See

discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/280093772

Real Estate Infrastructure Financing in Ghana:

Sources and Constraints

Article in Habitat International · July 2015

DOI: 10.1016/j.habitatint.2015.07.008

CITATIONS READS

0 646

5 authors, including:

De-Graft Owusu-Manu David J. Edwards

Kwame Nkrumah University Of Science and T… Birmingham City University
49 PUBLICATIONS 103 CITATIONS 214 PUBLICATIONS 1,974 CITATIONS

SEE PROFILE SEE PROFILE

Kenneth Donkor-Hyiaman Peter E.D Love

University of Reading Curtin University
11 PUBLICATIONS 5 CITATIONS 563 PUBLICATIONS 11,350 CITATIONS

SEE PROFILE SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Decommissioning of Offshore Structures: From Planning Through to Execution View project

Futureproofing Asset Information Management for Transport Infrastructure View project

All content following this page was uploaded by Peter E.D Love on 28 July 2015.

The user has requested enhancement of the downloaded file. All in-text references underlined in blue are added to the original document
and are linked to publications on ResearchGate, letting you access and read them immediately.
 Habitat International 50 (2015) 35e41

Contents lists available at ScienceDirect

Habitat International
journal homepage: www.elsevier.com/locate/habitatint

Real estate infrastructure financing in Ghana: Sources and constraints

D. Owusu-Manu a, D.J. Edwards b, E. Badu a, K.A. Donkor-Hyiaman c, P.E.D. Love d, *
a
Department of Building Technology, Kwame Nkrumah University of Science and Technology, Ghana
b
Faculty of Technology, Environment and Engineering, Birmingham City University, UK
c
School of Real Estate & Planning, Henley Business School, University of Reading, UK
d
Department of Civil Engineering, Curtin University, GPO Box U1987, Perth, WA 6845, Australia

a r t i c l e i n f o a b s t r a c t

Article history: Finance represents a major barrier to real estate development in Ghana and constraints responsible
Received 6 May 2015 remain unknown. In order to gain insight into this important social/economic issue, a positivist tradition
Received in revised form of thinking via the survey approach sought to uncover, explain and rank these constraints using the
24 June 2015
Relative Importance Index. A total of 53 questionnaires were distributed to real estate developers within
Accepted 16 July 2015
Available online xxx
the Kumasi Metropolis of Ghana. The survey reveals that real estate developers predominantly use debt
financing including short-term bank loans, mortgages and hire purchase. Finance is constrained by five
main factors: i) legislation; ii) macroeconomic barriers; iii) collateral barriers; iv) inadequate risk
Keywords:
Constraints
assessment and diversification mechanisms; and v) a dearth of financial mobilization mechanisms. This
Developers paper provides a practical reference for the targeting of policy interventions to overcome these con-
Financing straints and to catalyse the development of finance for real estate infrastructure delivery. The work is also
Ghana useful to the Government, banks and capital market regulators who seek to develop the capital market to
Real estate provide appropriate financing options. These options may include real estate investment trusts (REITs)
REITs and risk reduction/diversification platform via derivatives. Future research is proposed which seeks to
Risk explore practical innovations in designing tailor-made real estate financing options that meet the needs
of real estate developers.
© 2015 Elsevier Ltd. All rights reserved.

1. Introduction percent to Thailand's annual GDP (Chanond, 2009). However, an

As the population continues to grow and urbanization acceler-
ates, incremental housing development has consistently proven to
be deficient in meeting Ghana's housing need (Bank of Ghana,
2007; HFC, 2007). By incremental housing, owners become self-
developers relying on small crafts and trades to build ‘gradually’
over 5e15 years using their sweat equity as and when funds
become available (Debrah, Ibrahim, & Rufasha, 2002); or otherwise
use personal savings accumulated over long periods (Mathema,
1999; Tomlinson, 2007). This has resulted in a substantial hous-
ing deficit of about 100,000 units as at 2013 (UN-HABITAT, 2008).
According to Sandilands (2002), the real estate sector leads to
improved cities and contributes significantly to the gross domestic
product (GDP) of nations; for instance, it contributes about 10
* Corresponding author.
E-mail addresses: d.owusumanu@gmail.com (D. Owusu-Manu), david.edwards@
bcu.ac.uk (D.J. Edwards), edwardbadu@yahoo.com (E. Badu), kwakuhyiaman@
gmail.com (K.A. Donkor-Hyiaman), plove@iinet.net.au (P.E.D. Love).
important feature of the real estate investment market is its
comparative large size and long investment horizon, requiring co-
lossal sums of long-term finance. In a study by Attakora-
Amaniampong (2006), the main sources of finance to real estate
developers were bank loans, equity, retained earnings and deposits
by prospective buyers. Real estate is thus characteristically capital
intensive, usually requiring a mixture of both equity and debt
financing. The ability of real estate developers to borrow and spread
repayments over an extended period for housing development is
necessary to enhance affordability.
An efficient real estate finance system is nonetheless a sine qua
non to residential real estate delivery, which in most advanced
economies is inseparable from the mortgage market; contributing
77%, 85%, and 85% to GDP in the USA, UK and New Zealand
respectively (EFinA and FinMark Trust, 2010)ethis compares to
0.5% in Ghana as at 2012 (Centre for Affordable Housing Finance in
Africa, 2012). The availability of finance and its cost is a key
constraint to real estate firms (Attakora-Amaniampong, 2006;
Karley, 2009) and as such a vital resource to Ghanaian

