Covid-19, FX, interest rate top defining moments for real estate in 2020

More than anything else that could have shaped activities in the Nigerian real estate sector in 2020, Covid-19 pandemic, interest rate regime and foreign exchange were top of the defining moments for the struggling sector in the out-going year.

In Nigeria, Covid-19, the global health emergency, really dealt a deadly blow on the real estate sector and this was made worse by the EndSARS protest in October, when public and private assets with an estimated value at N700 billion were destroyed in various parts of the country.

These contributed to the worst recession in four years the sector entered into with -21.99 percent contraction in the second quarter of 2020, according to figures released by the National Bureau of Statistics (NBS).

The NBS report noted that the measure of the total monetary value of economic activities in the sector in Q2 was –18.15 percentage points lower than the -3.84 percent growth recorded in the corresponding quarter of 2019, and –16.72 percentage points relative to the -5.27 in Q2 2016.

BusinessDay survey during this period showed that retail, hospitality, and conference/event centres were top on the list of sub-sectors that were affected the most since February 2020, when Nigeria reported its first case of the virus.

While lockdown and social distancing rules outlawed public gatherings and prevented people from going for shopping or inspecting new projects, thereby reducing market transactions, movement restrictions and ban on international flights put an end to business travels, crippling activities in the hospitality sub-sector.

“Retail has taken a hit. It is one of the big losers, followed by the hospitality industry. Whereas the social distancing rule reduced occupancy rate to 60 percent of the full mall capacity, footfall (shoppers’ traffic) went down because consumer purchasing power also dropped, Gbenga Olaniyan, CEO, Estate Links, confirmed.

Paul Onwuanibe, CEO, Landmark Group, said, “Though it is difficult to quantify, the loss investors incurred in the conferences/events centre sub-sector was substantial,” estimating that operators of event centres lost over N800 million in the first three months of the pandemic.

It was not, however, all songs of woe for the sector as it recorded some positives or upsides in the year under review. “Because of the pandemic, EndSAARS protest, and lately inflation and recession, it seems everything went wrong for real estate in 2020,” Daramola Akindolire, managing director, Alpha Mead Development Company, noted.

“But that is not the case,” he added. According to Akindolire, the year, in spite of all odds, recorded some positives, citing the Central Bank of Nigeria’s (CBN) efforts to drive down interest rate, which helped to reduce the cost of funds down to 13 percent at some points.

“Mortgage rate came down to 17 percent and this impacted positively on demand for both mortgage and real estate assets,” Akindolire explained, adding that the nature of other investment asset class such as equities, bonds, treasury bills, etc, swayed interest to real estate such that more investible funds found their way into the sector, making it more attractive for investors.

A combination of these factors, perhaps, explained the signs of rebound the sector showed in the third quarter of the year. “Real estate is about the most attractive currently and we have seen a lot of traction during recessionary times,” Tayo Odunsi, CEO, Northcourt Real Estate, said.

The sector also recorded some positive movement in Q3, as reflected in the increase in bank credit to the industry that rose to N666.73 billion, the highest in almost two years, but lower than the N710.2 billion reported in the comparable quarter of 2018.

According to selected banking data by NBS, sectoral credit allocation to the sector was up by N83.77 billion year-on-year from N582.96 billion in Q3 2019 to N710.20 billion in the corresponding quarter of 2020.

On the flipside, the meteoric rise in foreign exchange rate from N360/$ to the current N460-N470/$ was a major negative development for the real estate sector as it affected supply significantly just like Covid-19, which reduced construction activities by more than 50 percent.

“Besides disposable income, which has gone down considerably, prices of building materials, especially cement and re-enforcement (rods), have increased by 60 percent. These are products of the economic disruptions we have seen in the course of the year,” Akindolire noted.

According to him, even though commercial office space struggled, warehousing and e-commerce flourished because of Covid-19 and its social distancing rules.

The residential real estate story is mixed, he said, noting that the year saw several cases of rent default, but some developers like Alpha Mead was upbeat with its Rent-4-Let product that charges monthly rather than quarterly or yearly rent.

“With this product, we have 200 apartments under management with zero payment default. We believe that the rental market is viable, but landlords will feel the impact of the current market slowdown if they don’t innovate,” he said.