BusinessDay
Nigeria's leading finance and market intelligence news report.

Nigerian economy and real estate sector

The COVID-19 pandemic transformed all our lives. Lock-downs forced us to change how we socialize, how we shop, how we work and how we live generally. But as vaccination rates increase, various parts of the world are beginning to open up.
Many countries around the world have ‘on paper’ seemingly recovered from the economic collapse that occured last year; Nigeria is no exception. Recently, the federal government announced a 5.01 percent growth in the country’s GDP, which it says “is the strongest ever recorded since the second quarter of 2014.”

The Minister of Finance, Budget and National Planning, Zainab Ahmed, disclosed this at the joint ministerial briefing in Abuja. The Minister stated that “this latest development is a clear indication that inflation is gradually trending downwards.”
Nigeria’s economy is gradually coming out of the woods after surviving shock-waves caused by crashing global oil prices and the outbreak of the covid-19 pandemic. Government has been making frantic efforts to stabilize the economy after it recorded a sharp decline in its growth rate, with inflation recording an upward movement and pushing the country into recession.
The non-oil sector is a major driver of this growth with an increase of about 7 percent. This suggests that businesses are gradually returning to pre-pandemic levels with 42 out of 47 sectors of the economy recording a significant expansion in the second quarter of 2021.

The federal government believes that this would lead to more employment opportunities for the citizens and drastically reduce food inflation and by extension inflationary pressures on the various sectors of the economy.
As the economy begins to stabilize and register positive growth, the government is hopeful that this progression would be sustained as the economy is projected to record a 3-5 percent growth rate by the end of 2021.

In line with these developments, the Nigerian real estate sector has enjoyed maximum 3.85 percent growth in the second quarter of 2021. The figures indicate its highest growth in 6 years. This according to analysis is due to full re-opening of the economy and increased investment interest. The 3.85 percent growth from data analysis is the sector’s highest second quarter growth since the 4.95 percent growth in Q2 2014.

With surging rents, significant housing deficits and over-regulation, the Nigerian real estate market is a metrics of opportunities and unique challenges which only optimistic investors would be able to successfully convert into viable and long-term profits.
However, in the wake of the recent pandemic, the real estate sector was one of the worst hit sectors in the Nigerian economy as the impact radically entered the industries long-term expectations. As the economy experiences a rebound, the real estate industry is still faced with numerous challenges impeding growth across its value chain such as radical exchange rate depreciation, access to finance, regulatory and commercial bottle-necks among others.

Despite a range of pressing challenges, the Nigerian real estate sector is set to continue expanding in the future albeit at a slower pace than over the past decade as the market provides attractive returns on investment that cannot be ignored by investors seeking to purchase properties in a nation where investments in real estate can bring returns of 30-35 percent.
Amidst these attractive opportunities, surmounting challenges still lie ahead. The Central Bank of Nigeria has been battling with the free fall in Naira value since 2015.The apex bank continues to deploy stringent monetary instruments that have failed to deliver the much desired halt to the weakened naira.

Read also: Could forests can help solve Africa’s housing challenges?

On July 27, 2021, the CBN governor, Godwin Emefiele at the MPC meeting for the year announced the ban of forex sales to operators of Bureau De Change (BDCs) in the country in a bid to curb the dubious and unwholesome practices by the BDC’s according to the CBN with regards to forex sale. Since the new foreign exchange policy took effect, the naira has encountered an eventful run with the rate reaching as high as $1/N570 at the parallel market.
Economic experts are of the view that the implication and effect on the economy and Nigerians would be adverse as the country remains largely import dependent which would affect cost of production and subsequently translate to inflationary pressures in the economy.

The consumer price index (CPI) which measures inflation increased by 17.01 percent (year-on-year) in August 2021. This is 0.37 percent points lower than the rate recorded in July 2021 (17.38) percent. On a month-on-month basis, the Headline index increased by 1.02 percent in August 2021, this is 0.09 percent higher than the rate recorded in July 2021 (0.93) percent.
Imported commodities have been taking hits from currency pressures and forex restrictions. In August, the price of imported commodities increased by 8.70% on average. This thus reflects the exchange rate pass through effect. There were renewed pressures at the parallel market last week with the naira crashing to an all-time low of N570/$1 due to forex shortages.
Most manufacturers claim they are only able to source 20 percent of their forex needs from the Import and Export (I&E) window. The effective exchange rate for their import is N512/$1 compared to a blended rate of N482/$ three months ago.

The National President, Nigerian Institute of Building, Kunle Awobodu stated that “In recent times, we have noticed that developers have gone back to the site but are constrained by the sharp rise in the cost of building and finishing materials eg aluminium windows, roofing sheets, iron rods and cement.”
Recent surveys revealed that the costs of steel, tiles, doors, and Plaster of Paris (PoP) cement, among others, have risen by over 20 percent between March 2021 and August 2021.