http://dx.doi.org/10.1016/j.habitatint.2015.07.008
0197-3975/© 2015 Elsevier Ltd. All rights reserved.
36 D. Owusu-Manu et al. / Habitat International 50 (2015) 35e41
developers. Finance is opined as essential by Tipple and Korboe
(1998) and the mode in which it is accessed represents a critical
factor of a healthy housing system (Boamah, 2010; Warnock &
Warnock, 2008). The source of housing investment provides a
medium by which finance is channelled from surplus units to de-
velopers for housing construction; a key issue for sustainable
housing delivery in any country (Boamah, 2011). The mere avail-
ability of a source of finance for real estate developments inures
little benefit in the absence of its efficiency. When combined,
availability and efficiency will increase access to, and accelerate the
allocation of adequate finance for the purchase and construction of
houses sustainably at a competitive cost (Gevorgyan, Stefan, Hirche,
& Entwicklungsbank, 2006). The adequacy of finance at a
competitive cost is crucial in reaping the full benefits from real
estate investments (Boamah, 2011). For instance, the growth in
sub-prime mortgage lending in the United States of America
increased homeownership (low-income and first time home-
buyers) by 12 million between 1993 and 2005 (Bible & Joiner, 2009;
Gramlich, 2007).
Despite the importance of real estate finance to developers,
particularly in developing countries, the literature (Bank of Ghana,
2007; HFC, 2007) reports upon a clear dearth of housing supply to
meet growing demand. In this study therefore, the sources of
finance available to private real estate developers in Ghana are first
identified and discussed using a synthesis of previous studies
(Attakora-Amaniampong, 2006; Awuvagoge, 2013). These afore-
mentioned ‘sources’ then form the basis of an examination and
explanation of any ‘constraints’ to capital flow. This paper aims to: i)
extend the discussion by estimating the relative importance of
these finance sources; ii) identify finance constraints within the
residential real estate sub-sector; and iii) provide pragmatic guid-
ance for government and, financial and property development
sectors of the economy.
2. Historical account of real estate financing in ghana:
1939e2013
Real estate financing is inextricably linked with the state's role
in housing policy formulation and the need to provide residential
developments, across a range of price levels (Anim-Odame, Key, &
Stevenson, 2010; Karley, 2009). However, the provision of subsi-
dized housing first emerged from two catastrophic events in 1939,
namely: i) the outbreak of world war two and the need to house
veterans; and ii) force majeure emanating from a cataclysmic
earthquake which left thousands of citizens homeless (Arku, 2009;
Tipple & Korboe, 1999). Between the late 1950s to the early 1980s,
the Ghanaian government directly financed and developed housing
infrastructure (Arku, 2009). As a leading provider of housing, the
state built a large number of dwelling units to replace the pre-
dominantly informal settlements that manifested from a popula-
tion boom and acceleration of urbanization (Owusu, 2012; UN-
HABITAT, 2011). As instruments to engender accelerated housing
development, the government set about establishing state-owned
enterprises and quasi-state institutions including the State Hous-
ing Construction (SHC), Tema Development Corporation (TDC) and
the Ghana National Housing Corporation (GNHC) (Owusu, 2012). To
act as a platform for these enterprises, a Development Plan was
implemented from 1959 to 1964 and 6,700 housing units were
proposed for construction. This plan then evolved into a formal
housing policy and from 1964 to 1970, 60,000 new dwellings were
to be constructed throughout the country (Owusu, 2012). To
finance these plans and policies, the First Ghana Building Society
(FGBS) was established in 1956 under the Building Society Ordi-
nance, 1955 (Act 30) to provide credit facilities to home builders
and buyers (Boamah, 2011). The state's role as the major provider of
housing shrunk during the 1970s because of the global economic
recession (Boamah, 2010) and it adopted an ‘enabling role’ to
empower people to finance and develop themselves (Arku, 2009).
To realise this objective and improve housing affordability, the
monetary strategy adopted established financial institutions to
provide credit facilities to homebuyers. For instance, the Bank for
Housing and Construction (BHC) was established in 1973, whilst
the Public Servants Housing Loans Scheme, the Armed Forces
Mortgage Loans Scheme and the Low Cost Housing Programme
were implemented to build more housing units and estates in three
urban centres around Accra, Tema and Kumasi. This era also saw the
promulgation of the (NRCD 96) to provide concessionary con-
struction finance and credit to home buyers.
The implementation of World Bank/IMF supported Structural
Adjustment Programmes (SAPs) as a panacea to heightened macro-
economic problems in the 1980s significantly shifted the role of
government as a direct provider towards a neo-liberal route
(Konadu Agyemang, 2000; Yeboah, 2003). This competitive driven
approach sought to enable private sector participation in housing
delivery and improve housing finance efficiency commensurate to
increasing housing supply through commercial development
(Arku, 2009). In turn, this saw the establishment of the Ghana Real
Estate Developers Association (GREDA), 2007 to act on the behalf of
private ventures and preserve professionalism throughout the
sector. Intensification of neo-liberal tenets (in the post-SAP era) has
seen the state facilitating and enabling the private sector to achieve
sustainable urban planning (UN-HABITAT, 2011). This role is
evident in the provision of conducive environments for the efficient
operations, which is integrated within Ghana's Growth and Poverty
Reduction Strategy (GPRS 2). For instance, financial and/or tax in-
centives were implemented to attract potential investors into
housing development, these include: the reduction of corporate tax
from 55% to 45%; declaration of a 5-year tax holiday for new real
estate developers; and exemption of house purchases (from real
estate developers) from Stamp Duty (Arku, 2009).
As part of the World Bank Urban II project, the World Bank and
the state (through the Social Security and National Insurance Trust -
SSNIT) contributed US$8 million and US$16 million respectively to
set up the Home Finance Company in 1990, now the HFC Bank. The
bank was to operate as a secondary lender (refinancing mecha-
nism) but now acts as a primary lender (i.e. originating, under-
writing, funding and servicing mortgages) and subsequently,
monopolized the mortgage market over a decade (Asare &
Whitehead, 2006). In response to this monopoly, some financial
institutions (such as the Ghana Home Loans, Fidelity Bank, Ecobank
and Cal Bank) sought to provide alternative mortgage and con-
struction finance (Attakora-Amaniampong, 2006). Amidst this
emergent competitive background, basic core points such as land
acquisition and finance necessitated the preparation of the five-
year Comprehensive National Shelter Strategy Programme
(1993e1997). Unfortunately, this programme failed to achieve its
objectives (PPEU, 1991: Abusah, 2004).
In 2009, the Government demonstrated an intent to provide
