number of units

Asokoro 4 163
Gwarinpa II 1,091 3,415
Kado I 41 878
Kado II 18 124
Karu I 62 261
Karu II 16 204
Kubwa I 26 468
Kubwa II 38 914
Kubwa III 15 346
Lugbe 519 3450
Maitama 12 479
Lugbe Ext. 33 240

Source: Federal Housing Authority (FHA); FBNQuest Research

A new land registry in place The Abuja Geographic Information System (AGIS), established in 2003 in an effort to
record land registry in the FCT, is responsible for land administration, and the issuance
of title documents such as the offer letter, right of occupancy and certificate of
occupancy.

Property registration in the FCT

Procedure Duration Cost

Pay search fees at a designated bank 1 day N20,000
Conduct search of property file at AGIS 1 day 4% of property value legal fee
Execute deed of assignment 1 day No cost
Submit application for ministry's consent 22 days No cost
Inspection and assessment of property value by AGIS 4 days No cost
Pick up letter of conditional consent 1 day No cost
Consent fees + processing fee + 1.5% of the property value
registration fee+1.5% of the property value stamp duty +5% of the
Pay fees at designated bank 1 day property value capital gains
Submit proof of payment to AGIS and receive payment
receipt 1 day No cost
Obtain official final consent letter from the minister 20 days No cost
Register deed at AGIS

Source: IFCs Ease of Doing Business in the FCT; FBNQuest Research

Yet the process still According to a survey by the World Banks International Finance Corporation (IFC, see
lengthy and cumbersome table), on average it takes 52 days to register property in Abuja and property
developers are required to pay about 12% of the property value as registration costs,
This compares with the average of 9% in sub-Saharan Africa according to a report by
Agusto and Co.

27 November 2015 13
Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

Lagos hub

In Lagos, the growth of e- The real estate market in Lagos state has evolved into a dynamic industry (see figure
marketing 7 in appendix), driven in part by high internet penetration. Sales and marketing
campaigns are generally conducted on e-channels via mobile communication systems.
Based on industry reports, online property advertising increased by 27% in 2013.

Lagos State is the most populous state, with a population of about 21 million which is
equivalent to 12% of Nigerias total population. In terms of federally allocated funds,
the state is the least dependent, with internally generated revenue of N157bn in
2013 or 53.0% of its total revenue.

Infrastructural development in Lagos State is among the most advanced in the

country although it bears the scars of years of underfunding for maintenance as well
as from rapid population growth. The state has a legal framework for private-sector
financing of certain infrastructure in the form of the Lagos State Roads, Bridges and
Highway Infrastructure (Private Sector Participation) Development Board Law.

It is expected that the enactment of this infrastructure law and the Infrastructure
Concession Regulatory Commission Act will increase the availability of private-sector
funding for the expansion of existing, and the provision of new public infrastructure in
the state.

Pre-eminent commercially Lagos State attracts about 65% of Nigerias commercial activities, and accounts for
and industrially about 60% of its industrial investment and foreign trade. In 2010 Lagos States GDP
was N12.1trn (US$60.8bn), with the real estate, building and construction, and
manufacturing sectors representing 2%, 20% and 30% of the total respectively.

Annual demand of 224,000 The FGNs policy thrust for housing, as defined in the National Economic
housing units Empowerment Development Strategy (NEEDS), places emphasis on the provision of
an enabling environment and the need to stimulate a private-sector led industry with
the participation of state and local governments as necessary. As at 2008 the Lagos
States ministry of housing estimated the states annual demand at 224,000 housing
units. Through the Lagos State Development and Property Corporation alone, it has
delivered over 19,000 housing units in several schemes across the state in the past
fifteen years.

Recent developments show private-sector participation particularly in the Lekki-Ajah

axis as well as locations bordering Ogun State. A number of upscale luxury
apartments, and commercial and hospitality buildings are being developed.

A home ownership scheme in The Lagos State home ownership mortgage scheme (Lagos HOMS) affords first time
place home buyers with a verifiable source of income the opportunity to own their homes.
Although priority is given to civil servants in state ministries and agencies, the target
market includes all residents of the state. It is funded by the Lagos State
government, which also provides funds for the mortgage facility being granted.

The Lagos Mortgage Board (LMB) has adopted a draw-style approach in which
applicants are selected. This is conducted on announced dates through a transparent
and well publicised process. The LMB concluded its eighth edition in October 2014,
when 34 out of 93 pre-qualified applicants emerged as winners.

Since its inception in March last year, Lagos HOMS has made awards to 477
applicants, of which 301 have taken full possession of their housing units. Successful
applicants are required to pay for their homes over a period of ten years after making
an initial deposit of 30% of the total cost. Mortgage payments attract a maximum
interest of 9.5% per annum.

