Scarcity or abundance in the economy answers to the law of supply and demand. It is that simple. A renowned real estate developer in Dubai recently advised a pause in the production of houses for, at least, 18 months as oversupply, which is not healthy for the market and the economy at large, is envisaged.
“If this oversupply continues, it will be a disaster,” Hussain Sajwani, chairman of Damac Properties PJSC, said in an interview, adding, “the banking system will get affected and that’s something we can’t afford.”
Oversupply is a kind of condition created when there is excess supply of a product relative to the demand, purchase power and purchase frequency of consumers. Oversupply occurs in real estate when the supply of real estate products far outweighs the demand for them by investors, aspiring homeowners or rent-seekers.
A country or state that will harness its real wealth must be able to accurately determine the actual stock and deficit of all forms of its real estate per time. This enables proper planning and regularization of supply for profitability as well as for a continuously thriving economy.
The nation of Dubai, in addition to great leadership, leveraged on true and accurate data of its real estate stock, its population and macroeconomics. It also ensured every aspect of its economy is thriving such that its real estate, in every form that it exists, will command the value it should command. Proper measurement and monitoring of all data stock is what made Hussain Sajwani’s suggestion, that production of houses be halted, possible at all.
Given our peculiarity as a nation and our data challenges, the best a real estate developer can do per time, is to focus on a certain location for housing delivery after deep research (one that captures the need for a relevant product in a profitable quantity as well as the willingness, readiness and ability of off-takers or consumers to invest in the product) and thoughtful planning.
Estate Intels recently published a report stating that it is time for Nigeria’s REITs to ditch residential properties. The reason is simple. Residential REITs must have been the most profitable real estate investment option at some points based on previous researches.
However, an oversupply without a corresponding level of demand has now made it unprofitable, probably because customer’s needs have evolved. This is bound to happen from time to time; a certain kind of real estate product will not be perpetually relevant to consumer need.
What are the measures that can then be taken to curb this trend? First, the approach to creating real estate consumer products must be flexible and accurate data-driven. The question of how much ownership and rent the obvious economic situation or purchasing power of individuals can accommodate per time, in a given phase of an economic cycle, must constantly be answered correctly.
Also, the government should take the lead by taking stock to determine how much real estate ownership versus rent option is healthy over a given period of the cycle and make this data available. The government certainly can cater for some quota of intending real estate owners and rental needs in a certain location per time as has been the case but they must also determine the quota of ownership or rental properties that private investors or businesses can cater for.
Equally important is the need to adopt a framework that allows real estate developers to do and grow their business based on the identified need gap of ownership or rent per time. This should, in no way, undermine the ambitions of investors or business people who can inject innovation, standard and structure into the process, beyond the status quo, provided they will enjoy long-term profitability from the venture.
As much as the government and developers, through creativity, can suggest and introduce preference/specific real estate products, it will be a lot more effective when consumers, through an organized mechanism, can equally be allowed to make the demand for more or different products as their need evolves. This will encourage healthy competitiveness and transparent business processes among all stakeholders as well as increase the potential for the appreciation of real estate value in Nigeria.
Oluwakemi Adeyemo, is a Real Wealth Creation Advisor with extensive experience in real estate wealth creation and investment optimization. She is the CEO of Futureperfect Limited.
