PROPERTY ARTICLES

Group Managing Director and Chief Executive Officer of Sterling Bank Plc, Mr. Yemi Adeola, in this presentation gives the thumb-up to the public-private partnership (PPP) option, saying that it is a viable avenue to finance and execute real estate development Real estate generically refers to buildings and land.

This covers housing, commercial and public buildings, hotels, parks etc. It includes the physical building as well as the totality of the environment, neighborhood & amenities within which the building is situated. Housing as a subset of real estate is one of man's most basic needs. Maslow's hierarchy of need depicts human needs as consisting of five levels - physiological, safety, social, esteem and self-actualization. Shelter or housing comes under safety needs, where the individual seeks personal security and comfort. This form of security is thus a basic necessity of life that every Nigerian should readily have access to without deprivation. One of the most worrisome features of Nigerian urban centres is the growing level of over-crowding and, in some cases, outright homelessness. It is commonplace to see families of eight persons cramped in a single room in a tenement building usually referred to "per room per room or face me, I face you.".

One index used to measure the quality of life is housing and improving the quality of life is the whole essence of government and governance. In most developed countries of the world, governments spend large proportion of their budget on provision of housing for the people, either directly or through public-private financing models. It is a different story in most African societies, where provision of basic housing is perceived and has been an individual's responsibility. Governments have always politicised this social need, talking so much about it albeit acting very slowly. As a basic necessity of life, housing must be a safe place of abode and must fulfill some specific functions, among which are protection against environmental hazards and provision of certain socio-economic services including transportation, communication, recreation, commerce, education, healthcare, employment opportunity and the required infrastructural facilities such as waste disposal, water, electricity and even street network. Current Situation in Nigeria The current democratic dispensation has given a commitment to review the various housing reforms including the Land Use Act that has been perceived as a major hindrance in real estate development and transactions.

This is a part of the Seven-point Agenda of President Umaru Yar' Adua's administration. Over the years, the government has attempted to implement its housing policy through the various MDAs like Ministry of Works and Housing, Federal Housing Authority (FHA), Federal Mortgage Bank of Nigeria (FMBN) and the primary mortgage institutions (PMls) even with international development agencies and donors. The FMBN has estimated that Nigeria has a housing deficit of about 14 million units, requiring about N35 trillion ($270 billion) to fund. According' to World Bank estimates, Nigeria requires the production of about 720,000 housing units annually for the next 20 years in order to solve the housing needs of the country. Considering the massive figure above and the 140 million population of Nigeria at an annual growth rate of 2.025 per cent (2008); there is a wide gap between demand and supply, which further validates the huge market for real estate business in Nigeria for which Ogun State is not an exception. Virtually all levels of government in Nigeria since independence have highlighted housing as a major priority, but the country has yet to develop a robust and workable social housing policy, vibrant housing and mortgage market and affordable homes for her citizens. Available stats also indicate that the Federal Housing Authority (FHA) built only 30,000 housing units nationwide between 1973 and 2006 while housing has remained an elusive target. This figure however does not reveal what proportion has remained habitable or were abandoned to date. The private sector has more than delivered multiples of this volume within the same period. Only recently, the FGN approved the development of about 1,032 housing units nationwide - a far cry from the huge demand for affordable housing in Nigeria. Failure of the Real Estate Sector of Nigeria (Public Sector) It is a statement of fact that real estate delivery has been fits and starts or at best non-existent. Before reviewing the performance of the public sector in real estate development, I will briefly review some features and challenges of the real estate development in Nigeria.

These issues cut across government, individuals and prospective developers. They include highly capital intensive, availability of finance (long term funding) and support, socio-economic considerations, local construction capabilities and material availability, infrastructure, per capital income and asset life cycle - maintenance of facilities and infrastructure. What is responsible for the failure in delivery? Political Support Is there a political support? Is housing delivery a priority? Housing is a social service. Though successive governments seem to regularly recast this mantra, there has not been adequate political support neither is there a strong systemic or institutional framework to do this in a professional manner consistent with the aspiration of majority of Nigerians. Nigeria does not yet have a workable social housing system because policy makers and executors have not backed their promises with the required action. In time past, the federal and state governments have forayed into providing low cost housing for citizens with limited success except for the revolution that we are witnessing in a couple of states like the Lagos and Ogun State axis spurred by the active involvement of the private sector. Absence of Long-term Financing The cost of construction of a modest and decent accommodation is high when you consider the average earning capacity (per capita income) of the populace. This could only be moderated by low cost construction finance and affordable mortgage financing (the current commercial rates for mortgages are an issue of concern for both users and providers). The absence of liquidity products like mortgage-backed securities complicates the financing structure for proposed development. Legal Framework The Land Use Act of 1978 in Nigeria has hindered mortgage financing and creates enormous obstacles to private sector involvement in the housing industry. Obtaining certificate of occupancy (C-of-0) and transfer of titles is marred by all manners of administrative red-tapism and untoward delays. Also, there is also no strong provision for foreclosure in the Nigerian constitution. This provision does not create a strong incentive to lend on long-term basis.

