Gbenga Olaniyan, a Fellow of the Nigerian Institution of Estate Surveyors and Valuers, is the Chairman, Estate Links Limited. Olaniyan is also an estate developer playing at the middle and luxury end of the market. In this interview with Chuka Uroko, Property Editor, he highlights major events that shaped the real estate market in the first quarter of 2024—a period he described as tough and turbulent for all players in the market. He also speaks on the crisis in the cement market, and on the near-comatose mortgage industry in Nigeria and offers solutions. Excerpts:
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The first quarter of 2024 was a turbulent one, talking about inflation, high energy cost, volatile exchange rates and building materials price crisis. How will you describe that quarter in relation to real estate?
That quarter was tough in every sense of the word. Talking about building materials, I was caught up in the entire price crisis. I am doing a project and we had a fixed contract with a contractor, which was signed in January last year. But a contractor that had deposited money for cement at N5,000 went back to collect his cement and was told, “we don’t have cement for you.” Meanwhile, they are selling the product at 10,000. So, they will tell people to inform those that want to buy at 10,000 to come. Because of that, some fixed contracts are difficult to enforce in its entirety. However, a number of credible contractors who value relationships and believe in corporate credibility have decided to shoulder the losses and, in some cases, share it with the client. The increase in the cost of building materials has caused a lot of havoc for a lot of building contracts.
It is also causing several developers to renege on their promises. A developer who had told buyers that he was selling his house off plan for N100 million, says it is now costing him over N100 million to produce the house. This is unprecedented and so, he is ready to refund their deposits. So, we are in a situation where some buyers who have deals that have been pre-signed but not delivered are going back to the table to negotiate.
Now, I would say this, coming from the angle of people having their fingers burnt. In times of hyper-inflation, a lot of projections are thrown out of the window and that was what we saw in the last six months. That is from both cost and revenue side.
But by the end of March which is also part of the first quarter, we saw the Naira bounce back heavily. Although, the effect of this will be felt in the second quarter, not now, because the person who bought his tiles for N20,000 will intend to sell that supply at perhaps N30,000 until it finishes. So, I see several stocked building materials that will be difficult to offload because those doing big projects are now taking the cheaper dollar to import from outside.
All these things affect the market in its entirety. I know several developers who were about to start in January or in December but have decided to wait, saying they will not build at the new price unless they are convinced that they can sell at the an increased selling price to avoid building at a loss.
Are you saying then that the sector slowed in terms of growth? How would you measure the growth?
Well, what I would say is that, clearly, within this period, there’s been stagnation, because a number of those who were meant to start did not start, and those midway fall into different groups. Some have stalled, because of lack of funds to inject at the inflated costs, others have stalled, because they want to invest their funds in an area with more aggressive returns, to hedge against losses before continuing the project, and then you have developers who have just continued to trudge along.
Without knowing the actual statistics, my guess would be that for every hundred projects that would have been developed, under the conditions of two years ago, I would say maximum of 70 were delivered. That means that the market slowed by about 30 percent.
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In real estate, it is said that people don’t wait to buy, rather they buy to wait. Will you advise any investor to invest in real estate in Nigeria today with the parlous state of the economy?
I would say yes, and I’ll tell you why. My advice for locals will be different from foreigners. For locals, I have example of a property whose price went from N60 million to N85 million in 6 months. There’s no way you’d have kept your Naira, apart from some businesses, or some stocks; there’s no fund that would have given you that kind of ROI.
If you have cash, it is time to invest because the only direction the real estate market is going is upwards. Meanwhile, as an investor, you’re not the one buying building materials and all that. What we are saying is that if you buy a property today at N100 million, you should perhaps see it hitting about N130 million at the end of the year, a 30 percent appreciation.
But that’s Naira for Naira transaction. For a foreign buyer, again it all depends on how our currency behaves. Imagine someone who brought in dollars at N750 to $1 in May last year. If you then sold two months ago when the naira was N1500 to $1, you would need to have sold at a 100 percent profit to break even and return your funds in USD.
If you are a foreign investor, you must be in the game long term, because if it is to come in now, invest to sell next year, you might be selling at a time when the dollar is at an all time low or the Naira is at its worst. this is largely unpredictable. I always advise foreign investors to play the long term game. The Nigerian real estate market is very rewarding. There is always a good time to sell. You make money when you buy; you also make money when you sell, but you wait for the right time. As long as it’s not a fire brigade approach, you will be fine.
There’s this aspect of real estate which seems as if the more you look, the less you see, and I’m talking about mortgage. What is happening in that sub-sector?
This is the worst time to discuss mortgage because the CBN’s rate right now is 24.5. Let’s not deceive ourselves. No bank will give you money for less than that unless you are a preferred customer, and the bank is bent on helping you. You know the story about the mortgage system in Nigeria. There are 200 million people with perhaps about 10% of these people who are mortgageable.
How much money do you have for this group of people in pension funds and all that? To be honest, until the government consciously steps in and directs things, nobody would blame the banks for not giving you interest below 20 percent which is not sustainable. In South Africa for example when mortgage rates hit 11 percent, the common man was weeping because, once you hit double digit, it is so difficult to keep up with repayments.
Would you advocate for another round of recapitalization for the mortgage firms?
What is most critical is better regulation because, take this from me, if you go to some mortgage banks today, they’ll give you double-digit for your deposit. So, if mortgage banks are taking my money at 12 percent, they will lend at no less than 18-20 because we all know the cost. The sector needs more regulation and more funding as you have said.
When money comes in, funds are meant to flow through them to eligible people who would take mortgages. Whatever regulation they have is very different from the regular banks. Even in advanced countries, we have banks that do what they call no-doc mortgages especially in the US. They call that no-doc loans, which means no-documentation for people who are unable to get mortgages, maybe because their credit has been messed up and all that. Foreigners also benefit from this.
