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NewsDay Thursday September 17 2015
Mortgage Financing & Housing Development
Levelling the playing field W
elcome to the mortgage Financing and Housing Provision Supplement, the second in a series of thematically driven and informative monthly publications brought to you courtesy of the smart partnership between NewsDay and the Monthly Financial Sector Bulletin (MFSB). The MFSB is an independent provider of proprietary data, business intelligence and
analytical content supporting decision-making in the financial and related markets. In the 2014 National Budget Statement, Finance minister Patrick chinamasa announced tax incentives for mortgage lending by banks, by which move he not only levelled the playing field, but also opened a new competitive frontier in local lending circles. Previously only building societies had enjoyed
tax privileges in respect of mortgage lending, but now commercial banks can partake as well. Unsurprisingly a number of non-traditional players immediately moved to stake their claims on the mortgage financing pie. After all, with a national housing backlog of anywhere up to 1,5 million units, the market was there for the taking. The net effect of this fis-
cal policy intervention was to diversify product offering and intensify competition in the mortgage lending space. Against this background, this supplement is a platform for players in the sector to showcase their housing projects to potential buyers while highlighting private sector initiatives in support of government’s national housing priorities enunciated by ZimAsset. In addition to advertising copy and proprietary editorial material, the supplement contains fiscal insights on housing provision and mortgage financing as well as aspects of the regulatory framework such as capital requirements and interest rate guidelines. Also included are views of some market players on housing finance.
Fiscal insights on housing provision, mortgage lending Picture: Stewart Mandabva
Finance minister Patrick Chinamasa In the 2014 national Budget Statement titled Towards an Empowered Society and a Growing Economy presented to the Parliament of Zimbabwe on December 19 2013, Finance and Economic Development minister Patrick Chinamasa outlined the fiscal framework to support efforts to meet the objectives enunciated in ZimAsset on the provision of housing On Civil Service Housing Loan Scheme Government will also capitalise the Civil Service Housing Loan Scheme, which acts as non-monetary incentive for members of the Civil Service. Under the scheme, civil servants access loans for purchase of housing stands, and construction and improvement of houses. On mortgage financing Mr Speaker Sir, the current legislation provides for exemption from income tax on receipts and accruals of building societies, in recognition of the role played by the institutions in the provision of mortgage finance. Expansion in the services offered by commercial banks has resulted in the extension of mortgage finance to home seekers. I, therefore, propose to extend the exemption from income tax to receipts and accruals on mortgage finance offered by other financial institutions with effect from 1 January 2013. On Insurance and Pension Housing Fund (IPHF) In order to address the housing backlog, government has established an Insurance and Pension Sector Housing Fund (IPHF). The Fund is expected to be funded from proceeds of housing bonds to be issued to companies in the pension and insurance industry. In order to facilitate uptake of the bonds, I propose to exempt from income tax, receipts and accruals of the Fund and interest earned on the bond, with effect from 1 January 2014.
NewsDay Thursday September 17 2015 23
Mortgage Financing & Housing Supplement
Is mortgage lending the new frontier? BY OMEN MUZA
Fiscal Incentives WHEN Finance minister Patrick Chinamasa announced tax incentives for mortgage lending by banks in the 2014 National Budget, he was in effect not only levelling the playing field, but also opening a new frontier in local lending circles. Previously only building societies had enjoyed tax privileges in respect of mortgage lending. The fiscal incentives were followed by the Reserve Bank’s exhortation for banking institutions “to offer mortgage banking products through the establishment of dedicated mortgage banking departments”. Low-hanging fruit ripe for shaking While a number of lenders such as FBC Buildings Society, CABS, ZB Building Society and CBZ Building Society were already playing in the mortgage space, it was hardly surprising that a number of non-traditional players immediately moved to stake their claims on the mortgage banking pie in typical me-too positioning. With a national housing backlog of anywhere up to 1,5 million units, the low-hanging fruit is ripe for shaking and the market is there for the taking. Free-for-all “In the later part of the year the bank was issued with a mortgage banking licence. As a result of the expanded product offering, the bank will soon be able to originate mortgage loans for the benefit of its customers. The bank is at an advanced stage of sourcing funds with an appropriate tenure and pricing to support this new line of business,” said Metbank chairperson Wilson Manase in a statement accompanying the bank’s 2013 financial results. Not to be left out, NMB Bank Limited group chief executive officer, James Mushore said the bank would soon be venturing into mortgage lending; a business with tax benefits, which building societies had all long been quietly enjoying. “We are looking at the bottom end of the market for this. We have limited funds left in this regard. Lines of credit are hard to find, but it is great business once we put the structure in place. We can do mortgage business inside the bank without having to set up another structure,” said Mushore. Diversified financial services group ZB Financial Holdings Limited said it would construct properties on its land banks in Harare and Beitbridge, after which it would roll out mortgages. In a move meant to cement its position, CABS, the country’s largest building society by assets and market share, increased its mortgage tenure from 10 to 20 years with effect from March 1, 2014. While this was ostensibly done to ease the country’s housing backlog through an affordable mortgage lending facility, the
