Real estate is generally considered a great investment option because of its predictable cash flow, less volatile nature which has many advantages over stocks, bonds or mutual funds and more especially as it appreciates, a resistant to inflation.
Nigeria’s property market is projected to stabilize and report growth in 2020. With an estimated 3 percent growth rate, the industry is expected to leverage the new policies by both the Federal government and the Central Bank of Nigeria, and the surge in the demand for affording housing to turn its 2019 contraction to a lucrative business for investors.
“The Nigeria real estate industry as a whole is stabilizing and it has the potential to fully stabilize and report growth in 2020, and this is because it is recovering from the effect of the recession,” Ayo Ibaru, COO /Director of Northcourt said.
After exiting 12 consecutive quarter recession in the first quarter of 2019, Nigerian real estate was hit by slow economic growth, lack of liquidity and dampened purchasing power and thus, ended the year on a negative but stabilising mode.
Nigeria’s economic growth of 2.28 percent eluded the real estate sector which contracted by 2.31 percent in the third quarter of 2019, the best growth in six months.
With a housing deficit of more than 20 million units, Nigeria’s property market which requires an estimated N170trillon to N200trillion to bridge the housing gap is considered one of the top investment options in Nigeria due to the following reasons:
Access to affordable housing is a challenge for Nigeria’s 200 million population. With the high rate of urbanization coupled with the projection that the country’s population will double at 400 million by 2050, the real estate market is an area that holds good return for residential and commercial investments.
Housing anywhere in the world is a basic necessity, which in the order of human needs, ranks third after food and clothing, and considering Nigeria has one of the lowest homeownership rates in Africa, the ability to create real estate projects that can bridge the supply-demand gap would mean a higher return on investment.
According to Northcourt, a Lagos-based real estate advisory firm, the surge in urban growth (at 4.3%, H2 2019) places pressure on real estate infrastructure, and as successful cities attract more population, the price of urban real estate will increase due to demand.
“Especially for well-conceived projects. This would require that new dwellings be provided to accommodate the growing population and businesses. This makes real estate an attractive investment media,” Ibaru said.
For a city like Lagos, which currently has the highest population in Africa, the small unit apartments is where residential investments hold most profits in 2020, as compiled from industry analysis.
“Investors and developer should consider exploring
Investors began reconsidering portfolio composition towards the end of 2019 as monetary policy changes caused Treasury bill (T-bills) rates to slide. The treasury bills market went bearish from the beginning of Q4 2019 as treasury stop rates dipped. The yields on the treasury bills went from double-digit at the beginning of Q1 2019 to single-digits towards the end of the year.
With the current T-bill rates which offer zero or negative return when adjusted for inflation, investors can find better return in investing in real estate either directly or indirectly.
More than N133.43 billion worth of failed transactions were recorded at the T-bill auction conducted Wednesday 13th February by the Central Bank of Nigeria on behalf of the Federal Government of Nigeria(fgn)as investors bid at rates as high as 5.9percent,9.5percentand1318 percent on the 91-day, 182-day and 364-day bills.
Subsequently, the apex bank lowered rates across the three tenors to 3 percent, 4 percent, and 6.54 percent, respectively. While the rates on 91-day, 182-day are the lowest since January 6, 2016, they compare with 3.5 percent, 4.5 percent and 6.50 percent they cleared on the 91-day, 182day and 364-day bills at the previous T-bills auction which saw rates crash to a single digit for the first time in 3 years.
President Muhammadu Buhari signed the Finance Bill, 2019 (now Finance Act) into law in January and it was specially designed to support the implementation of the 2020 National Budget and to create an enabling environment for businesses.
According to real estate experts, Nigeria’s property market is one of the sectors that will benefit the most from the new Finance Act, owning to the investment incentive it holds for the industry.
Described by industry experts as a major leap, the Finance Act which became effective February 1, 2020, holds benefits for both real estate investors and potential homeowners, analysis of the finance gazette shows.
According to section 23 (1) of the Company Income Tax Act (CITA) as amended in the Finance Act of 2019, “the dividend and rental income received by a real estate investment company (REICS) on behalf of its shareholders” shall be exempted from Company Income Tax (CIT) “provides that a minimum of 75 percent of dividend and rental income is distributed “within 12 months of the end of the financial year in which the income was earned.”
