…as securities offer higher yields, inflation erodes ROI in real estate
Current economic realities in Nigeria, especially at the macro level, have occasioned a situation where, going into the future, investors will be attracted more to fixed income securities than real estate assets.
Yields on Treasury Bills, for instance, drastically jumped from average of 6.7 percent on October 27 to 10.3 percent on October 30, 2023 as Central Bank of Nigeria (CBN) sought to attract foreign portfolio investors (FPI) via issuance of open market operations (OMO) bills at 17.5 percent yield.
Oluwole Abegunde, Group Managing Director, Meristem Securities Limited, who gave these hints at a Business Forum organized by Ubosi Eleh + Co with the theme, Current Economic Realities and its Impact on the Nigerian Real Estate Market’. He was the guest speaker at the forum.
According to Abegunde, the hyper inflationary environment, high exchange rate, and volatile exchange rate, which has seen the naira trading for N1,300 to one US dollar, have combined to increase caution on discretionary spending such as real estate.
He said that tighter financing conditions have worsened financing for new real estate projects and also depressed returns on highly-levered on-going projects, noting that, on average, rent review is not adequately compensating for spiraling inflation.
“Building materials inflation is on the upsurge and it is positive for merchants, but negative for real estate project return on investment (ROI). Naira depreciation is leading to higher construction costs via more expensive imported components,” he said.
He pointed out, however, that trade GDP and e-commerce growth should trigger increased demand for warehouses, adding that there has been moderate growth in retail (malls, fitness centres, entertainment centres), health awareness and hedonistic lifestyle which are offset by lower income.
Abegunde noted further that real estate is also impacted by rising cost of operation which has triggered hybrid work culture, making the vacancy rate in commercial real estate to persist. He added that mixed impacts of migration, weak consumer spending power, favourable mortgage policies/regulation have left residential real estate performance on the sidelines just as the hospitality sector remains depressed due to rising construction cost and increased operating expenses.
“In the midst of all these, however, pockets of opportunities still exist in real estate in the areas of land banking, trade-related real estate projects, real estate investment trusts (REITS), house flipping among others,” Abegunde said, assuring that residential real estate in locations that afford greater flexibility in rent review can also prove attractive.
Earlier, Emeka Eleh, a Principal Partner at Ubosi Eleh + Co, had highlighted the purpose of the forum which, according to him, was to inform, educate, provide a platform for sharing ideas, get feedback, interact with shareholders, and also as part of their corporate social responsibility (CSR).
He said that the Forum holds two to three times yearly. The previous one was held in Victoria Island because they moved the location round for the convenience of their clients and shareholders.
The forum, he said , was part of their efforts as a firm of estate surveyors and valuers to champion engagements to deepen the real estate space, adding that they also host regular radio programme in Lagos Talks FM known as Real Estate Today.
“We also have regular speaking engagement by our partners; we do mentorship, we have a monthly newsletter publication and another publication of our flagship annual Real Estate Report which analyses macro economy and gives real estate market update and forecast,” Eleh said.
He disclosed that their aim is to render the best kind of professional real estate advisory services and also to make real estate information readily available for decision making.