‘affordable housing’ for Ghanaians through a Private Public Part-
nership (PPP) arrangement. By this approach, the Government was
responsible for providing Sovereign Guarantees and other forms of
support to enable the private sector to raise substantial funding for
the construction of 300,000 ‘affordable housing’ units; this initia-
tive was otherwise known as STX Housing Project and was esti-
mated to cost USD 10 billion. However, this ambitious arrangement
never materialized and since then, there has been no substantive
housing policy. More recently, there has been the injection of sig-
nificant financial resources into the housing sector; for instance,
about 81 real estate and allied projects valuing about $105 billion
were recorded between 1995 and 2005 (Arku, 2009). Some studies
 D. Owusu-Manu et al. / Habitat International 50 (2015) 35e41
including CHF International (2004) have indicated that private real
estate developers constructed approximately 50,000 new detached
and semi-detached houses over a 15-year period. This growth may
be due to the tax incentive benefits that private developers now
enjoy, including: stamp duty exemptions; a reduction in corporate
tax from 55 to 45 per cent; and tax benefits for those who invest
part of their profits in real estate development (Arku, 2009). These
interventions may not be enough to induce the supply of adequate
affordable housing to meet the needs of the teeming population but
they are encouraging. Hence, finance remains an area that requires
further study and development.
3. Research method
3.1. Focus of the study and area profile
This study sought to identify: i) the sources of real estate
development finance in the developing country of Ghana and
leading on form this; ii) determine any constraints that would
reduce the flow of finance/investment into the housing sector. The
research was undertaken in the Ghanaian city of Kumasi, which is
the country's second-largest city with the largest population of
about 2,035,064. Kumasi is, in comparison to the capital ‘Accra’,
largely underdeveloped in terms of housing stock hence, the need
to shed light onto contemporary practices.
3.2. Data collection and analysis
The study employed primary data to explain cash flow con-
straints in the real estate development industry. Questionnaires
were distributed to 53 real estate developers within the Kumasi
Metropolis and the Relative Importance Index (RII) was used in
analysing the relative importance of the sources and constraints of
finance. In principle, the RII technique is employed when the
respondent is asked to rank a list of predetermined factors in order
of importance and relevance indicating his/her opinion, attitude or
preference. The RII is estimated using the formula below:
SW
Relative Importance Index ðRIIÞ ¼  ; where;
AN
W ¼ the weighing given to each variable by the respondents,
ranging from 1 to 5;
A ¼ the highest weigh (i.e. 5 in the study)
N ¼ the total number of samples. (i.e. 45 in the study)
After the analyses the criterion with the highest RII emerged 1st
indicating high compliance and vice versa.
The RII provides an indication of the efficiency of these sources
of finance and the severity of the constraints facing real estate
developers. The sources of finance to real estate developers were
analyzed broadly under the traditional debt and equity financing
options. Factors that constrain access to real estate finance were
identified and discussed under five main categories: (i) legislation;
(ii) macroeconomic barriers; (iii) collateral barriers; (iv) inadequate
risk assessment and diversification mechanisms; and (v) a dearth of
financial mobilization mechanisms.
4. Results and analysis
The survey revealed that the majority of the respondents (47 out
of 53), representing 88.68% are registered members of Ghana Real
Estate Developers Association (GREDA); the remaining 6,
37
representing 11.32%, were unregistered (refer to Table 1). The sur-
vey further shows that most real estate developers, thus, 41 out of
47 GREDA members representing (87.20%) have been in operation
for a period between 5 and 10 years, whereas 6 respondents, rep-
resenting 12.80%, have been in operation between 11 and 20 years
(refer to Table 2). The latter is indicative of a relatively young formal
real estate industry within the Kumasi Metropolis, compared with
matured markets in Europe.
4.1. Sources of finance to real estate developers in Ghana
The survey shows that there are about 18 sources of finance to
real estate developers d classified broadly as either debt or equity.
There are 9 sources of equity finance and 9 sources of debt finance,
with the latter predominating in terms of use (refer to Table 3). The
variants of debt financing and corresponding RII in parenthesis
include: bank loans (0.936), mortgages (0.912), hire purchases
(0.832), long-term leasing (0.730), trade crediting (0.712), bonds
(0.376), and debentures (0.256). The RII shows that bank loans are
predominantly used by real estate developers. Bank loans are
normally short-term advances employed as development finance -
for the development of new projects or the redevelopment of
existing property assets. Short-term bank loans fit the cash flow
requirements of real estate development, which require early
disposal; unlike real estate investments, which have longer in-
vestment horizon.
As the dominant source of real estate finance, the use of short-
term bank loans is only intuitive and practical because developers
tend to match their fundraising to the duration of the real estate
development process to reduce their cost of capital. Conversely,
short-term bank loans could be considered as the last resort due to
the structural scarcity of long-term real estate finance. This finding
is confirmation that it is the source vis-a-vis the cost of finance
that constitutes a major barrier to real estate financing. The
Government of Ghana, (2004) contend that, Ghanaian financial
institutions are currently structured to supply high-cost, short-
term credit.
Debentures and bonds are rarely used by real estate developers.
This could be due to the fact that the majority of real estate de-
velopers in Ghana do not have good credit standing to issue bonds
or access debentures (Bank of Ghana, 2007). However, further work
is required to confirm the researchers' intuitions. An obvious point
is the lesser use of equity financing options, including the issuance
of common stocks, equity and venture capital. It is observable from
Table 3 that, the use of owners’ equity and retained profits are the
last but one and last on the RII respectively. Other sources of equity
finance including; issuance of common stocks, sale and lease back
and venture capital are also uncommon. A probable reason may be
the desire of real estate developers to maintain absolute ownership
and control of their businesses. Alternatively, the almost non-
existence of the public equity real estate investment instruments
like real estate investment trusts (REITs), makes it difficult to raise
public equity for real estate developments. In contrast, although
Table 1
Number and status of real estate developers in the Kumasi Metropolis.
Member status Frequency Percentage
Registered under GREDA 47 88.68
Not registered 6 11.32
Total 53 100
Source: Field Survey, March 2014.
38 D. Owusu-Manu et al. / Habitat International 50 (2015) 35e41

