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Inflation, Interest Rates Push Developers to City Fringes

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As of April 2024, Nigeria’s inflation rate stood at 33.69 per cent, making it increasingly difficult for developers to access funding and build projects in urban areas.

In response, many developers are shifting their focus to outskirts and border towns in major Nigerian cities, where land is more affordable and housing demand is rising.

Interest rate averaged 11.89 per cent from 2007 until 2024, reaching an all-time high of 22.75 per cent in February of 2024 and a record low of 6.00 per cent in July of 2009.

The Central Bank of Nigeria raised its key benchmark interest rate by 400 basis points to 22.75 per cent on February 27, 2024, a new record high since at least 2007, and above forecasts of 21per cent.

The current lending rate is between 27.07-30 per cent, while the inflation rate is 31.7 per cent as of February 2024, according to the Nigeria Bureau of Statistics. Before the hike in the Monetary Policy Rate to 22.75 per cent, banks’ lending rate had already reached 27 per cent per year.

Following the increase recently, the commercial real estate transaction market has been significantly hindered, while the construction and development of new properties have declined due to developers’ reluctance to take on additional financial burdens and project risks.

According to data from the National Bureau of Statistics, land transactions in suburban areas have increased by 25 per cent in the first quarter of 2023 compared to the same period in 2022.

Developers are capitalising on this trend by directing their efforts towards the outlying regions, where they are constructing a spectrum of properties ranging from affordable apartments to luxurious estates.

Some of the suburbs benefiting from this trend include Ibeju-Lekki in Lagos State, Abuja Municipal Area Council in the Federal Capital Territory, and Ogun State, particularly the Obafemi Owode and Ado-Odo/Ota local government areas, among others.

While the shift to the suburbs offers a temporary relief for developers, experts warn that the long-term effects of high inflation and interest rates on the real estate sector remain a concern.

“The suburbs may offer a short-term solution, but the underlying issues of high inflation and interest rates need to be addressed to ensure sustainable growth in the sector,” said Dr. Adekunle Adeyemi, a real estate expert and lecturer at the University of Lagos.

Surge in housing costs

In an interviewthe Managing Director of Noble Grounds Ltd, Olajide Dosunmu, said the surge in housing costs is predominantly fueled by the steep rise in construction material prices, driven by inflation and the appreciation of property values.

“Over the past five years in Nigeria, housing costs have surged significantly, primarily driven by the escalating prices of construction materials due to inflation and the appreciation of property values. For instance, in areas like Mowe and Ibafo, the cost of homes has skyrocketed, with prices increasing from approximately 25m to 50m for a standard three-bedroom home.

“Similarly, in Ikeja, housing expenses have witnessed substantial increases, with prices surging from around N60m to 190m for a similar property. In Lekki Phase 1 it has increased from around 100m to 200m for a similar house. These examples highlight the notable impact of inflation, currency fluctuations, and heightened housing demand on the overall surge in housing costs across Nigeria,” he explained.

Dosumu asserted that while high inflation is a factor, developers are strategically choosing suburban and rural areas due to lower land costs and the growing demand for affordable housing, thus providing hope for a larger portion of the Nigerian population to achieve homeownership.

“The country’s high inflation rate, which has increased from 6.6 per cent in 1999 to 16.3 per cent in 2023, and currently 33.2 per cent has significantly impacted the cost of building materials and overall construction costs, pushing the price of homes beyond the reach of many Nigerians, particularly in urban areas.

“As a result, many developers are targeting suburban and rural areas where land prices are lower, allowing for the construction of more affordable housing. For instance, the cost of land per square meter in prime urban areas like lekki phase1, Yaba, and ikeja  in Lagos can reach up to 750,000.00, 250,000.00, and 400,000.00, respectively, whereas suburban land costs significantly less, about   50,000.00 in I ibeju Lekki and 20,000.00 per square meter in Mowe Ibafo.

“This price differential creates opportunities to develop lower-cost housing, which is crucial given Nigeria’s housing deficit, estimated to be between 22 million and 28 million units, one of the highest in the world.”

The real estate expert noted that over the past five years in Nigeria, housing costs have surged significantly, primarily driven by the escalating prices of construction materials due to inflation and the appreciation of property values.