In the no-doc mortgage, your deposit will be about 30 percent, because the bank knows you are not a credible or easily trackable borrower, and they know they are holding 30percent, and they have the asset. If you default, you are fined, and their rates are usually quite high ( about 5 points above average rates). There you also have eligible borrowers who go through the regular mortgage banks, and put down about 5 percent. In fact, there are some people who put down no deposit, and get some credit towards their legal fees and closing costs. So, you get your keys without paying a penny, and then you start paying your mortgage. A lot of that is done in the UK, US, and different places. We have a long way to go.
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Let’s go back to the issue of building materials. When you look at a product like cement, some of the raw materials used to produce it are sourced locally, yet the prices are high, what could be the reason for this?
Let me start with the one that is inflicted by the suppliers. A lot of suppliers move their prices in accordance with the movement of similar imported goods. Ours is a capitalist country. They say it is a way to make more money but, having said that, every local business has some imported components of whatever they are doing.
The machines are imported, the price of diesel to transport the goods and trucks has gone up. The problem really is that the inflationary trend is higher than the actual impact of the cost of the dollar on the economy. So, yes, the expectation is that it will go up, but I think our people are also taking advantage of the adverse situation in the economy. With the naira bouncing back, the expectation is for prices to come down. However lets wait and see.
What exactly is the problem in the cement market. If you look at the producers, you see they are not many. Each time you talk about these producers, the mind goes to just three of them. Are these fellows monopolists?
I would say yes, to a large extent. Imagine if there were 15 of them. The price would be more competitive. Under the current situation, whether they’re friends or not, they would come together and agree on a price ( or monitor each other’s prices) because each one of them would sell, no matter what happens. And to be honest, if I were to advise the government, I would tell them to open a window for importation, even if for a short period. We are in very desperate times, and a window should be opened, maybe for a six-month period, for the product to be imported.
Now, states and federal governments are getting involved in housing delivery which many think is not their turf. They should, instead, be creating enabling environment for the private sector to do developments. What do you see, right or wrong, with all these?
I am one of those who support government initiatives in housing. I think both the government and the private sector should be involved in housing development and this is done everywhere in the world. Each party has its own responsibilities. The private sector provides enough housing for those who can afford them, and you can’t tell a man not to build 10 mansions in Ikoyi instead of building 200 bungalows in Epe.
Government should come in to fill that gap. The government should take up social housing and low-cost housing. One of my challenges with government-owned estates is poor maintenance and, frankly speaking, if they are able to maintain the facilities well, government intervention is key.
Private sector will always build for profit but the government has no business doing high end properties. And that is why when I see state governments like Lagos coming to build nice estates in Lekki, I frown at that because they are to support those who cannot afford to build. The other way the government can help is to team up with private developers, support them with the land and agree on the selling price or give a tax holidays.
Today, Nigerians are prioritizing their needs with emphasis on basic things. What, therefore, is the fate of luxury developments and those who play in that segment of the market?
The market has slowed down but is still active. The secret of the market is that there is one segment of “luxury apartments” that is becoming saturated. I would class them as A, B and C, though it is a bit wider than that. In Ikoyi and VI for example, I would class 3 bedroom flats under 300m as class C; Those above 300m to about 600 million as B; and those in excess of 600m as class A. The most saturated market is class B. If 50 wealthy people are looking for a flat to buy, they are looking for the best ,such that if there is a little colour mismatch on a few tiles, they won’t buy. You would have the market if you were able to provide what they want. The very luxurious flats sell out relatively quickly because the supply is limited and the buyers are few but also ready to buy multiple units. One of the key issues to note is that many properties tagged as luxurious are actually basic.
The market generally looks dull and people are asking what the players in the business are doing to remain afloat? How are you players navigating the present situation?
Interestingly, sales are still going on. Up till today, property development is still going on but slowed down in January. So, it is what will happen in July-September that we are waiting to see and that is going to be the fall out of what is happening today. But again, the joy of it all is that Naira is starting to rebound. So, if the prices of things come down, people can go back to the status quo of the projections of last year with adjustment for reasonable inflation.
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The real estate market in the third quarter of 2023 performed better than the last quarter of that year. That too was better than the first quarter of 2024. Given this consistent decline, what are your projections for the remaining part of 2024?
The interesting thing about our country is that a lot of what happens to the economy is affected by what happens to our Naira. If Naira stays stable even where it is now for three months, the mindset of potential investors will be that we are stable again. The last time we were stable was when the Naira was N380 to a dollar. It stayed for years and prior to that was when it was about N160.
I strongly believe that with this shock, the Naira is finding its level and will stay there for a-while and once it stays there, people can do projections. Without being able to project, we just sit down and save. Once we just save, the economy doesn’t grow. No activities, no jobs. A lot is hinged on what happens to our currency and I think we can stabilize even if it is hovering within reasonable limits.
Economists are telling us that we are around the point where we should have stability and then developers will come out again, building material prices will come down. The only material that has that monopoly is cement and to a small extent reinforcement but every other thing can be bought from anywhere.
How is Estate links getting on as a company amid the current situation?
Quite well, but I tell you the biggest challenge we have is getting the right hands. Professionalism is being thrown to the dogs by a lot of the younger generation and even the quest for knowledge is dropping. It is hard to get the right people that fit into the firms culture. The most important assets to a professional service firm are its people. I retired as Managing partner of the firm last year and it is now easier to take a helicopter view of the practise. I am confident saying real estate practise has remained as stable as it was, as a lot of our clients are still taking aggressive investment decisions, and amidst all these, we are still busy.
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