About the House

Jan. 3, 2018

The construction sector runs in parallel with government spending, but a growing population and a serious housing deficit are likely to attract private investments from all over the world.

Tanzania's economy is faced with a very interesting challenge as President Magufuli takes decisive measures to fight against state corruption and secure fiscal discipline, while at the same time deploying strategies to trigger strong economic growth in all sectors of the economy, especially infrastructure. The construction sector runs in parallel with government spending, but a growing population and a serious housing deficit are likely to attract private investments from all over the world as mortgage lending costs slowly decline for commercial banks, given the government's expressed commitment to reducing related interest rates.

The World Bank estimates Tanzania's population, currently at 53 million, to grow at an annual rate of 3%. Together with a 30% urbanization rate, the demand for social amenities and infrastructure will drive an important portion of the country's economic growth. Deloitte refers to BMI's economic growth forecast of an average of 6.2% between 2017 and 2026.

The Bank of Tanzania (BoT) revealed that GDP grew by 6.2% YoY in the fourth quarter of 2016, compared with 7.3% growth in the same period in 2015. The sectors driving this growth were electricity supply, mining and quarrying, information and communication, and construction, altogether contributing about 55.4% of total GDP. In the fourth quarter of 2016, real GDP contribution of the construction sector to total GDP was 12%, falling from 13.8% in the same period in the previous year, reflecting President Magufuli's tightening public investment policy.

BMI states that although Tanzania's fiscal deficit has narrowed in fiscal year 2016/17 (from July 2016 to June 2017) on the back of reduced capital spending targets and delayed infrastructure projects, this trend is set to be reversed in the following years. BMI expects the momentum in publicly funded infrastructure projects to build up toward the end of 2017 and continue throughout the coming fiscal years, on the back of projects such as the regional standard gauge railway, the DIKKM project. In April 2017, President Magufuli launched the construction of the 207km standard gauge line linking Dar es Salaam with Morogoro. The 1,435km single-track electrified line is expected to open in October 2019. The second phase will run for 336km from Morogoro to the capital city Dodoma. Planned extensions will connect Dodoma to the Lake Tanganyika port of Kigoma and Lake Victoria port of Mwanza, and longer-term extensions to Rwanda and Burundi will complete a proposed 2,561km standard gauge regional network. Moreover, in July 2017 President Magufuli launched a USD421 million project that will nearly double the capacity of Dar es Salaam's sea port from 13.8 million tons in 2016 to 25 million tons over the next seven years. Media reports state that the project will be completed in 36 months and will make the port available to ships with a draft of 14m. The project will necessitate the construction of connecting six-lane motorways. The government announced in June 2017 that it plans to increase spending in its budget for the fiscal year ending June 2018 by 7.3% to TZS31.71 trillion (USD14.21 billion), with a focus on infrastructure, curbing tax evasion, and industry.

Thus, BMI predicts Tanzania's construction industry will grow at an annual average of 8.4% in real terms over the 2016-2025 10-year forecast period, a level that is significantly higher than the Sub-Saharan Africa average of 6.3% over the same period. BMI expects the nominal industry volume to rise from an estimated USD5.1 billion in 2015 to USD15.3 billion in 2025, keeping Tanzania as the second-largest market in East Africa, after Ethiopia. The expansion over the first half of the forecast period is expected to be driven mainly by infrastructure investments, while growth over the second half of said forecast period is expected to be driven by investments in the gas sector, in line with improving energy prices.

Tanzania's housing deficit is estimated at 3 million housing units with an annual unit demand of 200,000. Nehemiah Kyando Mchechu, Director General of the National Housing Corporation (NHC), told TBY the highlights of the firm's corporate strategy plan. The most important target is the commitment to build 30,000 houses by 2025. Mchechu explained the need to enter into strategic partnerships to ensure that demand is met in various ways. NHC is also counting on land development. He also added: “We have another portfolio due to start next year, which will deal with the production of building materials as part of our alignment with the government's drive to boost industrialization, beginning with roofing materials, painting, and brick making. With that, our overall contribution to the sector will be extremely high, more than the numbers we have committed. Finally, we are midway through negotiations with partners on a deal to put up prefabricated industrial houses. Dodoma will be our key focus now as there is great demand for houses with the new administration moving there, and we must support the government in this."

The real estate market is facing serious challenges as to the availability of affordable housing. The NHC aims to leverage PPPs to overcome this lack and is in talks with companies from Turkey, the Middle East, and Norway. Mchechu explained further: “The difficulty is that many with plans to invest in real estate in Tanzania look at mid- and upper-level housing. We have not yet been fortunate enough to find people who are keen to support the low-income and affordable houses, where there is growing demand. However, it is important to stress that business in that sub-market can be huge. The amounts might not be large themselves; however, the volume is certainly there, and investors can make double the profit they would make on medium or high-income developments." The NHC is willing to stretch investors' guarantees so that capital remains safe. “The guaranteed capital is something that we can provide and that provides comfort. That said, we have seen an appetite from impact financers, and we hope this will increase in the coming years so that we can make headway on these plans," he added.

One of the key areas for the NHC is the move to Dodoma, where it has already started building 300 houses. However, this number is not expected to be enough to meet demand and the NHC is waiting on financing possibilities, which once secured, will increase NHC's development 10-fold, with the aim to build 3,000 houses in Dodoma in 2018. In its latest sector update, the Tanzania Mortgage Refinance Company Limited (TMRC) revealed that the mortgage market in Tanzania posted a growth of 16% in 2016. Although the growth was below the previous year's 45% growth, it was still above the overall 7% GDP growth of Tanzania. At year-end 2016, the total lending by banking sector for the purposes of residential housing was TZS416.94 billion, equivalent to USD191 million, representing 3% growth compared to mortgage lending of TZS404 billion as of September 30, 2016. This growth is attributed to a greater awareness of mortgages among borrowers and higher competition from new lenders entering the market. At the end of 2016, the number of banking institutions offering mortgage loans was 28, with the introduction of two new institutions that year. The average loan size as of December 31, 2016 was TZS118 million. The report points to Tanzania's relatively smaller mortgage market compared to other East African countries, with outstanding mortgage debt as a proportion of GDP of around 0.45% at the end of 2016. Although lower than its East African neighbors, this rate is growing at an accelerated pace. The strategies of the NHC targeting high-, medium-, and low-income earners, as well as the government's commitment to reduce lending rates, are expected to boost the mortgage market and real estate sector in the years to come.