Table 2 pose varying degrees of difficulty in accessing finance for real estate
Age of real estate development firms in the Kumasi Metropolis. developments, as shown by the RII values in Table 4.
Years of existence No. of firms Percentage of firms

5 d 10 41 87.20
5. Discussion
11 d 20 6 12.80
Above 20 0 0 5.1. Legal and regulatory constraints
Total 47 100
The study reveals that the cumbersome financing arrangements
Source: Field Survey, March 2014.
involved in securing loans is the most critical factor limiting access
to real estate development finance, with an RII value of 2.930,
Table 3 representing 61.70% of the respondents. These cumbersome ar-
Sources of finance to real estate developers in the Kumasi Metropolis. rangements results from the weak regulatory framework (ranked
No. Source RII Ranking
9th) that connects surplus funds to the real estate market. In Ghana
prior to 2008, the security of the underlying collateral of a mort-
1 Loans(Debts) 0.936 1
gage contract was uncertain due to delays in enforcing foreclosure
2 Mortgage Loans 0.912 2
3 High Purchase 0.832 3 upon default. In fact, the (NRCD 96) forbade foreclosure on
4 Long Term Leasing 0.724 4 defaulting mortgages.
5 Trade Crediting 0.712 5 In the absence of well-developed regulatory and legal frame-
6 Sub-contracting 0.624 6 works for mortgage loan recovery, lenders’ credit risk exposure is
7 Cash Flow from Operations 0.584 7
8 Co-operating Shares 0.480 8
elevated and creates uncertainty, which undermines collateral se-
9 Disposal of Assets 0.456 9 curity and market efficiency. Collateral insecurity may discourage
10 Venture Capital (VC) 0.424 10 collateralized lending and may render credit unavailable and/or
11 Sale and Lease Back 0.400 11 only available at very high interest rates. It is well noted that
12 Industrial/Commercial Finance 0.380 12
countries with stronger legal rights for both lenders and borrowers
13 Bonds 0.376 13
14 Sale of Common Stock 0.316 14 via collateral and bankruptcy laws have well-developed real estate
15 Government Grants 0.300 15 finance systems (Gevorgyan et al., 2006; Warnock & Warnock,
16 Debentures 0.256 16 2008). However, the enactment of the Home Mortgage Finance
17 Equity 0.240 17 Act, 2008 (Act 770) has restored foreclosure rights. The cure pro-
18 Retained Profits 0.144 18
vided by the new Act, provides the impetus to attract many more
financial institutions into the financing of real estate developments,
especially through mortgage financing. The assurance provided by
Table 4
Factors constraining access to real estate development finance. the Act may account for the high use of mortgages by real estate
developers.
No. Constrains Code RII Ranking
In Ghana, the poor land administration system exposes real
1 Cumbersome Financing Arrangements CAF 2.930 1 estate developments to high collateral requirements (ranked 8th)
2 Difficulty in Accessing Land DAL 2.180 2 which may limit their ability to access real estate finance from most
3 Prevailing High Interest Rates HIR 2.150 3
4 Land Tenure/Administration Bottlenecks LTAB 1.865 4
banks. Land disputes question the titles to such lands that increase
5 Lack of Long Term Funds LLTF 1.690 5 collateral uncertainty, reduces their marketability and conse-
6 High Cost of Inputs HCI 1.650 6 quently, their utility to secure development loans. Collaterals are
7 High Cost of Labour HCL 1.600 7 perfect guarantees against the high risk involved in real estate
8 Excessive Collateral Requirements ECR 1.515 8
development, which is likely to manifest in the form of defaults on
9 Lack of Fiscal/Regulatory Incentives LFRI 1.480 9
10 Cumbersome Foreclosure Processes CFP 1.033 10 loan repayment resulting from the failure of the development
11 Low Skill Level in Project Management LSLPM 0.590 11 (Aryeetey, Baah-Nuako, Duggleby, Hettige, & Steel, 1994; Otero &
12 Lack of Saving Mobilisation Mechanisms LSMM 0.545 12 Lopez, 2001). Consequently, capital flows into real estate develop-
ment is limited, which constricts the real estate market and reduces
the rate of housing delivery. This finding supports
there are a few private equity funds,1 only but a few are directly Wattanaprutipaisan's (2002) view that collateral requirements by
involved in real estate development. commercial banks in developing countries have been a contentious
issue in real estate financing. Although real estate collaterals pro-
vide an incentive and a justification to lend and repay loans (as well
4.2. Constraints to real estate financing as offset losses in case of default), its inadequacy and frequent oc-
casions of imperfect titles to them present a major challenge for
Real estate developers identify at least 12 factors constraining real estate financing in Ghana, most especially for real estate
access to real estate development finance, as presented in Table 4. development start-up firms (Boamah, 2011).
To ease discussion, the 12 factors were reduced to 5 principal fac-
tors, based on the authors’ judgement of their underlying similar- 5.2. Macroeconomic barriers
ities: i) macroeconomic constraints; ii) legal and regulatory
constraints; iii) collateral constraints; iv) inadequate risk assess- Real estate development in Ghana is heavily dependent on im-
ment; and v) financial mobilization mechanisms. These factors ported inputs including raw materials and finished products. The
fact that debt financing is the major source of funding employed by
most real estate developers renders the unstable macroeconomic
1
Mobus Property Holdings is a real estate private equity firm in Ghana, regis- outlook essential in determining the cost of funds to real estate