“For instance, in areas like Mowe and Ibafo, the cost of homes has skyrocketed, with prices increasing from approximately N25m to N50m for a standard three-bedroom home. Similarly, in Ikeja, housing expenses have witnessed substantial increases, with prices surging from around N60m to N190m for a similar property.

“In Lekki Phase 1 it has increased from around N100m to N200m for a similar house. These examples highlight the notable impact of inflation, currency fluctuations, and heightened housing demand on the overall surge in housing costs across Nigeria.”

Dosunmi posited that the significant rise in housing costs over the past five years in Nigeria has severely impacted the affordability of owning landed properties, With prices doubling in some areas owning landed properties has become increasingly unaffordable for many Nigerians.

He added, “This surge in prices has made it difficult for individuals and families to purchase properties, especially first-time buyers and those with lower incomes. Additionally, the high cost of construction materials and currency fluctuations further exacerbate the affordability challenge. As a result, access to homeownership has become limited, widening the gap between the wealthy and the middle-to-lower-income populations.

“However there has been a surge in diaspora Nigerians’ demands for land and houses locally due to the sudden decline of the value of the Naira and this has been a major leverage in the real estate industry.

“In addition, despite the government’s efforts, such as the allocation of N 99.9bn to the Federal Ministry of Housing and Urban Development in the 2024 budget for housing, the gap remains vast. The Federal Mortgage Bank of Nigeria and other initiatives have managed to deliver only a fraction of the needed housing units.

“Furthermore, the average cost of housing in Nigeria ranges from N25m to N500m, with many urban dwellers finding homeownership increasingly out of reach due to stagnant income levels and rising property prices.”

Similarly, the Managing Director of Fame at Oyster & Co. Nigeria, Femi Oyedele, said Inflation is an economic factor that affects the standard of living.

He said, “Inflation, that is, the rate of increase in price over a period of time, is forcing some property developers to develop in the suburb/rural areas while some have stopped developing completely. A lot of property developers are in recess now, hibernating for a better day to come. The monthly inflation rates of building materials recorded between February 2023 and April 2024 have been unprecedented and ceiling-breaker.

“In the last 5 years, the price of land in Ogun State per square metre for residential, industrial, and agricultural, was N1.5m. In Lagos, for the same land uses, it was N10.25 m. Now, the price of the same land uses is N3.75m in Ogun State and N30.85m in Lagos State. While the average price for residential land is N3.5m in Ogun State, it is N35m in Lagos State.

“In terms of percentage, housing cost has risen to about 1,000 percent in the last 5 years in Lagos State and about 900 percent in Ogun State. The most affected land uses are residential, commercial, and industrial land. Companies like Mikano International Limited, which deals in generators, have decided to move from Sagamu to Benin Road. Nestle Plc also moved to Ogun State because of the high rate of land in Lagos State.”

According to the Director, School of Environmental Studies, Moshood Abiola Polytechnics, Dr Samson Agbato, the rising interest rates have led to an increase in the value of the active property market

Agbato, an estate surveyor and valuer, explained that higher interest rates can make borrowing money more expensive for real estate developers and consumers, while potentially making it harder to get approval for new applications for loans.

He said, “Higher interest rates can increase the cost of financing for real estate developers and construction projects. This could lead to a slowdown in new construction and real estate development activities. When interest rates rise, the cost of borrowing is higher. Therefore, one may pay higher interest rates on new loans and potentially be unable to borrow more. The impact on existing loans may also vary depending on whether it is a fixed or variable-rate loan.

“Higher borrowing costs deter some potential buyers from entering the real estate market or prompt others to delay their purchase decisions. Consequently, a decrease in demand can put downward pressure on property prices resulting in a market or prompting others to delay their purchase decisions. Consequently, a decrease in demand can put downward pressure on property prices or result in stagnation of market activity.”

He said real estate development can be highly lucrative, but profits can quickly erode due to cost overrun, from fluctuating labour and material costs to unexpected rises in interest rates. “The challenges faced by property developers, owner-occupiers, and commercial landlords, as well as lenders at a time like this are enormous.

The Executive Secretary/Chief Executive Officer, Mortgage Banking Association of Nigeria, Dr Adedeji Ajadi, said with the recent hike in rates by the Central Bank of Nigeria, all rates are expected to go up, adding that the Monetary Policy Rate is the benchmark rate that drives other interest rates in the economy.

