Why investment appetite for build-to-let residential property is low

Though the residential real estate market is growing and expected to grow more as a result of huge investments in the market and high demand driven chiefly by urbanisation, investment appetite or interest in the build-to-let segment of the market remains low.

Analysts have described this as a paradox of numbers in a country where the rental market is very active in its major cities, especially Lagos, Abuja, Port Harcourt, Enugu, and Kano where it is estimated that 50-80 percents of the residents live in rented accommodation, spending a sizeable percentage of their income on house rents.

With this scenario, it is expected that investors would not think twice before moving in to tap what is, obviously, low hanging fruits in those locations. But that is not happening.

Rufybaba offered some insights on why majority of investors are staying away. “The average gross yield of residential real estate in Nigeria is between 6 percent – 10percent,” he wrote on his X (formerly Twitter).

He added, “the last time I checked, the average cost of building a room was ₦5million and that was in 2020 or thereabout. That figure could have 3x or 5x by now. Let’s work with a ₦20million cost per room.”

What this means is that to build a three-room apartment by 2020 would have cost the builder conservatively N15 million. Today, given the rising cost of input materials, a builder would need over N15 million to build a room and a minimum of N45 million to build a three-room apartment.

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Unless the builder sells out the rooms on completion, it will be difficult for him to achieve the 5-10 percent yield if he rents out the apartment because of not only the difficulty in collecting the rents, but also the length of time it will take to recoup his investment.

Abayomi Onasanya, CEO, Student Accommod8, shares this view, stressing that apart from commercial real estate facilities such as office space and industrial buildings, student housing is the way to go as, according to him, residential real estate gives low returns on investment.

“Student housing as an investment asset can generate about 22 percent returns which is more than double what commercial real estate gives and more than the 4-5 percent returns per annum on residential property,” Onasanya, explained to this reporter in an interview.

Odunayo Ojo, CEO, UPDC Plc, described investment in rental property as service to humanity as it is not always profitable. “Anytime you build a house and rent it out to people, you have subsidised their lives and that is largely the return you get on your investment,” he explained.

Ojo, who was a guest at BusinessDay Television, said that as a developer, he would like to invest in a residential project, complete it, sell it out and move on, adding that because of the way the society is structured, enforcing rent recovery in the event of default is difficult because it becomes a moral issue.

“People go into investing and developing rental property as a thing of prestige, service or self-fulfilment. They are happy that they have property somewhere and people are living them as his tenants. Such people derive fulfilment from such investment and are less bothered about the returns,” he said.

Ojo noted, however, that besides private sector efforts to satisfy the growing need, the public sector is also active, recalling that the Federal Government partnered with Shelter Afrique Development (ShafDB) to deliver 5,000 housing units – a small target, but a worthwhile one considering that Nigeria is the second-largest shareholder in ShafDB with over $29million contribution.

Northcourt report on The Real Estate Market adds that Quickteller Homes, a subsidiary of Interswitch Group, moved into homeownership provision through instalment payments. “By integrating flexible payment options, the platform plans to ease the financial burden for Nigerians,” the report says.

Growth and Development Limited launched HouseMoni, a rent-to-own scheme offering a financially sustainable path to homeownership, according to the report. It explains that HouseMoni features a fixed 9.9 percent interest rate over 15 years, through a 3.5-year savings period followed by up to 11.5 years of financing.