tered with the Ghana Real Estate Developers Association (GREDA). The firm operate
as an integrated property development and management service provider with
developers and prospective home purchasers. For this reason, the
over USD 100 million worth of residential, commercial and industrial developments unfavourable exchange rate regime increases the cost of inputs and
currently on a 150,000 m2 (15 ha) of land. labour as well as the cost of importing materials. As the Cedi
 D. Owusu-Manu et al. / Habitat International 50 (2015) 35e41
depreciates, developers require more Cedis to acquire the US dollar
to facilitate the importation of construction materials needed to
meet client demands and remunerate expatriate workers. Under
this scenario, variations in development cost may occur, requiring
additional financing which normally comes at a high cost. This
situation is exacerbated in instances where the loans are dollar-
denominated and/or variable interest rates are indexed to the
dollar. Practically, the cost of funds increases in absolute terms any
time the Ghana cedi depreciates in value.
Further, as a well-documented feature of the macroeconomic
environment in developing countries, the high degree of macro-
economic volatility2 (Age nor, McDermott, & Prasad, 2000) in-
creases the nominal interest rates charged on bank loans.
Macroeconomic volatility tends to distort price signals and may
heighten the perceived risk of default, which may lead to a higher
risk premium on borrowing rates for private firms and individuals
(Agenor & Aizenman, 1998). Consequently, Ghana has the highest
spread and lending rates in Africa averaging 37.2% in November
2009 (Gyasi, 2010). This leads to high quoted repayments and the
front-loading of payments to compensate for losses in purchasing
power over time. To the developer, the prevailing high interest rates
(averaging 30% per annum (ranked third)) on bank loans and
mortgages resulting from high inflation and weak exchange rates
regimes drastically and directly increases the cost of accessing
funds for housing developments. At the corporate level, inflation
also reduces the value of funds set aside for contingencies and loans
acquired for various developmental projects, which tend to be
inadequate for the budgeted amount of work or construction. This
study therefore corroborates the findings of Attakora-
Amaniampong (2006), that these sources of real estate finance
are constrained by high interest rates coupled with high inflation.
Nevertheless, the use of debt financing remains the most attractive
to most real estate developers; confirming the findings by Aryeetey
et al. (1994) that it is access to finance rather than the cost of
finance which constrains real estate development in Ghana.
5.3. Inadequate risk assessment and diversification mechanisms
Limited data on borrowers’ credit history presents a barrier to
real estate financing in Ghana. This is because most real estate
developers in Ghana are start-ups without a reliable track record of
repayment of loans. It is therefore difficult to assess the capacity
and character of real estate developers given a lack, or inadequacy
of risk diversification mechanisms within a largely underdeveloped
capital market. Most credit facilities for real estate development
carry substantial specific risk - this may account for the relatively
high interest rates on credit.
5.4. A dearth of financial mobilization mechanisms
Ghana's underdeveloped capital market negatively affects the
development of real estate finance unlike developed economies
such as the UK and USA. Ghana has paucity of long-term real estate
finance mobilization mechanisms (Attakora-Amaniampong, 2006).
In this case, the inadequacy of long-term finance is not the main
problem. Public equity financing largely through Real Estate In-
vestment Trust (REITs) remains a major source of real estate finance
to developers in the UK and USA; yet, there is only one REIT in
Ghana (HFC REIT). There is also no means of loan securitization to
diversify away risks associated with lending to the real estate
sector.
2
As measured by large and erratic movements in inflation (about 11.5% in August
2013) and real exchange rates.
39
6. Theoretical and practical implications
This paper reveals at least three theoretical implications. First,
the Pecking Order Theory of the Capital Structure of a Firm. This
theory postulates that financing hierarchically comes from three
sources: i) internal funds; ii) debt; and iii) new equity; the cost of
financing increases with asymmetric information. Myers and
Majluf (1984) argue that when managers who are assumed to
have privilege information raise equity, it represents an indication
that the company is unsustainably overvalued for which reason
investors will value new equity less (because of lost confidence in
the company's profitability). This negative signal is the basis for
Signalling Theory. On the other hand, issuing debt is an indication
of the profitability of real estate firms. Consequently, companies
prioritize their sources of financing; first preferring internal
financing, then debt, and when further debt is no longer affordable,
equity is raised as a last resort. Therefore, the Pecking Order Theory
assumes that companies have a hierarchy of financing sources,
which makes debt a preferred option to equity if external financing
is required; largely against introducing external ownership into the
company.
Second, the study's findings support the Trade-off Theory which
hypothesizes that debt financing provides an interest tax shield to
companies because debt is tax deductible from profits. More so,
