Why rent control may be difficult to implement, by experts

There are worries that the move by the federal, state governments and legislators to introduce monthly rentals in major cities may impact rental housing investments. Experts warn that the move will create a black market in the real estate market. VICTOR GBONEGUN writes.

The fresh move by the authorities to regulate existing yearly rental payment and replace it with a monthly scheme is generating concerns among critical stakeholders.

The House of Representatives recently mandated its Committee on the Federal Capital Territory (FCT) to collaborate with players in the real estate sector in the territory to work out a modality for monthly rent payments. The committee will also review the real estate sector and recommend effective policies to regulate the activities of landlords.

The resolution was sequel to a motion moved by a member, Emmanuel Ukpong-Udo (PDP, Akwa-Ibom) during plenary. Mr Ukpong-Udo noted that landlords in the territory adopt a strict yearly rent payment system to the detriment of tenants. He also lamented the arbitrary increment of rent by landlords is pushing average civil servants to satellite towns.

When the motion was put to vote by the presiding officer, Deputy Speaker, Benjamin Kalu, it was unanimously taken. The motion comes on the heels of complaints by Abuja residents of the high cost and mode of payment of rent.

“Within the Federal Capital Territory, monthly rent payments are uncommon, with landlords usually demanding a minimum of at least one year’s rent, while others require two years upfront. Nigeria is ripe for an inclusive rental system that reduces the housing burden on working-class families, which will offer affordable monthly rentals for low- and middle-income earners,” he said.

Ukpong-Udo urged the government to intervene by building mass houses for civil servants. “Government must come to the rescue of the residents and formulate policies that will regulate house rents and the activities of landlords in Abuja. There is a need to build affordable houses for civil servants to reduce the burden of paying exorbitant rent,” the lawmaker said.

The Senate had in the ninth Assembly also worked on a bill to regulate rent in the FCT. Senator Ned Nwoko (PDP, Delta North) initiated a bill titled, “One-Month Rent Limitation and Landlord Registry Act.” The bill, if passed into law, will enable tenants to pay their rents monthly instead of the one-year/two- or three-year initial rent payment demanded by property owners, thereby making it flexible for tenants.

The bill is also seeking a rent control body to effectively monitor and implement the law in every state and local government area of the country.
As it was in Abuja, so it is in Lagos, where the government has said the state’s monthly rental scheme will be enforced before the end of 2024 or early next year.

Special Adviser to Lagos State Governor on Housing, Barakat Odunuga-Bakare, who spoke to journalists recently, said: “We know what is being done in other climes, rents are collected monthly. Hence, we are looking and hoping that before the end of the year, or by early next year, we will be able to implement the policy of monthly rental.

“The rental would be charged according to tenants’ earnings. The good part about it is that we would be test-running it first within the public sector since we can ascertain how much everybody is earning, and once it works in the public sector, we can push it out to the private sector.”

Under the scheme, the state government says it has set aside N5 billion for the programme. Although, many residents described it as people friendly policy, it, however, generated controversies among landlords and potential investors in the housing market.

The renewed attempt to formulate and implement rent control laws was triggered by escalating costs of accommodations in cities such as Lagos, Abuja and major cities, which are centres of urbanisation witnessing an increased number of migrants daily.

The unprecedented inflow of people into the cities has triggered challenges for existing infrastructures as housing, water, schools, power supply, and roads become undersupply, while many compete for the limited resources.

However, industry players said the government should concentrate efforts on providing an enabling environment such as reducing prices of building materials through policies that incentivise manufacturers, eliminating importation of building components, and reducing the encumbrances faced by developers and other professionals in the housing production value chain.

The Nigerian housing deficit is estimated at over 20 million, a development which has worsened homelessness among citizens with many living under bridges and unhygienic locations. Less than 100,000 housing units are produced yearly despite the involvement of the government and private developers.

Essentially, in some urban locations rental costs in the last two years rose by over 200 per cent. A two-bedroom apartment that was previously between N350,000 and N400,000 now goes for N1 million, while a three-bedroom accommodation previously N500,000 and N550,000 is rented out at N1.5m and N1.7 million and above depending on location.

The situation has triggered many urban dwellers’ relocation to the city’s outskirts in search of cheaper rents, while those who could not relocate now spend more than 75 per cent of their earnings on shelter amid the low purchasing power.

