CBN rate hike tests housing, construction industry resilience

The hike in interest rate by the Central Bank of Nigeria (CBN) will test the resilience of the housing and construction industry in terms of innovation and creativity on the part of developers, experts have said.

According to the experts, although most developers and sundry investors do not go for bank credit to do their developments, they will, nevertheless, be caught in the web created by the rate hike along the value chain.

They explain that the rate hike will affect manufacturing and importation which, in turn, will affect developers through increases in the cost of building materials, leading to higher cost of construction.

What the rate increase means for a developer, the experts explain further, is that he has to pay more to get materials such as cement and rods because the producers have also paid more to put them on the market. Besides the rate increase, the cement producer also has high energy costs to contend with, according to the experts.

“We are not only talking about building materials, especially cement and iron rods whose prices are already on the rooftop. We are also talking about the cost of labour. Most of the big ticket developers source their labour from abroad which means they have to pay a higher price to hire them,” Adeniji Adele, an estate surveyor and valuer, explained to BusinessDay.

“Yes, we know that many developers don’t borrow money from the bank to build as they depend on off-takers to raise funding, but one way or another, they are affected by this rate hike which is coming at a wrong time in the economic history of Nigeria,” Adele added.

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On her part, Udo Okonjo, Founder/CEO, Fine and Country West Africa, bemoaned the rate hike, describing it as unfortunate, coming at a time when, according to her, the country is still reeling from the naira devaluation and the lingering impact of Covid-19 pandemic.

“The impact is obvious and everyone is feeling it. We cannot wish away the impact because the market is already reacting to it. The positive side, however, is that it is going to task product suppliers more on innovation and creativity. You just have to be creative with your offering because the prices are already up. Affordability is going to be a big issue,” Okonjo said in response to this reporter’s question.

“We need to begin to look at how we can use technology to do what we are doing so as to increase homeownership in the country,” she advised.

Reviewing the rate hike further, Johnson Chukwuma, a civil engineer who is also an estate manager in Lagos, noted that the ultimate loser in all of this is the consumer whose income has already been rendered valueless by a terrifying inflationary regime.

“Whether you are talking about foodstuff, household items, manufactured products or housing, the consumer’s purchasing power has been crimped significantly,” Chukwuma said, adding that prospective home buyers have to have their dreams deferred.

Continuing, he said, “we have been worrying over the housing situation in the country where the majority of the populace cannot afford what the developers have on offer. Now, it is going to be worse because developers have to transfer any extra cost to buyers.”

Gbenga Olaniyan, CEO, Estate Links Limited, had at BusinessDay’s Property Investment (PRINVEST) Conference 2022, disclosed how his company started planning a moderate estate development with an estimated construction cost of N1 billion.

“Just six months into the planning, trying to perfect our documentation and get the necessary approvals from the authorities, we were forced to review our cost and the reality before us was that our projected cost has shot up to N1.7 billion. Because we are not Red Cross or any other charity organization, all these costs are to be transferred to buyers,” he said.

Early in the week, precisely Monday and Tuesday, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) came up with the decision to move the interest rate from 11.5 percent to 13 percent, meaning that it now costs more to borrow money from the deposit banks.

Godwin Emefiele, CBN governor, explained that the increase in the rate which had been at 11.5 percent since September 2020, was aimed to stem the rising rate of inflation in the country, while still cautiously ensuring economic growth.

Experts note that the rate hike is a retreat from the apex bank’s earlier stand that raising rates would not positively impact inflation. They believe that the aim of the rate hike is to mob up perceived excess liquidity in the financial system by encouraging people to invest in government bonds and other instruments in expectation of higher yield.

Besides the rate increase, the monetary committee also retained the asymmetric corridor of +100/-700 basis points around the MPR; it retained the cash rediscount ratio (CRR) at 27.5 percent while the liquidity ratio was also kept at 30 percent.