For players in Nigeria’s real estate sector, it’s been half a decade in the winter. Hit hard by the recession of 2016 which caused a 6.86% decline in the sector compared with the growth of 2.11% recorded in 2015, the post-recession fragile convalescing period was dealt a further blow by the Covid-19 pandemic. Post Covid, the sector is confronting another monster in the free fall of the naira and the accompanying inflation.
The rapid depreciation in the value of the local currency has continued to have telling impact in all sectors of the Nigeria’s economy – from aviation to manufacturing and everything in between – and for real estate, the past few years and months, many say, have been traumatic.
The bulk of input materials in the sector are imported. In the last 12 months, the naira has gone from less than N400 to the dollar to N700 to the dollar at parallel market. The rapid in drop in naira value has translated to spike in prices, which naturally means that the end product is increasingly being priced of the reach of many potential buyers.
Sources in the industry say the sale of some of the high-end properties have also been put on hold since the naira began its more recent free fall.
For developers, it is double whammy. Assets whose sale are dollar-denominated have remained on the shelf months after expression of interest. Some projects with timeline delivery have been delayed or stopped mid-way into construction. The bulk of facilities available to developers are short term, and for those denominated in dollar, loses begin to accumulate long before workers mobilize to site.
“Assuming you brought in $1 million and you change to N500 million today,” said Dr. Alex Otti, former Diamond Bank CEO, “but tomorrow you have to take it back, and you have to spend N700 million to get the $1million, from that point of view, you understand that it’s tough.”
Historically, some of the biggest challenges in the sector have been high interest rates and forex volatility. Recent spike in inflation have prompted the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to raise rate to 14 percent in bid to contain it. But such measures work better when the inflation trigger is excessive demand due to too much money in circulation. In Nigeria’s case however, people are struggling to get by, and inflation has little to do with demand, but everything to do with supply challenges. Thus, despite CBN’s efforts inflation surged to 17-year high in July at 19.64%, up from the 18.6% recorded in the previous month of June 2022.
Real estate has not been spared, and compounded by exchange rate volatility, the sector has continued to battle headwinds.
“Most of the loans available, we get are at double-digit rates and this makes it very difficult to get a decent return on investment,” lamented Uzo Oshogwe, Managing Director of Afriland Properties Plc. “The loan tenure is another challenge faced by developers; Short-term loans are not suitable for infrastructural projects which are long term in nature.”
Oshogwe who highlighted the effects of the volatility of the dollar on projects, said, “the private sector, federal government and all relevant regulatory agencies need to come together to develop a framework that will hedge against these challenges and agree on key measures that will promote cheaper constructions and drive infrastructural development in the country.”
It is not in doubt that the sector in Nigeria has huge potential. A 2020 real estate industry report 2020 by Agusto and Company valued the sector at $3.96 trillion. But the sector, like Nigeria’s itself, has remained a clay foot giant hobbled by lack of access to funding, inflation, forex volatility among others.
The devaluation of the naira has affected the cost of building materials as a spike has been recorded over the past few months due to the Nigerian construction industry heavily dependent on the foreign importation of raw materials and equipment for construction. With the naira on a free fall, the cost of purchasing these raw materials and equipment have spiked, and so has property prices while wages have not increased and unemployment is rising.
The National Bureau of Statistics (NBS) GDP report Q1 2022 report showed that quarter on quarter, GDP of the real estate services (nominal terms) came at -26.75% in the first quarter of 2022, an indication of the struggle it is facing.
Abdullahi Adamu, Managing Director of HXH Limited, a leading residential development company in Nigeria, in a recent interview opined that the cost of building materials, especially imported ones, has increased and this will be passed on to off-takers, leading to delays and higher prices of real estate products.
“The scarcity of skilled labour, price hikes, foreign exchange constraints and supply chain bottlenecks are among the challenges that the sector is facing. Not to mention the complex work of managing the multiple vendors required to complete a single unit. These factors have resulted in not just significant costs overrun and increased project costs but also setbacks in the pace of construction and consequential delays in the delivery of homes.
“Also, existing projects may suffer some setbacks including delays because of the naira depreciation. Similarly, new housing projects will be impacted depending on source of funds.
“But I tell you, despite the challenges, this is the best time to invest in real estate, buy properties because of the appreciation value. The cost of property will double by next year,” he said.
In his own intervention, Adeniji Adele, an estate surveyor and valuer, blamed the crisis in the foreign exchange market on the bad implementation of various government policies over the years as a result of double standards and inconsistency.
Adele, who is the president of International Real Estate Federation, Nigeria chapter, noted in an interview that, “the market reacts negatively to the continued rise in exchange rate which has affected cost of building materials and labour in the built environment; so real estate pricing will never be the same again.
“The market price has gone up, while cost of borrowing is higher and financial institutions are not willing to lend to grow real estate stock as they prefer to advance facilities on short-term basis.”
– Felix Onajite writes from Lagos, Nigeria.