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Real estate GDP improving but concerns remain

In the last two quarters, the Nigerian real estate sector has shown significant improvement, recording positive growth and showing prospects for investors. But these have been diminished by soaring building materials prices within the same period.

The sector posted positive nominal growth of 8.04 percent as reflected in the first quarter 2021 gross domestic product (GDP) report released at the weekend by the Nigerian Bureau of Statistics (NBS).

The sector returned to positive growth with 2.81 percent year-on-year in the last quarter of 2020. This enabled it to crawl out of recession after six consecutive quarters of negative growth. Its last positive growth of 0.93 percent before this period was recorded in Q1 2019.

In 2020, as the COVID-19 pandemic ravaged the economy, the real estate sector was also affected as the health crisis elevated vacancy rates in commercial properties, reduced average footfalls across retail centres and slowed the completion time of many residential developments and infrastructure projects.

The performance of the sector in the last two quarters, therefore, reflects the full reopening of the economy as many residential and commercial projects have begun full operations following quantitative easing of the pandemic.

The positive growth has also been attributed to increased construction activities and investment by investors scrambling for attractive yields in real estate as a preferred investment destination.

Bismarck Rewane, CEO, Financial Derivative Company, affirmed this at a breakfast meeting in Lagos. As of November 2020, residential construction spending in the private sector alone was up almost 7 percent while privately-owned housing starts also recorded 12.8 percent year-on-year growth.

Based on this, experts predicted significant growth for the sector from Q1 2021 going forward. “We expect to see growth in the sector as many projects that were put on hold amid the COVID-19 lockdown will commence,” Temitope Runsewe, CEO, Dutum Construction, said.

The implication of these developments is that opportunities are opening up for investors while hope of more jobs coming is rising. The construction sector is said to be the highest employer of labour. Analysts estimate that every square metre of real estate activity creates jobs for three people.

The slowdown in other investment asset classes such as equities, bonds and Treasury bills has swayed investment interest in real estate and that also explains why there is an influx of investors, especially those with patient capital and long-term view of the market, into the sector.

Increasingly, real estate developers have become innovative, according to Rewane, and that attracts more investment which is why land and house ownership packages now come with instalment payment plans. This has the advantage of bringing more people on to the property ladder.

Meanwhile, the gains of these recorded growth and the attendant opportunities are under threat from rising building materials, many of which, notably cement and iron rods, have seen over 60 percent price increases in the last six months.

Across Nigeria, cement price has hit the roof. In Lagos, for instance, Dangote Cement increased from N2,600 in October 2020 to N3,800 or N3,600 in some areas in April 2021; Lafarge Cement and BUA Cement increased from N2,400 and N2,250 to N3,600 and N3,250, respectively, within the same period.

The story is not any better in Port Harcourt where the price of the commodity has moved from N2,600 in November 2020 to between N4,000 and N4,200 in April 2021 for a 50kg bag.

In Abuja, the price hovers between N3,600 and N3,700. Dealers buy from the cement depot at N3,400, but the cost of transportation and off-loading push the price to N3,700 per bag at retail shops.

The price of steel reinforcement bars otherwise known as Rebars is a major source of concern in the building industry. From N275,000 per ton in September 2020, the price rose to N345,000 per ton in January/February and stood at N400,000 per ton in March 2021.

“At the current price, it means the price of cement within the first quarter of this year has moved over 70 percent. That means the dream of an average Nigeria to own a home is now very slim,” noted Kunle Adeyemi, CEO, Sterling Homes, in an interview.

He added that, for developers, that is a huge challenge because they have already fixed the prices of houses that are still being built. “At this cement price, you cannot deliver at your price,” he lamented.

The price of iron rods, according to Debo Adejana, the chairman of the South West Zone of Nigerian Real Estate Developers Association (REDAN), has almost doubled in the last six months too.

“We have found ourselves at the crossroads where we cannot discontinue on-going developments, yet it is difficult to continue because of rising prices. It is a dilemma and I believe this affects everybody. If you are not a developer or landlord, you must be a tenant; so we are all victims,” he said.

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