A sizeable number of Nigerian real estate firms are left with the option of raising funds through equity to debt as bank lending to the sector has maintained downward trend in the last five years.
Despite reporting 56.69 percent drop in Non-Performing Loans (NPLs) in 2019, banks’ confidence in the sector waned as credit allocation to real estate tumbled to its lowest level since 2015, at 3.62 percent.
Sectoral credit allocation to real estate shed N121.52 billion year-on-year from N710.20 billion in Q3 2018 to N588.68 billion in the corresponding quarter of 2019.
A breakdown of bank lending to the industry shows that of the N16.25 trillion combined credit extended to 17 sectors by the Nigerian deposit money banks, real estate got N588.68 billion in the first three months ended September 2019. While the credit for Q3 2019 was N5.72 billion higher than the N582.96 billion for Q2, the former as a percentage of the gross loan, at 3.62 percent, was lower than the latter that reported 3.85 percent.
“The decline in bank lending to the sector again shows that it is struggling. Our paper on Unlocking Dead Capital from earlier this year showed clearly both the impact of a vibrant real estate sector,” said Andrew S. Nevin, chief economist, PwC.
The NPL posted by the real estate sector was down by a whopping N74.02 billion from N130.58 billion in the third quarter of 2018 to N56.56 billion in the corresponding quarter of 2019, which shows the sector should have been more attractive to the lenders.
For industry investors, the low credit to the sector may imply that they would have to concentrate on sourcing for funds outside the shores of the country. The repayment of such funds may come with an interest rate problem as the naira has remained less competitive to the US dollar, for example.
“Finance is the key strategy to everything. The reason why the prices of properties are high is because the funding comes at a cost, and all those costs are buried into cost of construction,” Adekunle Abdul, managing director, Metro & Castles Homes, said.
Abdul said while it may cost as low as N25 million to put a property, it may be sold for, say, N40 million.
“By the time we bury in the interest rate, we may increase the selling price by 13 percent to cover for the finance before we start having other government agency costs, cost of survey and the likes,” he said.
Despite its large population and self-acclaimed biggest economy in Africa, Nigeria is crawling behind its peers in terms of homeownership level.
According to the Association of Housing Corporation of Nigeria (AHCN), an umbrella organisation for all federal and state housing agencies, more than 90 percent of new homes that are built in Nigeria utilise funds from personal savings.
Whereas homeownership level is 84 percent in Indonesia, 75 percent in Kenya and 56 percent in South Africa, it is only 25 percent in Nigeria whose population is estimated at 200 million. Going by United Nations projection, the country’s population will be as high as 400 million in 2050.
“The major issues that continue to affect housing delivery in Nigeria, which also account for the wide demand-supply gap, include constraints related to the high cost of securing and registering secure land title,” said Nasir El Rufai, Kaduna State governor.
The high cost of properties in a country like Nigeria, where 80 percent of the population lives on less than $2 a day, and the almost non-performing mortgage industry have kept the housing deficit on an upward trend. Africa’s most populous nation has a housing deficit of more than 17 million units.
Nigeria’s five-quarter recession which eroded the purchasing power of consumers is also one of the factors that have left developers handicapped in providing inventories that match the required housing demand.
The Nigerian economy continued to expand at a sluggish rate in the third quarter of 2019 with the National Bureau of Statistics (NBS) reporting a 2.28 percent growth for the period.
Although the fastest growth in four quarters, the GDP rate remained lower than the country’s population growth rate of 2.6 percent, a trend that has been constant since 2015.
Speaking further, Nevin said real estate is the most important sector to create jobs and alleviate unemployment.
“No other sector can have the multiplier effect of real estate and no other sector can compensate if real estate languishes. So it is disappointing that the sector continues to not grow robustly,” he said.
The Nigerian real estate sector continued to expand in recession in the third quarter of 2019 as the property industry reported -2.31 percent growth. Although the fastest growth in six months, the sector’s growth rate in the review quarter remained lower than the first-quarter growth of 0.93 percent, the first positive value it reported since 2016.
The third-quarter contraction of the real estate industry confirms that yet again the sector has slipped into recession, a cycle of contraction recognised after two consecutive quarters of economic decline.
“Not much progress can be made in this sector with a large portion of Nigeria’s population outside the housing market and mortgage remains too expensive for many people to access and afford,” Adeniyi Akinlusi, CEO, Trustbond Mortgage Bank, said.
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