Agudah: Rent-to-Own is a Solution to Housing Finance Problem



Natanel Florens, an integrated real estate services firm, has a thriving rent-to-own model of home acquisition. In this interview with Bennett Oghifo, the company’s Chief Investment officer and Executive Director, Oguche Agudah, a former Special Adviser to Nigeria’s Minister of Industry,Trade and Investment,, says rent-to-own is a revolutionary way to sustainable housing in a depressed economy

What do you think are the major issues with real estate financing in Nigeria?

The first issue is that the financial system is awash with short- term capital which is used to finance long-term assets in the form of property. That creates a mismatch, which many banks and developers are currently struggling with. The second issue is the cost of funding. This is usually in the high double- digit space. The effect of this is an increased cost of residential houses to individuals. It is therefore not a surprise that approximately 85 per cent of the Nigerian population are renting the places they live in. People have worked for years, and they cannot get their own houses, because of the financing model for real estate in Nigeria.

On the retail end, there is a dearth of affordable mortgages in the market. Statistics show that mortgage loans represent less than 1 per cent of Nigeria’s GDP and there are less than 100,000 mortgages written in the market. Furthermore, in a depressed economy, like we’re in, it’s difficult for individuals to drop lump sums for the purchase of their houses.

How do you intend to change this with your Rent- to -Own model?

The core of this model is that prospective tenants/homeowners pay the rent they are used to paying and own it over time. The beauty of this model is that it comes with 0 per cent interest and it begins to give hope to many Nigerians who never thought they could own a home. This model essentially seeks to integrate the informal rental market with the formal financial system. There are millions of Nigerians who have been paying their rent consistently over the years. What we are saying is that you can own a home, based on your integrity and consistency in payment of rent. This system is complimentary to the mortgage market, as it instils the need to pay consistently and data can be shared among financial institutions to create a larger database and discourage recalcitrant debtors.

What happens in the event of default?

The first thing to note is that we are working with credit bureaus in the market. Every potential tenant is checked with these bureaus, and if they have overdue debts with banks, utility companies and other organisations that keep their record with these bureaus, we will not enlist them in the scheme. Furthermore, if they default, their names will be submitted to these bureaus for circulation within the financial system, and this deters them from getting credit in other places. When this begins to evolve overtime, individuals will realise that it is better to be up to date with your rental, credit card, or personal loan payments; because this is the only way you can guarantee the purchase of fixed assets like houses and the rest. So this model helps to develop the financial system and also integrate the formal and informal markets and foster a better credit culture. In addition, we have rent default insurance that covers loss of job, disability and death. This scheme also helps to integrate the insurance industry and generate more business for them.

What’s your overview of the property investment market in Nigeria and how can investors benefit from the Rent – to- Own scheme?

The housing deficit in Nigeria is well documented. The World Bank estimates that there is a 17 million housing deficit, estimated to grow at 2 million annually. So, residential real estate will always be a growing and profitable asset class. Furthermore, the rapid urbanisation and Nigeria’s young and growing population, means that the current housing stock in the country cannot meet our future and current needs. So, the case for investing in residential housing is compelling. However, this space is practised in the traditional, archaic model of “buy for rental” or “buy for sale”. This comes with the hassles of managing tenants, facilities, infrastructure and administrative issues which investors ordinarily shouldn’t get involved with. Many times, real estate investors buy or build houses and wait for many months before they can get quality tenants.

However, the entrenchment of The Rent – to – Own concept in Nigeria, will allow typical real estate investors to enjoy; 100 per cent occupancy ratio on residential properties, because of the huge rental market, growing middle class and the promise of ownership to potential homeowners. They will also be able to improve their returns from the typical 3- 4 per cent rental yields to 17 per cent yield per annum.

The current administration has stated its intention to build a million houses annually, how do you think they can achieve this?

This can be achieved by fusing traditional housing development and modern finance in order to create new stocks of houses and enable Citizens own them through a 0 per cent Rent – to –Own concept. In addition, both state governments and the Federal government can use this concept to generate hitherto hidden sources of revenue and also reduce the amount of public funding that is allocated to building of new houses. We are currently speaking with some state governments to use this mechanism to deliver new houses for citizens and give them out on a Rent – to –Own model.

Your version of Rent – to- Own is Rent – Own –EarnTM. Tell us a bit more about this?

Again, Rent-to-own is not an entirely new concept. It’s practised in various forms across the globe. It’s just a way of enabling prospective homeowners pay for their property in instalments without any interest charge. The version that we’re rolling out in Nigeria enables the potential homeowner to begin to earn from their rental payment in a number of ways;

First, when they have finished paying their obligation under the rent, they can begin to earn annual returns on the value of their houses even while living in it.

The second is that, at any point in time, during the life of their occupancy, they can decide to capitalise their rental payments over the years and sell their option to buy that property to another individual and then move to another house on a rent- to- own basis. What this means is that individuals can live in a number of house in their lifetime, if they can be consistent in the payment of their rent.

The truth is that the current system of housing development, finance and ownership has only produced perpetual tenants and we must begin to devise creative ways to solve social problems, and the Rent – to –Own concept is definitely the way to go.