More worries for real estate investors, landlords as economy slips into recession

For real estate investors, developers, and/or landlords in Nigeria, the second wave of recession the country has plunged into following a -3.62 percent contraction in the gross domestic product (GDP) as reflected in Q3 2020 GDP report by the National Bureau of Statistics (NBS) means deeper worries.

The real estate sector in Nigeria had been having its peculiar challenges with falling demand, supply overhang, rent, and mortgage default, all made worse by the Covid-19 pandemic which, at a time, brought market transactions to zero-level owing to the social distancing rule.

Real estate is among the key sectors that contracted in Q3 2020 in the non-oil segment. Others are manufacturing, trade (wholesale and retail) accommodation, and food services. There was, however, a measure of growth in this sector and this was driven mainly by Information and Communication (Telecommunications), with other drivers being Agriculture (Crop Production), Construction, Financial and Insurance (Financial Institutions).

According to the NBS report, this sector grew by –2.51 percent in real terms, which is –4.36 percent points lower than the rate recorded in Q3 2019 but 3.54 percent points higher than the second quarter of 2020. In real terms, the non-oil sector contributed 91.27 percent to the nation’s GDP in the third quarter of 2020, higher than its share in the third quarter of 2019 (90.23%) and the second quarter of 2020 (91.07%).

“Though the impact of this slip-on the real estate sector is not going to be immediate, being a laggard, what it will do is to squeeze investors in more ways than one. Already, the sector is reeling with the impact of inflation, which has pushed up input prices to unimaginable levels,” Yemi Madamidola, a real estate marketing consultant, told BusinessDay on Sunday.

“With the recession, we are going to witness a period of decline in general economic activity, meaning that development activities will slow down, tenants will find it pretty difficult to meet their contractual obligations to their landlords,” Madamidola said.

He recalled that Nigeria slipped into recession first in 2016 and the real estate sector had been technically in the red since the first quarter of that year. It contracted by -9.40 percent in Q1:2018, worse than the -9.2 percent recorded in Q4:2016 at the heart of the recession.

“This means that the real estate service sector is the worst-performing economic subsector in over two years, after a few sub-categories in the manufacturing sector including Post and Courier Services and Motor Vehicle and Assembly,” he noted.

On the flip side, industry stakeholders argue that if Nigeria does not unlock the potentials in its real estate sector and its dead capital, resolve issues around the Land Use Act, and set up a functioning mortgage system, its economy will continue to move southwards.

This is trying to underscore the potential of this sector, which receives little or no attention from the government in terms of providing the enabling environment for private sector operators to invest.

According to the stakeholders, unlocking the potentials in this sector would mean more revenue from the 70 to 80 percent dead capital, affordable housing for over 23 million Nigerians, lower unemployment rate, and higher economic growth.

“Not only is the real estate sector one of the key sectors, but it is also the most important for Nigeria because it does not matter what you do in agriculture, power or manufacture, if those sectors do well and the real estate is not functioning, we are still going to have an economy that is not working for Nigerians,” Andrew Nevin, partner/chief economist at PwC, said.

It is noteworthy that while the GDP of the real estate sector fell sharply by –18.15 percentage points from -3.84 percent in the second quarter of 2019 to -21.99 percent in the corresponding quarter of 2020, Nigeria’s economy shrank 6.1 percent in the same quarter, the first contraction since 2017, implying that the economy was just a quarter away from recession. And now, it has happened.