Exchange rate, inflation slow real estate growth

.,,As construction GDP contribution drops in Q2 2024

Volatile exchange rate and galloping inflation have slowed the growth of Nigeria’s real estate sector, forcing potential investors to second-guess their moves.

Property prices have jumped across the Nigerian market, but real earnings have failed to match them, slowing investments and growth.

The contribution of the construction sector to the real gross domestic product (GDP) stood at 3.17 percent in the second quarter (Q2) of 2024, lower than 3.23 percent in the same quarter of 2023 and 4.01 percent in the first quarter (Q1) of 2024, the National Bureau of Statistics (NBS) said.

Similarly, real GDP growth in Q2 of 2024 stood at 0.75 percent, lower than the growth recorded in Q2 2023 and Q1 2024.

“There is a big impact of inflation on the cost of maintaining existing properties, which is huge,” said an Abuja-based financial markets analyst, Ike Ibeabuchi.

“Secondly, the cost of funds has risen. You need funds to invest in real estate and many available funds are expensive. You can’t have investments in the real estate when firms can’t easily have access to funds,” he said.

A developer recalled how he sold 24 units of semi-detached houses before he roofed them four years ago.

He is currently building 10 units of town houses at N65 million per unit. He has sold only two and is already at the final stage of development.

“Once people are holding on to cash, it shows you that times are hard. A man who has N60 million is not ready to buy a house of N45 million because he does not want to hold only N15 million. Such a man wants to relax and watch what will happen next,” the developer said.

An otherwise burgeoning market that was driven largely by ‘unearned wealth’, foreign inflows or remittances from diaspora Nigerians, the real estate market is now experiencing investment drought caused by hyperinflation and volatile exchange rate.

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At the rental market, the impact seems to be deeper as a landlord in one of the highbrow locations in Nigeria disclosed to this reporter that his property, which was priced at $85,000 per annum, has come down 40 percent to $45,000, yet cannot find tenants.

However, Gbenga Olaniyan, chairman, Estate Links Limited, advised that now is the time to buy or invest in the market.

“Anybody who does not buy now will only buy when it is more expensive, unless the market improves; when those who are selling now sell off their units, they are going to hold their funds.”

The real estate market has seen some positive developments as analysts say it is not only maturing and stabilising but also undergoing price correction which, at the moment, is estimated at 20 percent apiece for residential and commercial office developments.

“Yes, what we are seeing now is a clear price correction,” Olaniyan noted, recalling that as at a time, rent in Nigeria was higher than what obtained in Hong Kong, New York and some parts of UK and that the only country that could match Nigeria was Angola in terms Grade A office rent.

“At that time, Grade A office rent was $1,100 per square metre. Now, we can’t be looking at anything more than $800 per square metre. Similarly, the prime land in parts of Ikoyi like Bourdillon, Gerard and Kingsway Road which was, at a point, selling for $330,000 to $350,000 per square metre, matching Banana Island price, has dropped because people who bought at the time did so to build three or four blocks of 24 flats each but these are no longer selling or letting because demand has dropped,” he said.

He explained that when people were paying high rents in Nigeria, it was because there was almost zero supply of quality Grade A office spaces in the country, pointing out that rents in Nigeria are three times Sandston’s in South Africa where there are better quality office buildings.