VOLUME 15MAY 2011

The Proposed Lagos Tenancy Bill (LTB)

Will the Lagos Tenancy Bill encourage or endanger the rental property market?
The pressures arising from the shortage of housing in Nigeria (said to be between 14-17million units, depending on who is reporting) is felt strongly in the sale and rental markets. Properties are generally over-valued and rental rates unjustifiable. To put this in perspective, the relative dearth of new residential property in the UK from 2008 following the financial crisis has led to an upward growth in the rental market, with rates rising by 3540% in major cities.1 In Nigeria, a city such as Lagos (population of 15million people) is under immense pressure, having failed to keep up with its citizens housing needs in the past 30+ years! The result is that asking sale and rent values are often higher than comparable residential areas in major cities in Europe and America, whereas the property, infrastructure and services are not of comparable quality. Realtors have stated that high brow residential areas in Lagos such as Ikoyi were overpriced by as much as 30%.2 Tenancy agreements often include requirements such as 2 - 3 years upfront payment, up to 10% legal and agency fees, and large annual payments for facilities and back-up services (where the property is offered as serviced). This trend was fuelled by multinationals a decade and a half ago, who in a bid to acquire/lease limited residential and commercial office space were willing to pay significant sums in spite of several unfavourable tenancy terms. More recently however, these organisations now encourage their staff to house themselves and have also streamlined their commercial space requirements. This edition of Real Estate Insight discusses how the new Lagos Tenancy Bill could potential aid or hinder the development of a rental market considering the current state of the property market, analysing stakeholder and industry concerns about the law. The Growing Housing Shortage in Lagos Metropolitan Lagos covers 37% of Lagos land mass and hosts about 80% of the population, resulting in an average population density of 20,000 persons per square kilometer. 3 By comparison, London has an average population density of 4,900 persons within the same area .4 The Lagos State Development and Property Corporation (LSDPC) established to drive the provision of housing (directly and indirectly) has in the past 15 years delivered 20,000 housing units across the State.5 In the same period, Lagos State required 224,000 6 housing units per annum. In effect, the State agency contributed 0.6% of the actual requirement. By comparison, Accra, Ghanas capital city with an annual housing gap of 98,0007 units (and with several similar constraints as Lagos, albeit to differing scales) achieved an annual average of 35,0008 housing units in the same period, meeting 36% of the requirement. Today, Lagos requires a total of 2.17 million housing units to close the existing gap.9 Home ownership finance remains inaccessible and unaffordable to 80% of Nigerians. There are only a couple of mortgage products available and double digit interest rates (up to 20%) and short tenors (less than 10 years)10 continue to inhibit growth. Housing Supply: No Government Initiatives in the Build-to-Let Market Nigerias housing policies are a set of well documented but unimplemented ideas. Governments involvement in housing delivery has been fraught with inconsistencies and unfriendly private-sector policies. In spite of recent policies targeted at encouraging private participation, (2 years ago, Lagos State put out PPPs aimed at delivering 100,000 units), very little success has been recorded in the area of implementation/housing delivery. LSDPC one of the most vibrant state-owned housing agencies in Nigeria, focuses on the development and sale of homes (generally targeted toward the middle and high income earner) and does not play in the rental market. Invariably, investors buy these properties (often whole developments) and put the properties back into the rental market at exorbitant market rental rates. A Lagos State Government (LASG) research has revealed that 90% of the housing stock in the State is held by less than 10% of the population. In 2010, it was reported that 80% (as against 19% 11 in South Africa and 22% 12 in Ghana)11 of the population live in rented accommodation and spend more than 40% of their income on rent13- above the 20 30% benchmark recommended by the UN. In spite of this, LSDPC does not see itself as an organ which can act as a catalyst in the provision of build-tolet accommodation. LASGs Proposed Tenancy Bill In 2009, LASG initiated a tenancy bill which seeks to regulate tenancy and rent administration and strengthen existing housing laws in the State. Other reasons for the Bill include to enhance access to the current real estate stock by addressing the issue of escalating rent and property values.
Figure 1: Regulating Tenancy and Housing Laws Source: Assured Legal

Figure 2: Public Sector Supply of Housing Unit in Lagos Source::The State of the Lagos Housing Market, Roland Igbinobia

Figure 3: Housing Supply Versus Population of Lagos Source:: Alitheia Research Unit