The Economic Freedom of the World report ranked Nigeria 134 out of 141 countries in legal structure and security of property rights. Housing Policy The other constraint to the development of the sector could be ascribed to haphazard housing policy on the part of government and lack of continuity, which has being a bane of a well-orchestrated real estate development in Nigeria. Urban population today stands at 50-60 per cent with increasing migration. At such an alarming growth rate, major cities like Lagos, Abeokuta, Kano, Port Harcourt, Kaduna, Onitsha, Aba and lbadan are groaning under the weight of unfettered agglomeration. The consequences of this are apparent,and, without affordable housing, the provision of other amenities is greatly at risk. At this juncture, we must commend the initiative and resilience of Governor Gbenga Daniel to turn around and give a facelift to the entire landscape of Ogun State by providing the enabling environment for real estate development and investment through forums such as the first Gateway Lands Forum.

We have watched with keen interest the growth and development of several housing schemes involving the Ogun State Government, its directorates, investment companies and private developers. The gradual relocation of industrial facilities from Lagos is also a testament not forgetting the churches and schools. Traditional Financing Sources There are traditional sources of financing for real estate such as savings and loans, commercial banks and PMls; government and insurance companies; private investors; and, World Bank agencies (IFC, Exim, US OPIC). When we consider the housing deficit of the nation that has been estimated to be 14 to 16 million units, the Federal Mortgage Bank of Nigeria (FMBN) estimates that it is worth N42 trillion ($287 billion). Therefore financing an average of 720,000 housing unit per year, as part of the target of the MDG becomes an audacious task that is difficult to meet. Having discussed the challenges, successes and failures: what is the way forward for Ogun State? It's the Public Private Partnership. Public-Private Partnership A Public-Private Partnership (PPPs) is an arrangement typified by joint working arrangement between the public and private sectors. In the broadest sense, PPPs can cover all types of collaboration between the public and private sectors to deliver much needed social goods and services. There is usually a focus on planning, funding and operation through a partnership between the government and one or more private entities. In real estate development government contribution may include but are not limited to Provision of Land or Concessions & Permits, Enforceable Agreements, Enabling Legal Framework, Infrastructure; Taxes and fees Structure of a PPP Typically, a private sector consortium forms a special company called a "Special Purpose Vehicle" (SPV) to develop, build, maintain and operate the asset for the contracted period. Special Purpose Entity (SPE) (sometimes, especially in Europe, "Special Purpose Vehicle" or simply SPV) is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives. Companies typically use SPEs to isolate the firm from financial risk. Typically, the stream of cash flows from the project or facility is the source of repayment for any obligations against the SPV. A simple PPP example would be a hospital building financed and constructed by a private developer and then leased to the hospital authority.

The private developer then acts as landlord, providing facility management and other non-medical services while the hospital itself provides medical services. PPPs have been implemented successfully globally. It started in the UK (the Devon Silver Mines developed by the English Crown and the Florentine Merchant bank in 1299) but became popular in the US in the mid sixties to early seventies with independent power stations. Since then most major capital projects in the world have been executed through PPPs for the provision of infrastructure - toll roads, mass transit transportation systems, rails, bridges, water, hospitals, prisons, schools, markets, power plants and refineries. Examples of a PPP in Nigeria are the Lekki-Epe Expressway upgrade and the MMA2 terminal also in Lagos. We are also proud to say that Sterling Bank has also financed a real estate project that was previously abandoned by the FHA in Lagos under a very successful PPP arrangement in 2007/2008. PPP in Nigeria With the obvious paucity of investment capital sources to satisfy developmental needs in Nigeria, government has come to realise that the private sector can immensely contribute to the implementation of its policies. Recent experience has revealed, in a number of ways, a shift from government traditional activities to a modern and more meaningful result-oriented public-private partnership (PPP).

The Federal Government of Nigeria has supported this collaboration by passing requisite legislation to give a boost to PPPs. Many Nigerian states have identified public private partnerships (PPP) as the most effective way of improving infrastructure and stimulating economic growth as years of neglect and high population growth has left the country's infrastructure in an abysmal state. Currently, governments at all levels are committed to improving transport systems, water supply, waste management power and commercial infrastructure. Implementing projects of this magnitude will require substantial financial input that government is immediately unable to fully fund out of its annual statutory budgets. The PPP model will no doubt help Ogun State Government address the delivery of real estate projects in the state. The thinking behind the PPP initiative is to involve private companies to assist the government in fulfilling its mandate to the people. PPP projects can be structured in a variety of ways, but in most cases the financial and management burden is transferred from the state to the private sector. Projects are however structured in a manner that allows the private sector to achieve a reasonable return on investment. Why PPP PPPs promote mutually beneficial relationships between the public and private sectors, serving as an effective way to bridge gaps between demand and resources, quality and accessibility, and risk and benefit. It is a win-win situation for both parties. PPPs assign risk based on resources and ability.

