While other subsectors of the Nig e r i an real estate market are mostly affected by recession and downturn in economic activities, land banking has overtime shown that it is one of the investments that are resilient to shock.
Whether it’s faced with a recession like in 2016 or during a pandemic like in the last five months, the prices of land remain unchanged.
The term ‘land banking’ implies almost exactly what it is. Rather than putting cash into a savings account (where it will earn 1.25 percent interest per annum) or the stock market (which has become increasingly unpredictable in recent time), some investors take an alternative approach by acquiring land, a tangible, fixed asset, one that cannot be broken, stolen or destroyed.
Explaining the reason land banking is resilient in tough economic cycles, Seth Williams, a land investor said land is “a resource with a supply that is always going down (after all, they aren’t making any more of it) and a demand that is constantly on the rise.
According to the 2020 half-year real estate report by Northcourt, the average land prices for an area like Abraham Adesanya in Lagos increased by 61percent in the first six months of 2020 compared to the average in the comparable period of 2019. The trend is the same for Ikeja GRA, Lagos as land appreciated by 21 percent despite the impact of the pandemic which disrupted the real estate market since it entered the country on February 28, 2020.
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Analysis of the same report shows prime office rent reduced by 30 percent in Victoria Island, Lagos and 21 percent in Garki II in Abuja as other sub-sectors of the Nigerian real estate market also recorded some level of price fluctuation amid the impact of COVID-19 pandemic.
Tayo Odunsi, the CEO of Northcourt Real Estate believes that the lack of loan repayment pressure is one of the reasons land prices are resilient as people don’t typically borrow to buy land, unlike buildings.
“In recessions, developers feel they need to make houses more attractive to buyers by bringing down the price, so it doesn’t stay long and start to depreciate. Land doesn’t depreciate,”Odunsi said.
According to analysts, land negatively correlates with other asset classes and only slightly correlates with real estate. This means that while other assets reduce in value (stocks, bonds, etc.), land prices increase.
Meanwhile, the high cost of land in Nigeria is one of the barriers preventing developers from delivering relatively affordable real estate products. With the highest population in Africa, Nigeria is crawling behind its peers in terms of homeownership level. Whereas homeownership rate is 84 percent in Indonesia, 75 percent in Kenya and 56 percent in South Africa, Nigeria, Africa’s most populous nation has 25 percent.
“The cost of building a house is the same, whether you are building in VI or Ikoyi, but it is the land value that drives the cost of properties high,” Adekunle Abdul, Managing Director, Metro & Castles Homes, a real estate development company said.
Nigeria’s Land Use Act of 1978 which places all land in Nigeria in “trust” of the government and specifies that future transfers or sale of land must be confirmed by a government official, in writing, irrespective of the value of the transaction is one of the barriers to obtaining land title which is needed to put a property for a mortgage.
“It shall not be lawful for any customary right of occupancy or any part thereof to be alienated by assignment, mortgage, transfer of possession, sublease or otherwise howsoever without the consent of the governor in cases where the property is to be sold by or under the order of any court under the provisions of the applicable Sheriffs and Civil Process Law,” the Land Use Act read.
A recent report by PWC revealed that Nigeria has an estimated $900 billion worth of dead capital in residential real estate and agricultural land. Dead capital is described as assets that cannot be converted to economic capital.
“Approximately 95 percent of household dwellings in Nigeria have no title or a contestable title,” Andrew Nevin, Partner Chief Economist at PWC, said, adding that in Lagos, for example, it takes an average of 12 procedures and 105 days to register a property or as long as two years.
