Banks’ credit to real estate improves but sector reels under receding economy

Appreciably, credit from banks to real estate improved in the last couple of years, but the sector is still reeling under the weight of a receding economy unable to tame challenges at its macro level.

In what seems a reflection of confidence in the sector, banks’ credit to real estate rose to N666.73 billion in the second quarter of 2020, the highest of such credit in almost two years, but lower than the N710.2 billion reported in the corresponding quarter of 2018.

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, according to figures gleaned from Nigerian Bureau of Statistics’ (NBS) report.

This perhaps explains the increase in transactions in the sector in the Q3 of 2020, after industry players adjusted to the impact of COVID-19. The NBS Q3 report clarifies this further.

The report says though the -13.40 percent growth reported by the sector in this quarter was 11.09 percentage points lower than the growth recorded in the comparable quarter of 2019, the sector performance in Q3 was 8.59 percentage points higher than the -21.99 percent reported in Q2 2020.

But in spite of this fragile growth arising from the improvement in banking lending, which essentially is a fallout of the low yields in other asset classes such as equities, bonds and treasury bills, the sector is still groaning as the larger economy totters.

Most sectors of the economy are groaning under the weight of an economy that has seen two recessions in five years. While the impact of COVID-19 can be blamed for second economic contraction and slow pace of the real estate sector, an evaluation of the macro-economic indicators before the pandemic exposes how the pandemic only made what was already a bad situation worse for the economy.

Long before the pandemic started spreading across the globe, Nigeria’s economy had been gasping for breath and this has been its lot in the last five years.

For real estate, before the pandemic, access to affordable housing was crippled by, among other factors, the lack of non-functioning mortgage system, high cost of property development worsen by the country’s 42-year-old Land Use Act, which remains a major clog to growth in the sector.

Arguably, besides the improved access to credit and slight reduction in interest rate, it has been a tale of woes for the sector in the last five years, thus belying claims in government circles that the economy, including the sector, is better off now than it was five years ago.

“The question of whether the real estate sector is worse or better off now compared to five years ago depends on which indicators we are looking at; either on the demand side or the supply side. But generally, given the current state of the economy which impacts both sides, one can safely conclude that the industry is worse off now than before,” Femi Akintunde, GMD/CEO, Alpha Mead Group, told BusinessDay in Lagos on Wednesday.

According to Akintunde, purchasing power of an average Nigerian has significantly dropped, especially due to inflationary pressure, as many more people have dropped below the poverty line and are no longer considering home ownership a top priority.

Apart from leaving more people in the housing market and putting developers out of job, this development has also made mortgages to be riskier, pushing up rate of default and threatening the survivability of many mortgage institutions.

At macro-economic level, the he noted that exchange rate of the naira to the dollar had worsened, thereby increasing the cost of production for developers who import many of their building materials. He added that inflation had eroded consumer purchasing power while the price of cement had shot through the roof for inexplicable reasons.

The real estate sector, according to Damola Akindolire, an estate developer, is definitely not better now than where it was five years ago, pointing out that the sector has been in recession for 15 straight quarters, the longest period in the history of Nigeria.

“Sharp increase in exchange rate from 198 in 2015 to 385 in 2020, almost 100 percent increase, has led to sharp increase in the prices of building materials which has made housing less affordable,” he noted.

He added that Covi-19 challenge and supply chain issues have led to increase in key components such as cement and reinforcement, pointing out that macro-economic challenges such as inflation and unemployment have occasioned less disposable income and less demand for real estate.

Looking at the various segments of the real estate market, MKO Balogun, MD/CEO, Global Property & Facilities International, told BusinessDay that in the last five years, retail business in the country boomed until three events changed that.

These events he listed as the economy, Covid-19 and EndSARS protests, explaining that retail was usually buoyed largely by purchasing power increase and large middle class population, but with the recent economic realities of 2019 and 2020, retail got a hit.

“Covid-19 led to closure of most retail outlets while EndSars protests led to destruction and looting of a good number of retail outlets,” he explained.

According to him, though warehousing has seen some sort of boom with the growth in online retailing which is expected to continue, commercial office space saw an oversupply and no change in the level of tenants for migration across grades. This, he said, has been made worse by the new normal which has compelled some people to work from home.

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