competitive connotations of the move cannot be underestimated as it saw borrowers enjoying a payback period that is twice as long as what other market players were offering. CABS know that while it is fairly liquid, the same cannot be said about a fair number of other market players who gasp for air in an attempt to access long-dated funding. Reality check While the outlook for the mortgage market looks promising, a number of factors could keep the tantalising growth prospects in check. These include the lack of suitable long-term financing and the absence of a commercial court which slows down banks’ efforts to foreclose properties in the event of defaults. The dizzying combination of high interest rates of between 10% and 20% per annum, low incomes and high property prices attributed to an inadequate housing stock means that most workers either find the mortgages unaffordable or do not qualify for them altogether. According to figures provided by the Zimbabwe Association of Housing Finance (ZAHF) — which is made up of CABS, CBZ Building Society, FBC Building Society and ZB Building Society — local banks increased mortgage lending by 29% from $64,9 million in 2012 to $84 million in 2013 while the number of mortgage applications rose in tandem from 1 462 to 1 558 against a housing backlog of more than 1,5 million units. While it is clearly improving, this situation is akin to that of Nigeria, which has less than 50 000 mortgages for a country with a population of 170 million people. Policy Interventions So what policy initiatives could be deployed to counter these impediments to growth? The establishment of a commercial court, which the Reserve Bank is already pursuing, is certainly one. The Reserve Bank touts securitisation of mortgage loans, which they define as “a series of financial transactions designed to maximise cash flow and reduce risk for debt originators”, as another. While I completely agree with the apex bank, they should be doing more than just urging banks to “explore opportunities for the securitisation of mortgage portfolios.” As an agent of government, they should also be lobbying for the establishment of a Mortgage Refinance Company (MRC) to promote home ownership by providing long-term on-lending facilities to banks as happened in Nigeria in January 2014. That way the housing sector can finally realise its potential to effectively drive growth, with significant multiplier effects on the broader economy. Feedback: omen.muza@ gmail.com. Omen N Muza writes in his personal capacity. You can view his LinkedIn profile at zw.linkedin.com/pub/ omen-n-muza/30/641/3b8
Regulatory framework for housing finance Capital requirements for mortgage lending In the July 2014 Monetary Policy Statement titled Back To Basics: Setting the Tone for Zimbabwe’s Economic Recovery, Reserve Bank of Zimbabwe governor Dr John Mangudya announced the new capital requirements for Tiers I - III which must be met by 2020. Under the new regulatory capital regime, only Tier I institutions (large indigenous commercial banks and all foreign banks) whose current minimum capital requirement of $25 million is expected to reach $100 million by 2020, can conduct mortgage lending in addition to core banking activities. The minimum core capital requirement of $100 million is expected to enable Tier I banks to absorb the risk associated with the scope and complexity of their activities. Interest rate guidelines for housing finance According to the July 2015 Mid-Term Monetary Policy titled Beyond Stabilisation, the Reserve Bank of Zimbabwe and the Bankers’ Association of Zimbabwe (BAZ) agreed on interest rate guidelines within the broader policy to streamline costs of doing business and stimulate economic activity through affordable credit facilities in the domestic banking system. Housing finance will now attract interest rates of 8%-16% per annum, with a default rate of 3-8 % applicable above the interest rate charged to the borrower. Banking institutions are required to effect these lending rates for both existing and new borrowers,
with effect from October 1 2015. In their own words: What banks are saying about housing finance ZB Financial Holdings “This (property development portfolio) remains the primary focus of the group, companies are experiencing difficulties so we are shifting our business more to . . . property development . . . and we are looking to expand our land bank.” — Ron Mutandagayi, Chief Executive CABS “The society continues to pursue a number of initiatives in order to enhance its role in both housing finance and service delivery.” — Dr Leonard Tsumba, Chairman. Metbank “In 2015 and beyond, the Bank has opted to pursue a new strategic direction in terms of its business development initiatives, with an increased focus on property development.” – Wilson T Manase, Chairman NMBZ Holdings Limited “We are looking at the bottom end of the market for this. We have limited funds left in this regard. Lines of credit are hard to find but it is great business once we put the structure in place. We can do mortgage business inside the bank without having to set up another structure.” — Former NMB Holdings Limited Group Chief Executive Officer James Mushore. Reserve Bank of Zimbabwe On Mortgage Financing Departments and Risk Management “In view of the extension of the
exemption from income tax to receipts and accruals on all mortgage finance by the minister of Finance and Economic Development, in the 2014 National Budget Statement with effect from January 1 2014 is a welcome development, critical for national housing delivery. Accordingly, banking institutions are expected to take advantage of this initiative to offer mortgage banking products through the establishment of dedicated mortgage departments. The realisation of this objective, however, entails that banking institutions put in place adequate risk management systems.” — The then Acting RBZ Governor, Dr Charity L Dhliwayo, January 2014 Monetary Policy Statement. On securitisation of mortgage loans “Securitisation is generally defined as a series of financial transactions designed to maximise cash flow and reduce risk for debt originators. The securitisation of mortgage loans entails the development of a secondary mortgage market for the sale of securities collateralised by income streams from mortgage loans. A secondary mortgage market allows financial institutions to sell mortgages, giving them new funds to offer mortgages to borrowers. Essentially, an efficient secondary mortgages market connects low-cost capital to housing projects, increases liquidity for lenders, and improves financial risk management for lenders and investors.” — The then Acting RBZ Governor, Dr Charity L Dhliwayo, January 2014 Monetary Policy Statement.
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