since debt is an investment to the lender with cashflow generally
defined and secured in the loan contract, debt is less risky than
equity investment hence, corporate finance theory suggests that
debt (leverage) enhances returns. Therefore, leverage may explain
why the majority of private (profit-oriented) real estate developers
predominantly resort to debt financing.
The third theoretical implication emanates from the five major
constraints identified in this study: i) legal and regulatory con-
straints ii) macroeconomic constraints iii) inadequate risk assess-
ment iv) diversification mechanisms, and (v) a desert of financial
mobilization mechanisms. A closer look at these constraints in-
dicates they are largely systemic in nature - affect every economic
agent - and they lie within the framework of broader economic
management. Hence, these constraints could be attributed to gov-
ernment inefficiencies, such as high inflation or high interest rates.
The government should intervene with policies that seek to lessen
the financing burden upon private developers and homebuyers.
This creation of negative externalities by the Government ren-
ders the market inefficient. Yet Government intervention in the real
estate development market is scant. Tax exemptions, which were
the only visible incentive granted by the erstwhile neoliberal ori-
ented Government to stimulate interest in affordable housing
development was subsequently scrapped by the incumbent so-
cialist Government. Although it is justifiable by the evidence of
non-delivery mainly due to the weak or lack of monitoring and
evaluation systems, these policy interventions could have inured to
the benefit of low-income earners who constitute the majority of
Ghanaians. This despite the fact that circa 90% of Ghanaians cannot
afford the cheapest developer-built unit (Ayitey, Gyamfi-Yeboah, &
Agyei-Mensah, 2010). Tax exemptions to private real estate de-
velopers could be viewed as Government subsidies necessary to
reduce the cost developer-built home purchases. In the absence of
Government intervention, the market economy has perpetuated
the housing affordability problem and thus further exacerbated the
housing situation in Ghana. Yet, the persistent Government failure
is evident that a strong Government presence in the market is also
not a panacea to the housing financing problem. In this vein, this
study contends that neoliberal tenets which espouse a strong
market with Government intervention are a sine qua non to
reducing the intractable housing deficit. This is hinged on evidence
from the United Kingdom which delivers the majority of its housing
40 D. Owusu-Manu et al. / Habitat International 50 (2015) 35e41
infrastructure through the private sector.
7. Recommendations
Despite the improvement in land titling brought about by
Ghana's Administration Project (LAP), collateral risk remains a
major hindrance to the development of real estate finance for
housing developments. To overcome collateral (property) risk,
collateralized lending using project finance approaches should be
adopted in financing housing developments by real estate de-
velopers. Through this approach, access to finance would depend
solely on the feasibility of the housing project and not on separate
collaterals usually required of developers. Project finance ar-
rangements could reduce and streamline the cumbersome
financing requirements associated with using insecure brick and
mortar as collaterals for credit.
Further, the development of the capital market proffers two
unique opportunities. First, it is a prerequisite to the development
of the public equity real estate sector (i.e. REITs) which could be
instrumental in accessing equity financing through partnerships
and joint ventures between REITs and developers. In recent times,
the Securities and Exchange Commission has announced plans to
develop the regulatory framework for the establishment of REITs
particularly to serve as a source of long-term finance to real estate
developers. In this regard Donkor-Hyiaman (2013) proposes that
the creation of a mortgage REIT using the 2nd tier contributions3 of
the new National Pension Fund of Ghana could serve as a conduit
for the accumulation of a critical mass of funds which can be
accessed by developers for housing development. Second, the
capital market could as well assist in risk reduction and diversifi-
cation of real estate development projects via the use of derivatives
including swaps4 (interest rate and default) and financial options.5
Currently, the capital market in Ghana does not have this financial
and real estate infrastructure. Securitization of real estate debt
could also be a major source of refinancing to most lenders of real
estate infrastructure developments and a risk diversification
mechanism as well. In view of this, the Ghana Home Loans Limited
has sought to pioneer the first securitization in Ghana which could
revolutionize the real estate finance market.
8. Conclusion
Arguably, real estate remains one of the most important sectors
of the economy with the highest multiplier effect; this being due to
its forward and backward linkages to the productive sectors of the
economy including finance and construction. Admittedly, although
the essence of real estate in the economies of nations cannot be
compromised, many developing economies like Ghana face major
financing challenges, which has become a consistent area of
concern especially to real estate developers. The survey of real es-
tate research outputs has unanimously and consistently identified
finance as the major barrier to real estate development in Ghana.