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Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

Again, a highly successful A similar home ownership mortgage scheme has been in existence in China for over
Chinese model 40 years. The rationale is the same but in Chinas case the scheme is far larger and
the government has sold apartments to eligible low-income residents at discounts as
high as 40%.

Eko Atlantic City

City being built out of the The acute shortage of housing and office facilities in Lagos has created high demand
Atlantic Ocean for residential and commercial property. Eko Atlantic City is designed to meet this
gap. Over 10 kilometres have been reclaimed from the Atlantic Ocean to form its
foundation.
Manhattan-scale plans on The city consists of several districts, with strict building regulations for each. They
the drawing board are Harbor Lights, Business District, Eko Drive, Ocean Front and Avenues. On the
completion of the project, it is expected that nine million square meters (sq m) of
land will have been developed, equivalent in size to the skyscraper district of
Manhattan in New York City.
Rising prices on international
Based on data obtained from Residential Auctions Company (RAC), a real estate
demand
research company in Lagos, current land prices in Eko Atlantic is now US$1,800/sq m
for inner city plots, US$2,500/sq m for the road and US$3,000/sq m for the
waterfront. Land prices have risen in value by as much as 85% since the projects
inception, fuelled in good part by fast growing interest from international firms.

Eko Atlantic development pipeline

Name of development Type No. of beds No. of units Status

Eko White Pearl Towers Flat 2&3 96 Under Construction

Eko Black Pearl Towers Flat 2&3 120 Under Construction
Eko Indigo Pearl Towers Flat 2&3 120.0 Under Construction
Eko Champagne Pearl Towers Flat 2&3 132 Under Construction
Eko Aqua Pearl Towers Flat 2&3 96 Under Construction
Eko Energy Estate Phase I Flat 1/2/3/4 260 Under Construction
Lagos Sky Tower Flat 2&3 110 Proposed
Le Reve Tower Flat 1,2&3 40 Proposed
Azuri Peninsula Flat 2/4/6/7 120 Proposed

Source: Residential Auctions Company (RAC), Lagos; FBNQuest Research

Other cities
Patchwork developments Mass housing projects have begun in several states across the country including
across the states Anambra, Delta, Rivers and Abia. In September 2014 it was announced that the
FMBN had concluded plans to commence the construction of 500 housing units in
Abia State as local civil servants contribution to the National Housing Fund (NHF)
had hit N1.5bn.

Meanwhile in Delta State the commissioner for housing disclosed towards the end of
last year that the state government was nearing the completion of 150 housing units
for public servants. The estate will be located along the Ibusa-Asaba road, comprising
50 one-bedroom flats, 50 two-bedroom flats and 50 three-bedroom flats. The
average cost of the units is N2.8m.

27 November 2015 15
Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

State government the In Kaduna State, which is highly populated, the FGN commissioned 200 bungalows at
provider of the land the Sky Diamond Estate in the states capital earlier this year. These units were fully
funded by the FMBN and fall within the national mass housing scheme.

The beneficiaries are public and private sector contributors to the NHF. As its
contribution to the project, the Kaduna State government provided 20 hectares of
land at no cost and constructed all access roads. The estate consists of 200 three
bedroom semi-detached bungalows, a 500 KVA transformer and tarred access roads.

Retail property market

The retail (commercial) segment of the property market is fast evolving. Activity
extends beyond the hotspot hubs (Abuja and Lagos) to cities such as Port Harcourt,
Calabar, Enugu, Ibadan and Owerri.

Middle class demand for new
retail facilities
Expansion plans of Shoprite
Prestigious retail project for
Abuja
Based on industry reports, the retail market was valued in 2011 at US$106bn. In
2014 retail property leases hit US$160bn and are expected to reach US$198bn by
2016. The large population, and the growing sophistication and purchasing power of
middle class consumers are helping to drive Nigerias retail market.
This retail market is built upon the hunger for modern and convenient shopping
experiences among consumers. Shoprite, the South African retail chain, plans to open
15 new outlets within the next three years. It already operates 11, including two in
Abuja and four in Lagos.
The Jabi Lake Mall in Abuja is a joint venture between Actis LLP and Duval Properties
Limited, and is set to offer an attractive retail experience with leisure facilities and
high quality brands. Actis is financing the construction while Duval provided the land
as its equity contribution. The mall will follow in the footsteps of Palms (Lagos), The
Junction (Nairobi) and Accra Mall (Ghana). In Nigerias capital city, it will offer
27,000 sq m.

For the fiscal impact, Jabi and other shopping malls will contribute to internally
generated revenue for states through taxes. Furthermore, multiple post-construction
jobs will be created.

The luxury and hospitality segments are also gaining traction. The NSIA, through its
Infrastructure Fund, is developing five star hotels across the country, with Abuja as the
pilot.

