Insecurity, cost of building materials threaten Nigeria’s real estate growth
For two straight quarters after it exited recession in the last quarter of 2020 with 2.81 percent growth, the Nigerian real estate sector has recorded impressive positive growth. The sector expanded by 1.77 percent and 3.85 percent in Q1’21 and Q2’21, respectively. The latest 3.85 percent growth is its highest in six years.
Experts have attributed this growth to a number of factors. Bismarck Rewane, CEO, Financial Derivatives Company (FDC), links the growth to improvement in economic activities, which is partly driven by increased investment as interest rates declined.
Damola Akindolire, managing director, Alpha Mead Construction Company, says the growth is coming from two major fronts. One is increased investment interest, which the sector is enjoying due to low returns on other instruments such as equities, treasury bills and stocks. The other factor, according to Akindolire, is the exchange rate that gives Diaspora Nigerians more opportunity to invest back home with stronger currency advantage.
“But it is still early days to clap for the growth the sector has seen,” says Yemi Madamidola, an estate manager, explaining that the growth is still fragile given the many threats to the sector chief among which are rising insecurity and building material prices that have seen 50 percent rise in most cases.
At his monthly breakfast meeting (economic briefing) in August, Rewane noted that besides insecurity and building material costs, growth in the real estate sector was also threatened by the planned re-introduction of Lekki toll in Lagos, poor rail networks, virtual work and e-commerce.
The real threat to the real estate sector growth is building material prices. According to Kunle Adeyemi, CEO, Sterling Homes, the price of cement within the first quarter of this year moved over 70 percent.
“So, the dream of an average Nigerian to own a home is now very slim. For us as developers, it is a huge challenge; we already have the prices of houses that are still being built. At the current cement price, you cannot deliver at that price,” he says.
Kunle Awobodu, national president, Nigerian Institute of Building (NIoB), agrees, stressing that though developers have gone back to site, they are constrained by the sharp rise in the cost of building and finishing materials such as aluminium windows, roofing sheets, iron rods and cement.
“As the prices of the materials increase, there might be a tendency for intending homeowners to abandon their housing projects for a while until they can afford to continue,” he says.
“I believe that the rising cost of building materials (especially when it is abnormal) will pull the purchasing power of intending homeowners and could further increase the number of abandoned building projects in the country,” he adds.
A recent survey reveals that the prices of steel, tiles, doors, and Plaster of Paris (PoP) cement, among others, have risen significantly between March 2021 and August 2021. The price of steel, for instance, which was N360,000 per ton in March 2021, increased to N441,000 at the end of August 2021, representing a 22.5 percent increase within the period under review.
For these and other reasons, the outlook for the sector in the third quarter of the year is not so bright. For instance, rents are climbing in Lagos due to high inflation and the rising cost of building materials.
Rewane pointed out that in some market nodes in Lagos, particularly Ikoyi and Lekki, vacancy factors increased significantly. Vacancy factor is defined as the number of empty houses relative to occupied buildings. On a street of 50 houses, if 10 are empty, that means there is a 20 percent vacancy factor there.
“Vacancy factor index increased to 33 percent from 32 percent in Q2’21 in Ikoyi and that was due to high rents for big corporate buildings, and also because some rents are priced in dollars,” Rewane said.
He noted further that virtual work was reducing demand for office spaces; vacancy factor index fell to 13 percent from 21 percent in Q2’21 due to an increase in demand for commercial real estate and increased supply of short-lets and serviced apartments.
Rewane cited a recent housing trend in Lagos that seems to be crowding out self-contained apartments, which is partly due to high default rates among low-income earners, adding that new buildings were mostly 2 and 3 bedrooms, serviced and shared apartments and duplexes.
He said serviced and shared apartments were mostly on the Island, as investors were delving into commercial real estate in that area. “There is a new trend of short-lets and Airbnb leading to shortage of residential real estate; this could be a threat to hotels,” he said.
Amid all these, analysts still hope, saying that improved economic activities and low-interest-rate environment would support the real estate sector growth in Q3 ’21. The demand for commercial real estate, especially office space, will continue to rise as more companies resume physical work.
On the other hand, the analysts see demand for residential housing falling as consumer disposable income remains squeezed. “Luxury real estate like hotels will keep springing up in highbrow areas,” they said, advising on the need for more government interventions to address housing deficit in the country.