The survey reveals that debt financing including bank loans,
mortgages and high purchase agreements are the major sources of
3
The 2nd Tier is a mandatory occupational (or work-based) “defined contribu-
tion” pension scheme (5% out of total contribution) which is “fully funded” by
employees and privately-managed by approved Trustees assisted by Pension Fund
Managers and Custodians under the New National Pension Law in Ghana. It is
designed primarily to give contributors lump sum benefits.
4 Policy Brief, June http://www.bog.gov.gh/privatecontent/Research/Research%
A swap is a derivative in which counterparties exchange cash flows of one
party's financial instrument for those of the other party's financial instrument.
5
An option on the other hand is a contract which gives the buyer (the owner) the
right, but not the obligation, to buy or sell an underlying asset or instrument at a
specified.
finance to real estate developers in Ghana. Although it has been
argued by the Bank of Ghana (2007) that the financial market in
Ghana is structured to supply high cost short-term debt, this study
suggests that the supply of short-term debt financing may be un-
realistic. This is because real estate development unlike investment
requires early disposal which therefore requires short-term
financing. Contrary to the predominant use of bank loans, other
sources of finance such bonds and debentures are rarely used by
most real estate developers in Ghana.
Equity financing is also not a major source of financing to de-
velopers. The lumpiness of real estate developments require sub-
stantial financing which most real estate developers cannot raise
through equity financing. This situation could chiefly be attributed
to the underdeveloped public equity real estate sub-sector which
results from the under-developed capital market in Ghana. It is also
possible that the lesser use of equity financing could be due to the
fact that most developers desire to be absolute (100%) owners of
their developments and therefore, may not engage in partnerships
or joint ventures. Nonetheless, the banks remain a major financing
source (perhaps the first and last resort) as short-term bank loans
and mortgage loans are predominantly used by most estate de-
velopers as indicated above.
Mitigating these constraints would require the development of
the capital market and real estate market infrastructure (swaps and
options) which could serve as a source of equity financing to de-
velopers via REITs. This approach would aid risk reduction and
diversification respectively, and help deal with the substantial
specific risk priced by most lenders. In summary, the real estate
finance market is nascent and constrained by factors, which albeit
difficult, could be dealt with through the creation of appropriate
real estate development, investment and financing infrastructure.
References
Abusah, S. K. (2004). Access to land for housing development: A review of land title
registration in Accra, Ghana. Stockholm, Sweden: Department of Infrastructure.
Department of Infrastructure Building and Real Estate Economics, Royal Insti-
tute of Technology, (KTH). Available at http://www.kth.se/polopoly_fs/1.
130969!/Menu/general/columncontent/attachment/251.pdf Accessed 20.03.14.
Agenor, P. R., & Aizenman, J. (1998). Contagion and volatility with imperfect credit
markets. International Monetary Fund Staff Papers, 45(l) (June 1998) http://
documents.worldbank.org/curated/en/1998/01/440234/macroeconomic-
fluctuationsdeveloping-countries-some-stylized-facts Accessed 20.03.14.
Agenor, P. R., McDermott, C. J., & Prasad, S. (2000). Macroeconomic fluctuations in
developing countries: some stylized facts. World Bank Economic Review. l,
(World Bank).
Anim-Odame, W. K., Key, T., & Stevenson, S. (2010). The nascent real estate invest-
ment market in Ghana. Shaping the change FIG congress 2010. Sydney, Australia,
11e16 April, 2010.
Arku, G. (2009). Housing policy changes in Ghana in the 1990s. Housing Studies,
24(2), 261e272.
Aryeetey, E., Baah-Nuako, A., Duggleby, T., Hettige, H., & Steel, W. F. (1994). Supply
and demand for finance of small enterprises in Ghana. World Bank Discussion
Paper 251. Washington, D. C: The World Bank.
Asare, E., & Whitehead, C. (2006). Formal mortgage markets in Ghana: nature and
implications. RICS Research Paper Series, 6(13), 5e29.
Attakora-Amaniampong, E. (2006). Residential development and borrowing in Ghana:
A Challenge for Banks and private estate developers. Master of Science Thesis No.
334. Stockholm: School of Architecture and the Built Environment Royal
Institute of Technology http://www.kth.se/polopoly_fs/1.121646!/Menu/
general/column-content/attachment/334.pdf Accessed 20.03.14.
Awuvagoge, S. A. (2013). Affordable housing in urban areas in Ghana: Issues and
recommendations. A Research Paper submitted to the Graduate School in Partial
Fulfilment of the Requirements for a Masters Degree in Urban and Regional
Planning. Muncie, Indiana: Ball State University.
Ayitey, J. Z., Gyamfi-Yeboah, F., & Agyei-Mensah, S. (2010). The state of residential
mortgage in Ghana. The Ghana Surveyor, 3(1), 33e44.
Bank of Ghana. (2007). The housing industry in Ghana: Prospects and challenges.
20Papers/bog%20housing.pdf.
Bible, D. S., & Joiner, G. (2009). Adjustable rate mortgages and the mortgage crisis.
Journal of Property Management, 27(3), 152e162.
Boamah, N. A. (2010). Mortgage market in Ghana: the past and the future. Housing
Finance International, 24(3), 10e14.
 D. Owusu-Manu et al. / Habitat International 50 (2015) 35e41
Boamah, N. A. (2011). The regulatory environment and the housing finance markets