He urged the government to intervene in the housing and mortgage sectors of the economy to maintain affordable rates for citizens, given the strategic positioning of the sub-sector in supporting the provision of shelter, financial security, and overall economic development of the nation.

Poor mortgage system

Nigeria’s housing shortage still persists, despite the real estate industry contributing 5.64 per cent to the country’s GDP in 2022. The Federal Government would need to spend N21 trillion to address the country’s 28 million housing deficit. This is to meet the needs of a rapidly growing population, which is estimated to be 219 million.

The country’s poor mortgage system and economic crunch have made it difficult for many Nigerians to have a roof over their heads. This is compounded by a lack of finance, a dearth of long-term loans, and the high interest rates that lenders demand. Many depend on personal savings to build a house.

The high unemployment rate in Nigeria, which the Nigerian Economic Summit Group predicted would hit 37 per cent this year, and the low disposable income of many Nigerians have made it difficult for many to afford a house, experts said.

The Executive Secretary of the Association of Housing Corporations of Nigeria, Toye Eniola, disclosed in an interview that the mortgage system in Nigeria was crawling.

He said, “The mortgage system is seriously crawling. We have some enabling laws that are supposed to drive the mortgage system in Nigeria but they are not well implemented. We have mortgage banks that are in the business of buying and selling, but not in the actual business of mortgage because the majority of them do not have the funds to give out.

“Virtually every mortgage bank in Nigeria depends on funding from the Federal Mortgage Bank. Funding from the Federal Mortgage Bank cannot go around to everybody. We need a serious funding structure in the mortgage market to make it more vibrant.”

According to him, there should be an enabling law that will grant a provision for foreclosure.

He added, “We have a very bad law in Nigeria that makes it easy for people to hide under it to perpetuate illegality. We need a foreclosure law that once you defraud on a mortgage, you will be found culpable. This will attract investors to pump money into the mortgage market.”

Speaking on the issue, a mortgage banker, Bukola Jegede, faulted the country’s mortgage system, describing it as nonexistent.

She said, “The interest rate on any mortgage is double-digit and it is around 28–30 per cent. It is only a ritualist or a fraudster who can take a mortgage with that kind of high interest. The institution here is not like we have it abroad, where they get a single-digit interest rate.

“It is true that the Federal Government-owned mortgage institutions charge six per cent interest. For other mortgages, you cannot get anything less than 18 per cent, which does not allow the mortgage system to thrive. Also, most mortgage institutions do not do long-term lending. They only do five years maximum because they want their money back as fast as possible. After all, the longer loans are with Nigerians, the more difficult it would be to get them back.”

While asserting that the country’s mortgage system was faulty, another mortgage banker, Nnaemeka Omeh, noted that the system was characterised by flaws and the major issues were the high interest rates and the securitisation process.

Attributing the challenge to financial incapacitation and liquidity, the Managing Partner of Fonahanmi Idris & Associates, stated that the country has the capacity and potential to harness the mortgage system.

He said, “We are supposed to lend a huge sum of money for a long period of time, but most of what we have in Nigeria are short-term deposits because the mortgage banks want quick terms, and it has become like a term loan.

“Most of these mortgage banks do not have the capacity, even the Federal Mortgage Bank of Nigeria, because they do not have enough money to support the mortgage banks.  Even when they lend, some of the people do not have collaterals, even if they have collaterals, some of their titles have challenges that make it difficult for the mortgage banks to accept them.”

Meanwhile, Dosunmu said there was a challenge with the Nigerian mortgage system because the government was copying the developed world model.

He said, “Our major challenge is inflation, which is over 33 per cent. The problem is that before any bank can give a loan, they would add the bank to bank lending rates, the monetary policy rate on inflation, and then the bank would add its charge. The inflation is because the naira would have devalued at the point of mortgage repayment. Hence, the money borrowed would increase as the years go by.

“To solve this problem, it is the government’s responsibility to bring down soaring inflation.”

The Branch Manager of Wema Bank, Opebi, Ikeja, Lagos, Shola Adio-Moses, said that in developed countries, the government was a major player in the thriving mortgage sector.

She said, “Unlike developed countries with avenues for long-term mortgages, countries like Nigeria cannot. What we do in Nigeria is commercialise mortgages by giving them tenure of five years, or at most seven years.

“Mortgage is not an industry that controls it; it requires a holistic approach whereby the government would sit with the finance industry to collaborate.”

Punch