A huge number of real estate firms get funding from equity sources than debt to execute projects owing to risk-averse attitude and cautious stance of Nigeria’s financial institutions, BusinessDay findings have shown, meaning that debt financing is hard to come by.
According to industry sources, real estate firms rarely utilize debt finance as financial institutions, especially deposit money banks, prefer to fund projects with short pay-back period to others with longer gestation period like real estate projects.
Folorunsho Bankole, Deputy Managing Director, Stable Shelters Development Limited, told BusnessDay that real estate companies explore private equity and off-taking financing or a combination of the two, or their personal funds, while a few apply for loans from deposit money banks.
Even though most funds are drawn from private equity, it doesn’t come cheap either. Information gathered revealed that private equity investors charge interest between 35percent and 50 percent, or even more, and this is a majoy reason cost of housing executed by private developers are unaffordable to an average Nigerian.
“Debt financing is very rare because banks don’t give”, said Bankole. “Requirements attached to loan facility are numerous. And at the end of the day, they tell you that the risk assessment of your project is not viable,” he added, noting that funding real estate is not a bank-thing.
He, however, maintained that top real estate developers or firms that have close relationships with management of banks get funds easily from them, but this is not so for an average developer.
Rotimi Olu-Steven, a broker at International Real Estate Partners, shares that view. “Real estate firms are not borrowing from banks as before. Moreover, banks are very careful knowing that the sector is in downturn.”
An analysis of banks’ loans and advances to the sector in full year 2018 shows waning debt finance for real estate projects.
Eight lenders including Access Bank, UBA, First Bank, Zenith, FCMB and Guaranty Trust Bank collectively gave loans and advances worth N623.3 billion for real estate projects in 2018, which is N60 billion lower than N683.3 billion given out in the previous year.
Worse still, total banking industry credit to the sector dipped some 4.54 percent points to -2.92 percent in quarter four of 2018 compared with 1.62 percent in the previous quarter.
However, even though experts claim that real estate developers scarcely make use of debt financing because of its complexities, a cursory look at how some high-rise buildings in Lagos are financed shows something different.
For instance, Heritage Place, a 14-storey Grade A office building in highbrow Ikoyi area of Lagos, developed by a consortium led by London-headquartered private equity firm, Actis Capital, was financed through a $65 million loan sourced from First City Monument Bank.
The mid-tier one lender is also a major financier of Eko Atlantic, a coastal city being developed on land reclaimed from Atlantic Ocean, having committed $100 million along with First Bank, Guaranty Trust Bank and Access Bank for the financing of the project.
Najeem Adeyemi, Head of Valuation Unit at Mustapha Ewenla & Partners, says financial institutions are predominantly major financiers of big ticket real estate projects, noting that, in some cases, developers obtain funds from pension administrators, insurance firms, merchants and mortgage banks.
“In a saner clime, real estate investment trust (REITs) are where funds are sourced for projects. But the reverse is the case in Nigeria. REITs here are not doing well and are unattractive to investors despite potentials.
“The truth remains that investors are conservative towards financing the sector, probably because of long repayment period. This calls for proper overhauling of financing structure,” Adeyemi advised.