in Ghana. Journal of Property Management, 29(5), 406e422.
Centre for Affordable Housing Finance in Africa. (2012). Housing finance in Africa: A
review of some of Africa's housing finance markets. South Africa: FinMark Trust.
Available at http://www.housingfinanceafrica.org/wp-content/uploads/2012/
10/2012-HOUSINGYEARBOOK.pdf Accessed 20.03.15.
Chanond, C. (2009). Pro-poor housing finance, Thailand country report, June. Available
at http://s3.amazonaws.com/zanran_storage/www.ghb.co.th/ContentPages/
45842968.pdf Accessed 15.03.14.
CHF International. (2004). Strategic assessment of the affordable housing sector in
Ghana. A Report Presented to the Government of Ghana. December 2004.
Available at http://www.globalcommunities.org/node/37160 Accessed 20.03.15.
Debrah, W. K., Ibrahim, G., & Rufasha, K. (2002). Micro finance for housing for
low/moderate-income households in Ghana. In Conference on housing and
urban development for low-income groups in Sub-Saharan Africa, 22e26, July
2002. Available at http://irep.ntu.ac.uk/R/-?func¼dbinjumpfull&object_
id¼181210&silo_library¼GEN01 Accessed 20.03.15.
Donkor-Hyiaman, K. A. (2013). Rethinking Ghana's housing financing challenge: A
paradigm shift from the traditional mortgage financing approach?. Unpublished
Dissertation submitted in Partial Fulfilment of a Master of Philosophy Degree.
UK: Department of Land Economy, University of Cambridge.
Enhancing Financial Innovation and Access (EFInA) and FinMark Trust. (2010).
Overview of the housing finance sector in Nigeria. [online]. Available at http://
www.finmark.org.za Accessed 19.03.15.
Gevorgyan, K., Stefan, W., Hirche, W. S., & Entwicklungsbank, K. F. (2006). Pro-
moting housing finance market development in Armenia. Housing Finance In-
ternational. December. Available at http://www.housingfinance.org/uploads/
Publicationsmanager/0612_Arm.pdf Accessed 20.03.15.
Ghana Real Estate Developers Association (GREDA). (2007). Affordable housing in
Ghana. Accra. Ghana: National Agenda. Available at http://danquahinstitute.org/
docs/PressReleaseGREDAProposalforSTX.pdf Accessed 19.03.15.
Government of Ghana, International Labour Organization and United Nations
Development Programme. (2004). An employment framework for poverty
reduction in Ghana. [online]. Available at http://www.google.com/gh Accessed
19.03.15.
Gramlich, E. M. (2007). Booms and busts: the case of subprime mortgages. Economic
Review, 92(4), 105e113.
Gyasi, S. J. (2010). Banks ripping customers off (pp. 64e65). Africanwatch Pan-African
Magazine of Choice. April 2010.
HFC Bank. (2007). Challenges and opportunities for developing mortgage markets (The
ghanaian eperience) [online]. Ghana: HFC Bank. Available at http://www.
hfcbankgh.com Accessed 20.07.13.
Karley, N. K. (2009). An overview of the prospects for Ghana's real estate market.
View publication stats
41
United Kingdom: Royal Institute of Chartered Surveyors (RICS).
Konadu Agyemang, K. (2000). The best of times and the worst of times: structural
adjustment programs and uneven development in Africa: the case of Ghana.
The Professional Geographer, 52(3), 469e483.
Myers, Stewart C., & Majluf, Nicholas S. (1984). Corporate financing and investment
decisions when firms have information that investors do not have. Journal of
Financial Economics, 13(2), 187e221.
Mathema, A. S. (1999). Housing and land markets in Kathmandu, Nepal. Cambridge,
MA: Department of Urban Studies and Planning Massachusetts Institute of
Technology. http://danquahinstitute.org/docs/PressReleaseGREDAProposal
forSTX.pdf.
Otero, M., & Lopez, C. (2001). Credit scoring in microfinance. Washington, D. C.. In
Paper presented at the global conference on credit scoring. Asian development
review, 20 pp. 2e3). Available at http://www.ibrarian.net/navon/paper/
2003ASIAN_DEVELOPMENT_REVIEWVolume_20_Number_2.pdf?
paperid¼793623 Accessed 03.03.14, 2
Owusu, G. (2012). Urban growth, globalization and access to housing in Ghana's
largest metropolitan area, accra. http://aegis-eu.org/archive/ecas4/ecas-4/
panels/81-100/panel-90/ECAS-FULL-PAPER-GEORGE-OWUSU.pdf.
Sandilands, R. J. (2002). How to motivate faster growth in Colombia: The leading sector
strategy revisited, Estudios Gerenciales. Available at https://ideas.repec.org/a/col/
000129/004873.html Accessed 16.02.15.
Tipple, A. G., & Korboe, D. (1998). Housing policy in Ghana: towards a supply-
oriented future. Habitat International, 22(3), 245e257.
Tipple, A. G., & Korboe, D. (1999). Housing supply in Ghana: a study of Accra,
Kumasi and Berekum. Progress in Planning, 51(4), 253e324.
Tomlinson, M. R. (2007). A literature review on housing finance development in sub-
Saharan Africa [online]. FinMark Trust. Available at http://www.finmark.org.za
Accessed 19.08.14.
UN-HABITAT. (2008). GhanaeOverview of the current housing rights situation and
related activities [online]. Available at http://www.unhabitat.org Accessed
20.03.15.
UN-HABITAT. (2011). Affordable land and housing in Africa. Nairobi, Kenya: United
Nations Human Settlements Programme. Available at http://mirror.unhabitat.
org/pmss/listItemDetails.aspx?
publicationID¼3376&AspxAutoDetectCookieSupport¼1 Accessed 19.08.14.
Warnock, C. V., & Warnock, E. F. (2008). Markets and housing finance. Journal of
Housing Economics, 17(1), 239e251.
Wattanaprutipaisan, T. (2002). SMEs subcontracting as bridgehead to competi-
tiveness: framework for an assessment of supply-side capabilities and demand-
side requirements. Asia-Pacific Development Journal, 9(1) (June).
Yeboah, I. E. (2003). Demographic and housing aspects of structural adjustment and
emerging urban form in Accra, Ghana. Africa Today, 1(1), 107e119.