Industry experts say it will be difficult to control the price of rent as it is determined through demand and supply, with the high cost of acquisition of land, cost of borrowing to finance housing projects, property registration and approvals, the rising cost of building materials along the instabilities in the exchange rate of the dollar and other litanies of challenges.

They also harped on the lack of long-term funding for real estate developments, as many developers build their houses with bank credit in which they hope to recoup their investments in good time to avoid high interest on loans.

A Professor of Estate Management at the University of Lagos, Austin Otegbulu, argued that it would be difficult for the government to control rent in houses that it does not produce, whereas the interest rate, cost of cement, labour and other factors of production considered in construction work are left uncontrolled.

He said if rent is controlled, many developers who borrowed money to build houses may not be able to pay back because huge amounts of money are often involved, adding that the development may force banks to stop funding housing projects.

“People are borrowing to build houses at a commercial rate even if the interest rate is higher than the rents paid by tenants in some instances. Attempts to control rent will create a black housing market.

“If rent is controlled and the cost of materials is rising, the housing stock will be reduced indirectly. If the rents are not enough to pay back loans for the project and the house goes into disrepair, the owner may find it difficult to carry out renovation and the building will further deteriorate, leading to the short economic life of such building,” Otegbulu said.

He explained that in other climes where the cost of loans and building materials are quite reasonable, monthly rent can work effectively but not for commercial property as nobody can control such property.

“There could be a high level of rent defaults too, in monthly rental because the month when a tenant doesn’t have money, he may end up owing in arrears. This can be a problem at the beginning of implementing such a policy. Importantly, what the government should do is to encourage developers with development loans at affordable interest rates of a single digit, and minimise the cost of building materials,” he explained.

Chairman, Research and Development Committee, Nigerian Institution of Estate Surveyors and Valuers (NIESV), Mr ‘Dotun Bamigbola, said until such a law comes out and tested, it may be difficult to state its workability.

He said: “Lagos State government under the military administrations intend, tried and had laws on rent control. Why did they all fail? It was those laws that pushed us into the era of yearly rentals because Lagos was on a monthly rental, but rent is a subject of market forces, demand and supply. If Nigeria is like Canada, which has many houses, who says that people can’t be given a rent-free period?”

He emphasised that with Nigeria’s housing shortage that has not been met coupled with growing populations in Lagos, FCT, Port Harcourt and other urban centres, people will bargain and request to pay more for housing.

Bamigbola said if the government does not regulate the building materials market, importation of materials, or facilitate local production, housing prices will continue to rise.

“People will do businesses to earn whatever they have invested. You can’t tell a developer to lose profit. As the Monetary Policy Rate (MPR) is increasing, the cost of funding is increasing.

“If this is not controlled, you can’t control the result, which is the rental or sale prices. It is not by law, but fiscal policies need to be put in place to ensure real growth in the economy, “he said.

For instance, he observed that no state, local council or Federal Government is selling any property at N5 million, adding that with such development, the government may find it difficult to control rent.

“Government should stop treating the symptoms but cure the real disease. If we have a vibrant local building materials industry in the next 10 years, there will be more companies to reduce the cost of cement, steel firms, nails and other components used in buildings. Government should develop a policy that will enable the production of building materials locally, to reduce the cost and promote export,” Bamigbola said.

Former chairman, NIESV’s Faculty of Real Estate Consulting, Mr Niyi Fadoju, expressed concerns that when politicians fail to do the right things economically; they look for shortcuts to give the people unrealistic hope. He observed that the worry about the monthly rent policy is the negative impact it will have on the economy and stakeholders.

Fadoju said: “Politicians look at housing as a social good and think that will solve the problem. However, the truth remains that most houses in Nigeria were built by the private sector investment even though it is largely inadequate.

“If the government or the legislator wants to be charging monthly rent, they should build their own houses to charge monthly rent. There are council flats in the United Kingdom and people pay rents even in arrears and not in advance.”

He further explained that if the investor had invested a lump sum why should the government or legislators say they want rent to be collected monthly?

Fadoju further argued that when rents are charged monthly, the risks are higher, and cost of collection is higher and the personnel needed are in large numbers.

He, therefore, advised leaders to come up with better ideas aimed at providing houses to those in the informal sector as many Nigerians survive on transitory income and not actual income, which is not paid monthly.