Rising costs: Residential real estate outlook shows slower short-term transactions

Though strong fundamentals still underpin the residential (living) segment of the real estate market investments globally, sector outlook shows slower short-term transactions due to rising costs, a new report by Jones Lang LaSale (JLL) says.

The report notes that, in many markets, investors are adopting the wait-and-see attitude to investment and to the market generally. In Nigeria political uncertainty, more than anything else, accounts for that attitude as the country prepares for general elections early 2023.

The sector will continue to face challenges through the coming months on both operational and investment fundamentals, according to the report titled ‘Global Real Estate Perspective November 2022’. It cites rising energy costs, particularly in Europe, which will moderate the near-term outlook for real rental growth.

It, however, hopes that government support for household bills will be a welcome boost to landlords.

“Uncertainty surrounding construction and financing costs will flow through to investor activity and pricing in Q4 and early 2023. Deal-making will be relatively slow for the next couple of quarters as a result,” the report notes.

Back home in Nigeria, despite increased demand for residential property, there’s still a shortage of available homes due largely to liquidity crisis affecting the economy which is in turn piling pressure on the nation’s real estate, especially the residential market.

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In recent time, the market has seen new factors that are adding to investors’ woes in terms of costs. These are construction cost variations on projects which are hurting investors, making them shift completion dates. This has the singular disadvantage of delaying supply.

Another factor is increase in labour cost as a significant part of the labour force has raised their costs due to inflation and increasing standard of living. In some cases, labour is not readily available locally.

JLL, however, sees some respite going into the future. The company notes, in the report, that as more stable market conditions emerge into 2023 and beyond, and stakeholders adjust expectations, the residential sector will be one of the more favoured sectors globally.

“Owner-occupier housing market price adjustments (driven by higher mortgage rates) will drive solid rental demand, while the structural undersupply of student homes (and other forms of resident-specific accommodation) will continue making the investment case for purpose-built student accommodation (PBSA) and new forms of home such as co-living,” the report says.

The report reasons that capital expenditure (Capex) requirements for the retrofitting of older stock, in advance of new regulations, will become an increasing challenge for some landlords, while residents will be more conscious about energy efficiency.

At the local level, the most common factors influencing market activities include depreciation of the naira, poor access to state land for mass housing, high cost of building materials, and high cost of finance.

Others are a larger population of citizens desiring homeownership, shortage of options for low-income earners and lack of conducive environment for investors seeking long-term wealth.

Amid these challenges, most of which are surmountable where there is political will, some market players still see hope. Sam Eboigbe, an estate surveyor and valuer, was quoted as saying recently that the listings and corresponding offers of residential real estate transactions and deals in the marketplace are lately becoming interesting.

“It should be appreciated that apart from the initial setbacks witnessed in the sector during the COVID-19 and immediately after, the market has recovered in selective areas with impressive performance,” Eboigbe said.

He noted that what the commercial real estate sector would record as setbacks are, however, regarded as the multiple gains for the residential real estate market, adding, “we have in recent times witnessed offices downsizing and offering some units of commercial spaces back to the market.”

According to him, the work-from-home culture introduced into society has positively influenced the high volume of deals in the market. “We have witnessed tremendous appreciation in the prices of serviced residential blocks of flats in Lekki Phase 1, Victoria Island and mainland post-Covid till the present day on concluded listings.

“It is not unusual to find listings not marched with healthy offers as some developers who desired to take advantage of the market introduced products, which could not compete with the expectation and standard available in the market. For early closure of deals, you are advised to come up with generous designs and tastefully finished products that will stand out in the market,” he said.

He said emerging factors capable of influencing the market may not have changed much, except with the unimaginable exchange rate with the naira being exchanged at N850 to a dollar going by the black market.

Yemi Adelakun, a property developer and managing director of Nigeria Integrated Social Housing (NISH) Affordable Housing Limited, also confirmed that the residential real estate market in the upper and medium income bracket was doing good, given the purchasing power of the off-takers.