Strong parallels with India
Country comparisons
As in Nigeria, housing for the poor in India has failed to keep up with rapid urbanisation.
The Indian government estimates the urban housing deficit at more than 18 million
homes, of which 95% are in the economically weaker and low-income group segments
in which families earn up to INR8,330 (US$130) and INR16,000 (US$240) per month
respectively. These families cannot afford privately built housing unless the government
provides some subsidy.

Increased efforts are required from practitioners such as developers and housing
finance companies as well as facilitators (government, international development
agencies and foundations) to bridge the housing gap.

27 November 2015 16
Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

The shortage of affordable housing is very high in Mumbai, India's financial capital
where an estimated six out of every ten people live in slums. A report by Knight Frank,
the UK-based estate agent and property consultancy, shows house prices in Dadar, a
middle-class area in central Mumbai, at INR20,000-30,000 (US$300-US$450) per
square foot. These prices are clearly out of reach for low-income earners.

Affordable housing a rarity in The Indian government aims to provide housing to all its citizens by 2022. Industry
Mumbai reports indicate that a total of US$3.5trn may be required for urban housing and
supporting infrastructure. Both central and state governments have taken steps to
mitigate the housing deficit, particularly through private sector partnerships. However,
these efforts are not sufficient and need to be accelerated.

Target of housing for all by Extending the parallels with Nigeria, India suffers from lengthy and complex approval
2022 procedures. According to the World Bank Groups Doing Business 2015 survey, India
has one of the most cumbersome processes globally. A shortage of funding and high
development costs also pose as roadblocks.

There has been increased interest from offshore investors in the Indian market. In
January it emerged that Japans Tama Homes is looking closely at Indias mass housing
sector. Over the next five to six years the company may invest between INR5, 000
crore (US$760m) and INR6,000 crore (US$900m) in residential homes and the
hospitality industry.

South Africa the leader on South Africa has the largest and most mature property investment market in Africa. A
the continent number of funds established by its developers and investors have targeted viable
markets within the continent. Earlier this year Momentum, a subsidiary of MMI
Holdings (a South Africa based financial services group), launched its Africa Real Estate
Fund with a target of US$250m and a country focus including Ghana, Nigeria and
Kenya. South Africa has a pivotal role as well in the development of shopping malls in
Nigeria.

Investment potential
Potential spend in Nigeria of As we mentioned earlier, the estimated cost of bridging the Nigerian housing deficit is
US$1trn US$300bn. Once ancillary developmental projects (such as malls, hospitals, schools,
hotels and office complexes) are added, total potential investment could reach
US$500bn to US$1trn. Assuming these projects are executed over a period of 40
years, this implies investment of US$12.5bn -US$25bn annually.
If we focus on one segment of the retail (commercial) aspect, we could assume that
ten malls of 300,000-450,000 square feet, and so similar in scale to Palms and
Ikeja malls in Lagos, are built over the next five years. We estimate that this would
cost around US$1bn or US$200m per year.

Exposure for investors in Investors can gain exposure to the sector through listed equities including: UACN
listed companies Property Development Company (a subsidiary of UAC of Nigeria), Skye Shelter Fund,
Abbey Mortgage Bank (a PMI), Resort Savings & Loans, Tourist Company of Nigeria,
ASO Savings and Loans (also a PMI), Transcorp Hotels and Ikeja Hotel. Additionally,
indirect exposure can be obtained via construction companies, cement companies and
paint companies including; Julius Berger, G. Cappa, Dangote Cement, Ashaka Cement,
Lafarge Africa, Cement Company of Northern Nigeria, CAP (another subsidiary of

27 November 2015 17
Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

UAC of Nigeria), Paints and Coatings Manufacturers, Portland Paints & Products
Nigeria, DN Meyer, Premier Paints, Berger Paints and African Paints.

Greater opportunities in the However, the greater proportion of investment opportunities lies outside the publicly
unlisted space listed sphere. In the aspect of commercial development, the increased participation of
private equity companies such as Actis and Persiana has helped to drive investment
inflows into hospitality, commercial office space and mall development (the Palms, Ikeja
and Jabi Lake malls, just to mention a few). We are also aware that other private equity
funds are planning to raise capital towards real estate projects and we estimate that
the potential size of funds targeting this market could be US$300m to US$500m.

