Property developers leverage off-plan sales, joint venture to stave off credit squeeze

As banks become increasingly lending-shy to property investors and developers, especially those playing at the middle and low-end segment of the market, off-plan sales and joint venture initiatives have become major strategies for these developers to stave off credit squeeze.

Banks are generally choosy with the kind of real estate projects they finance and where they choose to fund a project, the interest rate charged on the fund is usually high, hovering between 18 percent and 22 percent. In some cases, they demand off-takers that must not be less than 50 percent of the entire project.

“The truth is that there is a big problem in the funding aspect of the real estate business, but if you are a fish in the river, you must learn how to swim because you have to survive. We are in this river and, therefore, we must swim to survive,” said Uche Ajaere, managing director, Lordwin Gate Real Estate Limited, in an interview with BusinessDay.

“Because bank loans come with very high interest rate, we devise other ways of getting income to carry out our projects. We do much of off-plan sales. We find money, buy land, develop and sell off-plan which we consider a win-win situation for the buyer and the seller,” he said.

Another way investors go about their business without undue exposure to bank loans is through joint venture initiatives, according to Gbenga Olaniyan, MD/CEO, Estate Links Limited.

“A lot more people are now doing joint ventures. People have started realising that you don’t need to find all the cash to develop your property,” Olaniyan said, adding that joint venture initiatives cut across private and public sectors, comprising individual, private equity, institutional investors and government.

While Ajaere sees a win-win situation for parties in joint venture initiatives, Olaniyan says such initiatives are sustained by investor confidence in the real estate sector of the Nigerian economy, estimating that investor confidence has risen about 80 percent, up from 40 percent about 12-18 months ago.

The confidence level in this sector is such that Nigeria has become an investment destination for about $652 million raised not too long ago by international private equity firms.

Currently, many foreign investors are in the country, including a Gambian property developer who is in Port Harcourt, Rivers State, developing an estate that promises to be one of the largest mixed-use estates in the oil-rich region.

BusinessDay had reported earlier that The Artee Group, which already runs Spar and Park & Shop in Nigeria, is planning to open 100 shopping outlets in Nigeria in the next six years and the proposed outlets will come as hyper format units comprising between 400 and 500 shops. Shoprite, the South African retail chain, is also in an aggressive expansion of its outlets in the country.

“We see demand in this market and are, therefore, making strategic investment in order to tap into the opportunities which the market offers,” a private equity investor disclosed to BusinessDay in an interview.

The investor, who did not want to be named, added that investors were putting their money into the market because “Nigeria has a large market with its over 160 million people who need homes, office spaces and shops for their businesses”.

Because Nigeria is a trading economy, the commercial segment of the property market has all the potential for good returns on investment, said Olaniyan, adding, “This segment of the market is booming despite the relative lull in the upper-end residential segment, and this is because Nigeria is a trading economy”.

Adebayo Adeleke, MD/CEO, Lancelot Ventures Limited, says investors see commercial real estate as the area where the economy is actually going to boom.

“As it is now, the level of development we have in the economy actually justifies the demand we have seen in this segment of the market,” Adeleke said, expressing hope that the confidence level in the market would see further increase as investors begin to take in the country’s new GDP value.

CHUKA UROKO