By Jean Philippe Ado of the Centre for Affordable Housing Finance in Africa (CAHF)

What impact does the pandemic have on these markets and what measures are needed to ensure their resilience? This paper is written in two parts. This part (Part 1) discusses the purpose of our interest in rental housing markets in Africa during the Covid-19 pandemic.

Africa’s housing finance markets are developing and investors have struggled to find targets in the residential real estate space that are sufficiently substantial and/or accessible to warrant their attention. Image credit: CAHF

Africa’s housing finance markets are developing and investors have struggled to find targets in the residential real estate space that are sufficiently substantial and/or accessible to warrant their attention. Image credit: CAHF

The paper highlights briefly the challenges faced by the different parties involved in this sector and offers a brief definition of rental residential market. It also discusses why we consider the African residential market during the pandemic and presents some interesting measures undertook in developed economies toward the resilience of their rental residential markets.

Since the beginning of March this year, almost all countries around the world have introduced measures to protect their citizens and their economies exposed to the threat of the Covid-19 pandemic. This has included voluntary or forced lockdown measures, quarantine, curfew, and compliance with basic hygiene rules, among other steps. Although certain features of the measures implemented have been similar, countries have adapted these to their own circumstances.

While commendable, it is necessary to recognise the indirect consequences these measures have had on various national, regional, and international economies. The real estate sector as a whole has felt economic repercussions that have affected commercial real estate as well as residential and hotel real estate. Other players such as mortgage and commercial banks, private and institutional investors, landlords and tenants have also been affected.

For each of the players in a rental market, the economic impact is different. Residential tenants question their ability to pay rent and what will happen with reduced working hours and wages for some, and the loss of income and/or employment for others. Those homeowners, who rely heavily on regular income from the rent of their property, allowing them to sometimes determine their annual liquidity plan, financing or mortgage refinancing, are now exposed to uncertainty and are having to question how best to manage a large-scale loss of rental income in the event of economic difficulties experienced by their tenants.

This article explores rental residential markets in Africa with a focus on the owner-tenant relationship. The aim is to highlight the impact of the Covid-19 pandemic on these markets and to explore solutions and measures, inspired by the measures taken in industrialised countries that have attempted to reduce the negative effects of this pandemic in this segment of the real estate market. It first defines the rental residential market and then presents the reasons for its fragility in the face of the pandemic. Second, it explores some measures taken by developed countries to control the level of exposure of landlords and tenants. Finally, it makes suggestions for the adoption of some of these measures on the African continent.

Defining the residential rental market

A rental residential market is composed of all real estate properties intended for simple or social rental in a given space. Simple tenancy is the rental of a fixed-term property on an open market where the costs of rents are not determined beforehand. Social renting refers to low-rent or supervised housing estates for people with modest incomes who are unable to access the offer available on the open market. Social rental is usually concluded for an indeterminate period.

This rental relationship is often framed by a real estate lease or lease agreement. This document is established between two parties, the landlord/lessor and the tenant, and defines the provision of the property subject to the tenancy (term of the lease, cost of the lease,  obligations of the tenant, obligations of the landlord, and conditions for renewal). Why the African residential rental market?

In 2013, according to a survey by Credit Foncier on property in Europe,  there were 70% of homeowners and 30% of tenants across Europe in these three European areas as follows: Eastern Europe (Romania, Slovenia) with 87% of homeowners, Southern Europe (Spain, Greece, Portugal, Italy) with 71% and Northern Europe (England, Germany) with 60%.

In contrast, home ownership in Africa, particularly in the urban sector of major African cities and capitals, remains low. In 2017/18/19, the Centre for Affordable Housing Finance in Africa (CAHF) undertook a series of studies on rental markets in Côte d’Ivoire, Senegal, Uganda, Tanzania and Angola. CAHF has also published a paper setting out a methodology to identify key indicators for understanding rental markets in African countries. These studies show that in Côte d’Ivoire,  three-quarters of households living in Abidjan (78 percent) are renters; in Dakar, Senegal, the rate is 50%; in Kampala, Uganda, 71% of households are renters, and in Dar es Salam, Tanzania, the rate is estimated at more than 55%.

Moreover, data on the performance of the mortgage market in Africa, when available, remain limited compared to European countries. According to the 2019 Housing Finance in Africa Yearbook, the top five African countries with a relatively operational mortgage market are (in descending order) Namibia, Cape Verde, South Africa, Tunisia and Eswatini (according to ratio of mortgages to GDP). The number of mortgages outstanding in these countries is 73 396 (Namibia) and 1 700 436 (South Africa), with data for Cape Verde, Tunisia and Eswatini not available. The mortgage credit-to-GDP ratio is 24.57% in Namibia compared to 5.60 percent for Eswatini (last of the African top five). In most countries across the continent, the mortgage-to-GDP ratio is less than one percent (such as for Côte d’Ivoire, Senegal, Ghana, and the Democratic Republic of Congo (DRC)).

In Europe, real estate markets are more active. Mortgage credit is often the largest debt in the household, with housing representing the family’s most important asset at the same time. For example, in Holland, the total stock of mortgages represented 83% of the GDP; in Switzerland, it represented over 90% of GDP; whereas in Denmark it is estimated at over 109%.

The mortgage-to-GDP data are crucial for understanding the relevance of rental residential markets in Africa. Indeed, they show that, contrary to European practice where mortgage credit remains the major form of housing finance and access to housing for households, this practice remains weakly developed in Africa. Mortgage credit is available only to a small segment of the population in Africa, thereby limiting the direct impact of banks and financial institutions on housing finance. If the greatest housing risk arising from this Covid-19 pandemic is the high probability of default of mortgage borrowers, this issue is less of a concern in the context of banks and financial institutions in Africa.

From this analysis it appears that, in Africa, the pandemic will have a greater impact on residential rental markets and landlord-tenant relationships, since this formula represents the most common formula for homeownership. Unlike In Europe, where mortgage markets would be most exposed because of the depth of their mortgage markets (as illustrated by their total volume by GDP by country), African mortgage markets will not really be affected by the decline in economic activity and the reduction in human capital.

The Centre for Affordable Housing Finance in Africa (CAHF) has been operating as an independent think tank in South Africa since May 2014, pursuing its mission of making Africa’s housing finance markets work. CAHF’s work extends across the continent, with the aim of bringing information to the marketplace to enable stakeholders in the public and private sector to make policy and investment decisions in favour of improved access to affordable housing.

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