27 November 2015 18
Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

Appendix

Figure 1: Trends in Nigerias real GDP (% chg; q/q) Figure 2: GDP and real estate sector growth in Nigeria (% chg; y/y)

25 18.0
20 16.0
15 14.0
12.0
10
10.0
5 8.0
0 6.0
-5 4.0
-10 2.0
0.0
-15
-2.0
-20 -4.0
Q1/12 Q3/12 Q1/13 Q3/13 Q1/14 Q3/14 Q1/15

Q1/12

Q3/12

Q1/13

Q1/14
Q1/11

Q3/13

Q3/14

Q1/15
Q3/11

Q3/15
GDP Private consumption
GDP Real estate

Source: National Bureau of Statistics (NBS); FBNQuest Research Source: National Bureau of Statistics (NBS); FBNQuest Research

Figure 3: Mortgage loans/GDP (%), 2012 Figure 4: Sectoral allocation of credit by DMBs (2014: N12,608bn)

90

80

70 Others, 35% Oil and gas,

26%
60

50

40

30 Manufacturing,
13%
20 Real estate,
5%
10 Government, Commerce,
6% Information 8%
0
and
UK US Hong South Ghana Botswana Nigeria
communication
Kong Africa
, 7%

Source: ASO Savings and Loans; Oxford Business Group; FBNQuest Research Source: NDIC; FBNQuest Research

27 November 2015 19
Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

Figure 5: Land registration & construction permits procedures Figure 6: Household monthly income profile of residents in Abuja

250
Above
N100,000
200 28%

Under
150
N30,000
47%

100 N50,000-
N100,000
5%
50

N30,000-
N50,000
0
20%
Lagos Abuja Port Harcourt

Registering land (days) Duration of construction permits (days)

Source: International Finance Corporation (IFC); World Bank; Agusto & Co.; Source: Federal Capital Territory Administration (FCTA); FBNQuest
FBNQuest Research Research

Figure 7: Lagos Island prime land prices (Apr 2014 - Mar 2015) Figure 8: Formal housing cost structure in Kenya (%)

2,500 Infrastructure,
11%

2,000
Land, 11%

1,500

1,000
Professional
fees, 11%

500

Construction,
0 67%
Victoria Eko Ikoyi Banana Oniru Lekki
Island Atlantic Island phase 1
City
Source: AfDB Informal Survey of Developers 2012; Shelter Afrique;
Source: MCO Real Estate; FBNQuest Research FBNQuest Research

27 November 2015 20
Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

Figure 9: Consumer price inflation in Nigeria (% chg y/y)

16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15

All-items Core Food

Source: National Bureau of Statistics (NBS); FBN Capital Research

Figure 10: Central economic indicators

2013 2014 2015E 2016E

Real growth (in per cent) 5.5 6.2 3.5 4.8

CPI (in per cent; y/y Dec) 8.0 8.0 9.8 9.5
Monetary policy rate (%; year-end) 12.0 13.0 11.0 10.0
Current account/GDP (in per cent) 4.1 0.1 -1.2 -2.0
Bonny Light (end-period spot; US$/b) 112 65 48 60
Bonny Light (average spot; US$/b) 111 100 54 56
Official fx reserves (in US$ bn) 44 34 30 32
N/US$ (end-period) 159 185 197 210
N/US$ (average) 159 165 196 202

Source: CBN; NBS; Bloomberg; FBNQuest Research

27 November 2015 21
Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

Important Risk Warnings and Disclaimers

This report was prepared, approved, published and distributed by FBN Capital Limited (FBN Capital), operating under the brand name FBNQuest, a company
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Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in
this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be
directly or indirectly dependent on the specific recommendations or views expressed in this report.

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This material was produced by FBN Capital Limited solely for information purposes and for the use of the recipient. It is not to be reproduced under any
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Mentioned company Price (N unless otherwise stated) Rating Applicable disclosure

Actis n/a n/a -
African Paints 2.59 Not Rated -
Ashaka Cement 23.00 Neutral III
Berger Paints 9.75 Not Rated -
ASO Savings and Loans n/a n/a -
CAP 38.00 Not Rated -
Cement Company of Northern Nigeria 7.80 Not Rated III
Dangote Cement 159.99 Neutral -

27 November 2015 22
 Nigeria | Investment Research | Housing Sector Special Report | The first bricks in place for building

DN Meyer n/a n/a -

G. Cappa 14.46 Not Rated -
Ikeja Hotel 3.50 Not Rated -
Julius Berger 37.44 Not Rated -
Lafarge Africa 89.00 Neutral -
Paints and Coatings Manufacturers 81.0 Not Rated -
Persiana n/a n/a -
Portland Paints and Products Nigeria 4.20 Not Rated -
Premier Paints 10.93 Not Rated -
Resort Savings and Loans 0.50 Not Rated -
Skye Shelter Fund 100.00 Not Rated -
Tourist Company of Nigeria 3.51 Not Rated -
Transcorp Hotels 6.42 Not Rated -
UACN Property Development Company 26.45 Not Rated -

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FBNQuest 2015. All rights reserved.

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16 Keffi Street, Off Awolowo Road
S.W. Ikoyi
Lagos
Nigeria

27 November 2015 23