The public sector manages the political risk and provides the enabling legal framework while the other bears commercial risks related to financing, developing, and managing the project. PPPs have proven over the years to better manage the triple constraints in project finance and management, cost, time and quality. Aside the above, PPPs have a higher statistical probability of success in the ratio of 10:1 in real estate financing in Nigeria. Private-sector governing principles minimize mispricing, cost overruns, and supposed lack of transparency. PPPs deliver in less time. Private firms have many incentives to deliver on time, and greater efficiency by introducing more effective practices to reduce waste and improve revenue collection. More robust investment sources enable partners to meet increased demand and channel resources to previously underserved prospective homeowners. For the Government PPPs ameliorate budgetary constraints, as the state is currently under pressure to develop necessary infrastructure with limited resources. PPPs free up government resources and fuel growth if the right factors are in place: the number, value, and type of PPPs, combined with supportive policies.

The more PPP projects launched, the higher the rate of GDP growth. They bring capital into the State while creating long-term employment, in turn driving consumption, generating more wealth and fueling a stronger economy. PPPs ensure better infrastructure and better quality of life. Factors Influencing PPP Performance Creating Effective Legal, Regulatory and Institutional Environment; Ensuring Value for Money, Access and Service Quality; Risk Mitigation and Financing; and finally and most importantly, our general environment for doing business must live up to international standards, to encourage a large flow of foreign direct investment. Alternative Funding Sources in PPP Pension Funds A possible significant change for real estate finance is the creation of pension funds. The investment rules set by the Pension Fund Commission favour mortgage-related securities - provided they receive an investment grade rating from rating agencies.

In the investment guidelines of the 2004 Pension Act, the Pension Funds can invest in real estate or its derivative products. This is one source of financing that has yet to be explored. For this to happen there must be complement of other factors that must be in place. Real Estate Investment Trusts (REITS) There are also plans to introduce Real Estate Investment Trusts to fast track the growth of the real estate sector because of the obvious limitation to direct investment of pension funds in real estate. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. Asset-Backed Securities In addition, a related area of support by the government is a comprehensive regulatory framework for Asset-Backed Securities (ABS). Some elements included are rules and regulations concerning security of tenure, foreclosure of property on non-performing loans and the use of non-property assets as collateral. Mortgage Backed Securities (MBSs) are security-based mortgage assets: and the FMBN has issued the first tranche of N26 billion of the planned N100 billion MBSs to refinance the acquisition by Nigerians through the primary mortgage loan originators of non-essential houses owned by the government in Abuja in 2007. The question to ask here is how much has been applied to mass housing? Real Estate Development Opportunities in Ogun State The Gateway State remains the upcoming preferred area of development for both the commercial, industrial low, middle and high net worth individuals in pursuit of pure residential serenity and commercial convenience.

This is attributable to government's desire to show performance; availability of land for real estate development; huge off-take potential; the Mega City Project involving Lagos and Ogun states; well developed and improving and growing industrial estates like Agbara and Otta; investment friendly reforms, peace and security; availability of infrastructure (power/transportation); corroboration of Lagos and Ogun states; and, political support. Notable private initiatives aimed at boosting Ogun State's real estate sector include Review Estate, Isheri (in the works); Masters Golden Estate (500 housing units); Police Housing Scheme (300 housing units); Hill Crest Estate (in the works); Pearl Estate (in the works); Evergreen Estate (in the works); and Paramount Estate (in the works). Action/Steps for the Government In conclusion, it is important to note that real estate finance under the PPP does function in isolation but becomes an attractive proposition under an environment where other infrastructures are being developed in tandem. One of the key success factor for Ogun State Real Estate Development PPP will be driven largely by the level of investment that will create the required off-take of affordable housing.

I wish to encourage the government to: continue the investment friendly reforms and transparency; focused development of infrastructure, such as development of industrial parks to open up new areas; ensure continued collaboration with international development agencies and professional agencies to create capacity for PPP implementation in the state; carry out implementation of budget allocation for housing delivery and implementation of infrastructure development master plan for the state; ensure the provision of infrastructure for the proposed private initiatives in an organised manner to attract required financing; and, complement, extend or collaborate with neighbouring states on projects such as the mono rail system and complementary roads and highways.