A major economic discourse in Nigeria today is the current economic reforms which the President Bola Tinubu administration is implementation and the impact of those reforms on the people and the various sectors of the economy.
When, therefore, experts gathered on Thursday last week for the third edition of an annual Real Estate Summit hosted by UPDC Plc in Lagos, how these reforms impact the housing and real estate sector was the focal point of discussion. The Summit had as theme, “Current Economic Reform and Their Impact on Real Estate Sector.”
In the last 18 months, President Tinubu and his team have been struggling with the consequences of removal of petrol subsidy, floating of the naira, tax reform, market-reflective electricity tariff, among other reforms whose unintended consequences far outweigh the intended.
According to the experts, galloping inflation, high interest rate and volatile exchange rate stand out as the most impactful of the unintended consequences of the reform, adding that these three, more than anyone else, impact th/’e real estate sector in a negative way.
“Nigeria’s inflation rate remains extremely elevated at over 33.88 percent and the economy is feeling the full impact of the central bank of Nigeria’s (CBN’s) aggressive rate hikes, which have pushed the benchmark rate to a record high of 27.25 percent,” Bismarck Rewane, CEO, Financial Derivatives Company, noted.
The apex bank’s tightening measures, which have led to an 8.5percent cumulative hike in interest rates, have weakened the naira and, according to Rewane, this impacts negatively on the real estate in many ways including increases in costs and overall construction expenses.
“A weak naira leads to higher property prices, making real estate less affordable. It leads to reduced foreign direct investment (FDI) and slows the development of large-scale projects, makes mortgages and loans more expensive and reduces housing affordability. A depreciated naira erodes the purchasing power of potential property buyers,” Rewane noted further.
Similarly, he said, high interest rate impacts on real estate by increasing cost of borrowing, slowing down real estate investment, making borrowing more expensive for both homebuyers and developers. He added that inflation is also impacting on the real estate sector by increasing construction costs. “Inflation drives up the cost of building materials, labour and other inputs necessary for construction, it reduces affordability and demand for property purchase.
It erodes buyers purchasing power and makes it harder to save or afford property investments, shifts investor focus by pushing it to fixed-income assets such as government bonds. It also leads to increase in rental demand because more people may choose to rent rather than buy, driving up rental prices,” Rewane said, stressing that inflation lowers the real value of gains on property appreciation.
He stressed further that inflation poses enormous challenges for low-and mid-income houses as it shrinks the supply of affordable housing, thereby worsening existing housing deficit and putting pressure on the lower-income population.
Biodun Adedipe, a consummate economist and CEO, B.Adedipe and Associates Limited, noted that the on-going reforms have worsened the housing challenges, especially with high interest rates driven by high costs of funds, high construction costs, massive housing deficit and low mortgage penetration.
He, however, sees positive impact of the tax reform on the sector which Ayo Ibaru, CEO, Northcourt Real Estate, agreed with, explaining that there are tax exemptions on commercial real estate which, according to him, gives developers of such assets flexibility in terms of pricing and giving concessions to tenants.
Going into 2025, Ayo projected positive developments in the sector that would offer opportunities for investment in land-banking because of its resilience as an investment asset class, warehousing, hospitality, logistics, and residential properties which e said will also be good but developers should not over-build.
Ibaru noted that in Lagos, there is high occupancy rate for residential buildings, but Rewane warned that builders should also be mindful of high delinquency rate, explaining that presently there is high rent default rate as a result of challenges in the economy.
He advised that people should invest where there are low hanging fruits like distressed assets which could be remodeled and refurbished for renting instead of starting new developments. “There are conversions too which are moderating delinquency in the rental market,” he said, explaining that there are also good investment assets where opportunities exist.
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