“By amending the CITA provision on ‘Payment of Dividends by a Nigerian Company’ and including an exemption for distributions made by a REIC, this risk, and the obvious disincentive to invest in REICS, is managed,” KPMG said.
Commenting on how the new Act will impact the real estate industry, Albert Folorunsho, the Managing Consultant of Pedabo, a Lagosbased auditing firm said it will be encouraging for real estate investment as the company income tax will not be charged on the minimum 75 percent dividend.
“It is a major leap, and the provision can support the housing need of the public,” Folorunsho told Businessday.
According to industry experts, REIT provides a practical, effective and efficient avenue for investing in real estate through the transfer of legal interests and has an enormous impact on economic performance as a result of increased activities in both the capital markets and the real estate sector.
A REIT is a company owning and typically operating real estate which generates income. Most REITS specialize in a specific real estate sector, and properties included in a REIT’S portfolio may include apartment complexes, data centres, health care facilities, hotels, infrastructure—in the form of fibre cables, cell towers, and energy pipelines—office buildings, retail centres, self-storage, timberland, and warehouses.
Taiwo Oyedele, Fiscal Policy Partner & West Africa Tax Leader, PWC thought that the new Finance Act will make REITS more attractive.
“With the Finance Act, they will become more attractive as the tax effect produces the same result as REITS. As such, this initiative has the potential to encourage public investments and mobilise more liquidity for real estate projects with a corresponding positive impact on the capital market,” Oyedele said.
The prospects for REIS in Nigeria is perceived to be strong due to the high demand for, and undersupply of, real estate assets, and limited institutional investment. However, the absence of an enabling tax framework had hindered investment in REITS and failed to unlock the potential benefits attributable to REIT activities, as compiled from industry sources.
Adeniyi Akinlusi, president of Mortgage Bankers Association of Nigeria (MBAN) and CEO, Trustbond Mortgage said the new Finance Act will encourage people to invest in real estate and when that happens the investment companies will have more funds at their disposal to execute projects.
The new Finance Act also holds an opportunity for small and medium enterprises (SMES) with a turnover of N25 million and below as they will no longer pay company income tax (CIT). This means real estate start-ups with a profit of N25 million will be exempted from paying CIT
initiative experts have said will spur growth in the sector.
“The amendments contained in the Finance Act should positively impact companies operating in the real estate sector and thus spur the growth of the industry. The tax-exemption of small companies and the reduced CIT rate for medium-sized businesses, for instance, will increase their capacity to absorb the shocks in the Nigerian macroeconomic environment and improve their cash flow position,” Akinlusi said.
Real estate investments are often described as inflation hedge investments. Inflation resistant investments are typically assets that are expected to increase, or at least maintain in value. This plays into three aspects that make real estate a great tool to fight inflation: appreciating value, increasing income (rents) and depreciating debt.
Simply put, inflation means as time goes on and the prices of goods and services go up, one’s buying power becomes less and less with the same amount of money.
For example, if two years ago an apartment in Lagos, was going for a monthly rent of N36, 000 ($100) due to inflation, that same apartment can cost as much as N72000 ($200). The fact that real estate projects appreciate with time is the major reason why it is resistant to inflation.
Figures by the National Bureau of Statistics (NBS) put Nigeria’s inflation rate (All items year on change) at 11.98 percent as of December 2019, a record of 11-month high.
The fear of a further spike in inflation regime forced the Central Bank to undertake a moderate tightening stance at the first monetary policy of 2020, leading to the raising of Banks’ cash reserve ratio (CRR) by 500 basis point, from 22.5 per cent to a new level of 27.5 percent.
The move by the Central Bank is to mop up what the apex bank described as liquidity surfeit in the Nigerian economy, responsible for driving the inflation since August of 2019
“To avoid loss of capital, investors need to invest in inflation-protected instruments.
With the drop in the T-bill rates occasioned by the CBNS policy, real estate is now positioned to protect against the decrease in investment portfolio value. Increased demand for real estate products, and its potential to withstand the effect of inflation has positioned it to be a good investment option in 2020,” an industry expert said.
Real estate is a tangible asset that can always be monetized through renting or residing in the property, regardless of financial market conditions. This makes it far more resilient against asset market swings compared to traditional stocks or bonds. Real estate is part of the broader category of alternative investments.