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In a recent workshop with stakeholders including property owners, agents, lenders and tenant groups, the LASG revealed the intention of the Bill, stating that it is illegal for a landlord or his agent to demand or receive from a sitting tenant rent in excess of 3 months in respect of any premises (residential and commercial). The Government affirms that the infringement of the law will attract a fine or/and an imprisonment term. The workshop concluded with some pessimism. Tenant groups were concerned about the ability of the enforcing agency to ensure compliance and act decisively with defaulters and wondered how such laws could be implemented in the face of a huge housing gap.14 Comments from property owners and Agents were no less negative. Tenancy Laws in Other Emerging Markets In India, the rental property market is regulated by law. With strict enforcement of these laws, property analysts say the market is distorted, contributing to the freeze in land and rental prices in city centres, hindering new urban renewal initiatives. The rent control law became a disincentive to investment in rental housing and led to a reduction of rental housing stock which in turn led to a stagnant municipal property tax revenue. Although attempts have been made to amend the laws, real estate experts insist the laws should be expunged altogether and market forces should determine rental rates and the shape of rental property market.15 In Ghana, laws established to regulate the rental property market are not enforced. Instead of a 6-month upfront payment as stated in the law, landlords demand multiple years rent in advance. Property analysts say markets forces will continue to hinder enforcement, calling for a repeal of the law.16 Proposed Tenancy Law - Inhibiting Factors For reasons already addressed, rental housing will continue to be in high demand across Lagos. A tenant in dire need of residential or commercial accommodation will meet a landlord (or agent) and an agreement will be struck regardless of what the law states. ties," he said. "There must be reasonable penalties to serve as deterrents. If a landlord collects two 17 years, what happens?" With the law in place however, institutional investors will take a view on the side of the law. This means project viability studies will take into consideration the high cost of finance and construction and reduced upfront rental charges (income), likely making investments in new projects less attractive. Construction costs are nearly 15% higher than in South Africa for comparable developments.18 This is driven by incessant increases in the cost of building materials (of which 70% is imported)19, the growing cost of labour, and payments to LASG on property transactions. These costs amongst others make the supply of housing (and property development in general) even more capital intensive. A reduced immediate return (from upfront rent payments) may make the financing of real estate even less attractive. The administration of rent payment

may also become more cumbersome. Tenant turnover will likely increase (as tenants will have more options) and for property owners who have traditionally dictated the tune, the possibility of voids within the course of a year increases significantly. Recommendations UN Habitat states that a healthy housing system provides authorities with a way in which cities can reduce quantitative housing deficit and a wider range of housing options through the supply of affordable housing and the development of a vibrant rental market. Unfortunately this is not the case in Lagos as the huge deficit will always distort the rental market. However, it is recognised that an unregulated system will also continue to foster a strong pro-landlord market. For effective implementation and enforcement of the proposed tenancy bill, LASG needs to; encourage potential landlords by developing an effective land administration system which makes land accessible and affordable for development of rental properties, provide/encourage access to affordable housing finance options for mortgages and small loans for landlords to improve their homes for rental purposes, create an enabling environment which encourages private sector involvement in the supply of varying affordable housing options which suits different income levels, implement policies which reduce construction costs. These include reducing fees and taxes related to the cost of production of houses and consider regulating the cost of building materials, establish a legal and regulatory structure to promote, control and monitor housing supply. The general increase in supply will by itself promote competition in the rental property market. Renting is an essential component of a healthy tion of the rental property market, LASG should recognize existing rental arrangements and find flexible ways to regulate them. In addition LASG should enact the law with provision for it to evolve and be backed against current market forces.

Figure 4: Number of housing units supplied in London in 15 years Source: Global Property GuideUnited Kingdom

Figure 6: Lagos Real Estate Landscape Source: TIG Blogs

"Legal theories must give way to practical reali- housing system, therefore, for effective regula-

References
1 2 3 4

Jones Land LaSalle Global Market Perspective , Second Quarter 2011, Real Estate Resillience Data Collected from interview with Realtors and real estate agents in Lagos The State of Housing Market 2009, Pison Housing Company Focus on London: Population and Migration Date Store 5 Lagos State Development and Property Corporation Website. 5 Pison Housing Company, 2008 7 Figure is based on estimate which states that 70% of the National annual housing deficit of 140,000 is required in Accra 8 Brief on Ghana National Project To Be Executed Six Engineering & Construction, Ghana Limited, 2011 9 Affordable Housing Part 1: Brigadier General Reis 10 Africa Housing Yearbook 2010, Center for Affordable Housing Finance in Africa 11 South Africa Community Survey on Dwelling UTenure, Social Housing Foundation, 2007 12 Strategic Assessment of the Affordable Housing Sector in Ghana CHF International 13 N Kokularupan, Housing Finace Consultant11IFC Malaysia at the International Housing Finance Workshop 2010 in Lagos, Nigeria 14 The Lagos State Government Website 15 INDIAN GROUND: Rental Laws in India - An Overview 16 Issue on Rent: Not A National Concern Enough -www.joyonline.com 17 Rasaq Akande: Enforcing Lagos Tenancy Rights, www.next234.com, June 2011 18 Alitheia Research 19 Alitheia Research