When BusinessDay asked Metro & Castle Homes, a real estate development company, what it will take for a developer to construct a property that can be sold for less than N10 million, it said the solution was access to cheap funds.
“Finance is the key strategy to everything, the reason why the prices of properties are high is because the funding comes at a huge cost, if you are going to the market to look for $2million to fund a project, it will come at a cost and all those cost are buried into cost of construction,” Adekunle Adbul, Managing Director of Metro & Castle Homes told BusinessDay in a recent interview.
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According to him, the actual cost of developing a house may be less than N25 million but that same property can be sold at N40 million, the selling price may be as a result of factors like interest rate, which can cost as much as N5 million coupled with other government agency cost.
“So I think if we have a guaranteed market and the bank is ready to finance, it will be a different ball game. Even if I make N3million from one house, I won’t mind as long as it is bought as I construct but in a situation where you don’t know when the house will leave the market and the cost of finance is high, we have to make provision,” Adbul explained.
The MD added citing an example of an Air Condition producer who manufactures 100 products in a day, and is sure of selling at least 95 of such products. “I can tell you that my margin will drop drastically, but if I don’t know when I will sell it, I will have to factor in time, and then interest rate, and so that is what increases price.”
For over a decade, Nigeria has recorded more than 17 million housing unit deficits, a country whose annual population growth rate has been less than economic growth pace since 2015.
According to the Association of Housing Corporation of Nigeria (AHCN), underdevelopment of Nigeria’s mortgage industry in driving home ownership is worrisome as more than 90 percent of new homes utilise funds from personal savings for incremental construction.
Developers in Nigeria are continuously in search of viable alternatives sources to funding real estate projects in a country where cost of funds has made bank credit inaccessible, unaffordable and unattractive to the sector.
Commercial banks are not an ideal or suitable medium for financing real estate projects because whereas commercial bank deposits are short-term in nature, real estate is for the long term which is usually vulnerable to the vagaries in the economy such as changes interest rates, exchange rates, and the rate of inflation.
“If the banks can finance, we can be making N2million on each property we wouldn’t mind, as long as people are taking it off the market, and I am able to move to the next project but as they say, the unknown will give you doubt to want to increase your price so that it covers the unknown,” Adbul said.
Despite the real estate sector getting out of the woods as it broke its 12 consecutive quarters of decline by recording 0.93 percent growth in the first quarter of 2019, banks’ confidence in the sector waned as credit allocation to real estate tumbled to its lowest level at 3.92 percent in four years.
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Of the N15.21 trillion combined credit dissipated to 17 sectors by the Nigerians deposit money banks, real estte got N596 billion in the first quarter of 2019, N26 billion or 4 percent lower than the N622 billion received in the preceding quarter.
With population that is more than 100 percent less that of Nigeria, mortgages in South Africa account for almost 30 percent of total credit, the largest component of banks’ assets, which amounted to about ZAR5.14 trillion ($382 billion) at the end of January, according to central bank data.