The cost of steel, which was sold at N360,000 per tonne as at March 2021, increased to N441,000 at the end of August 2021, representing a 22.5 percent increase within the period under review.
The cost of super white cement increased from N3,200 (25kg) to N8,000 and N9,000, and the cost of high-quality white cement (40kg) also increased from N6,500 to N16,000. The cost of 8mm diameter and 25mm diameter (imported) steel increased from N330,000 and N380,000 to N380,000 and N420,000 respectively.

The cost of Flush door (high quality), Panel door and Turkish steel door (1,500 x 2,100) also rose from N60,000, N75,000, N235,000 to N85,000, N115,000 and N350,000 (or N400,000 depending on the brand) respectively.
The hike also affected other building materials like cement blocks, binding wires and roofing sheets. Cement blocks (6 inches) are up from N180 to N230; 9 inches blocks are up from N210 to N280. The cost of binding wires and roofing sheets also rose from N8,000 and N6,500 per square metre (psm) to N16,000 and N9,000 psm.

Despite these challenges, some real estate firms have demonstrated resilience and confidence in the real estate market in particular and the economy at large. They are not only surviving, but also thriving in the midst of these challenges, developing and putting products on the market.
Among These are Arkland Properties and Investment Limited, Knight Frank Nigeria, foremost firm of estate surveyors and valuers; Oak Homes Limited, Nedcom Properties-developers of Victoria Crest properties; Middlechase Investment Limited, among several others.

These ones, in this special report, share their experiences during Covid-19 pandemic and also in the post-Covid Nigerian economy. Besides telling their stories, they also make interesting revelations on their survival streaks; the opportunities in this sector, and offer suggestions on what the managers of the economy could do to make the sector bigger and better than how it is at the moment.
Real Estate analysts’ however, speculate that the improvement in economic activities and low-interest-rate environment would support the real estate sector growth in Q3. The demand for commercial real estate, especially office space, will continue to rise as more companies resume physical work.

The demand for residential housing units is likely to fall as consumer disposable income remains squeezed. Luxury real estate like hotels will keep springing up in highbrow areas. However, there is an increasing need for more government interventions to address the housing deficit in the country.
Unfortunately, Nigeria is currently known as the poverty capital of the world. The nation recently exceeded India with the largest rate of people living in extreme poverty. In Nigeria, about 86.9 million people live in severe poverty, which accounts for about 50 percent of its entire population.

In summary, the Nigerian economy is bedevilled with problems which include: Growth problem, investment problem, inflation problem and debt/revenue problems. If the various sectors in the economy are to thrive in the nearest future, then resolution of these problems must be of paramount importance to the Nigerian government moving forward.
“Also, more companies have resumed physical work, thereby leading to an increase in demand for shared residential and office spaces. This has now triggered a decline in the vacancy factor in some areas, particularly on the island,” he added.
The vacancy factor is defined as the number of empty houses compared to occupied buildings. For example, in a street where there are about 50 houses, if 10 are empty that means a 20% vacancy factor.

Nigeria and Lagos in particular (considering it’s the hub of commerce) has a huge stock of uncompleted buildings, approximately estimated at 30 percent.
Tunde Oluwole, a fellow of the Nigerian Institute of Builders stated that “In 2020, housing starts remained stagnant because of low interest rates and the inverse relationship between interest rates and real estate values.”
“Developers rotated their portfolios from financial instruments into other asset classes including real estate, thereby leading to an increase in the supply of housing starts. During the lockdown, rents remained flat and the growth in the real estate and construction sectors fell sharply,” Oluwole added.

In Q2’20, the real estate sector recorded the sharpest contraction in the last 14 quarters to -21.99%. The construction sector also recorded negative growth of 31.77% in the same period.
Real Estate analysts’ however, speculate that the improvement in economic activities and low-interest-rate environment would support the real estate sector growth in Q3. The demand for commercial real estate, especially office space, will continue to rise as more companies resume physical work.

The demand for residential housing units is likely to fall as consumer disposable income remains squeezed. Luxury real estate like hotels will keep springing up in highbrow areas. However, there is an increasing need for more government interventions to address the housing deficit in the country.
Awobodu stated that “As the prices of the materials increase, there might be a tendency for intending homeowners to abandon their housing projects for a while until they can afford to continue.’’
“I believe that the rising cost of building materials (especially when it is abnormal) will pull the purchasing power of intending homeowners and could further increase the number of abandoned buildings in the country,” Awobodu added.

Unfortunately, Nigeria is currently known as the poverty capital of the world. The nation recently exceeded India with the largest rate of people living in extreme poverty. In Nigeria, about 86.9 million people live in severe poverty, which accounts for about 50 percent of its entire population.
In summary, the Nigerian economy is bedevilled with problems which include: Growth problem, investment problem, inflation problem and debt/revenue problems. If the various sectors in the economy are to thrive in the nearest future, then resolution of these problems must be of paramount importance to the Nigerian government moving forward.

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