Why luxury real estate still finds buyers amid economic downturn

In a curious case of twisted law of economics, luxury real estate still finds buyers in the Nigerian property market despite the downturn in economy that has seen incomes drop and consumer purchasing power shrink considerably.

A luxury real estate or home is one that is valued within the top 10 of such properties on the local market. Such properties tend to be considerable in size, located in optimal areas, constructed and finished with high-end materials.

They are designed with uncommon architectural details and exceptional amenities, and therefore they command and people pay premium prices to acquire them. Usually, luxury real estate suffers market lull in a troubled economy such as Nigeria’s, and immediate follow-up of such a situation is high vacancy factor resulting from subdued demand.

But this is not the story in the Nigerian market where, though the economy is bad, developers are still putting products on the market and people are buying as if all is well with the economy and purchasing power of individuals.

“There is huge cash supply caused by the dollar-naira exchange rates. A lot of people, especially the wealthy people in society, are seeking a home for this cash and real estate is about the one and only viable destination,” MKO Balogun, CEO, Global PFI, explained to BusinessDay.

Balogun noted that most of the people who buy do so as an investment, citing Diaspora Nigerians and footballers who, according to him, earn hundreds of pounds and dollars monthly. “These people don’t buy to live but to invest; these are patient cash; they are not bank loan,” he added.

Since there are still vacancies, now hovering between 30-50 percent, in well-built properties within luxury areas like Ikoyi or Victoria Island, it is clear that the driver is not excess occupier demand, according to Dolapo Omidire, research director at Estate Intel.

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He affirmed that luxury residential property developers are taking advantage of the greater liquidity that high net-worth individuals (HNIs) and other individuals with non-institutional capital seemingly have.

“The developers are sponsoring new projects that these owner-occupiers and ‘store of value investors’ are eager to buy in spite of high vacancies or rental volatility. As more of these projects start and eventually get sold out, a handful of the units may not be leased or will remain vacant,” he noted.

What is happening in the luxury real estate market, apart from being unsustainable, is not a true reflection of the economy but, as Balogun put it, a fallout of government policy that allows people outside the country to import their money home.

The true reflection of the economy, relative to the property market, is that, because of lay-offs and salary cuts in many organizations as a result of the slowdown in the economy, many people have downgraded their accommodation requirements.

Many of the middle-level workers in the oil and blue-chip industries, who used to occupy posh and large-size apartments, have come down to one-bedroom and two-bedroom apartments. Some of them who lived on the island have migrated to the mainland, pushing demand and rent for small-size family units in places like Surulere, Ilupeju, Gbagada, Okota, Amuwo Odofin, etc to unimaginable levels.

Another reason for the curious rise in demand for luxury real estate is corruption in governmental systems where public office holders who embezzle public funds find real estate a ready haven for the stolen money.

At a recent media programme in Abuja, Abdulrasheed Bawa, chairman of the Economic and Financial Crimes Commission (EFCC), described the real estate sector of the economy as a major conduit for money laundering in the country.

The chairman noted that 90 to 100 percent of stolen public funds are used for the procurement of houses and lands, citing a case of a female minister who bought $37.5million property from a bank manager and deposited $20 million cash.

Though Chudi Ubosi, Principal Partner at Ubosi Eleh+Co, does not see what is called luxury properties in the Nigerian market as a luxury in the real sense of it, describing what is happening in the market as pent-up demand, Udo Okonjo, CEO, Fine and Country West Africa, sees some benefits in investing in that space.

Okonjo cited Victoria Island where she mentioned gain in property values and capital appreciation as part of the benefits in investing in luxury real estate, pointing out that VI is a prime location at the nerve centre of Lagos upscale market, financial and business district.

“Properties located in this area will continue to reap economic gains and increase in value. More lucrative jobs, businesses, and recreational activities will continue to enter this marketplace. The effect is an increase in demand for office spaces, business outlets, and housing,” she said.

Compared to other investment assets like bonds and stocks, real estate has lower risk. Its prices will continue to increase through economic constraints long term because of its intrinsic value. In Victoria Island, for instance, luxury real estate is limited in supply due to a fixed amount of land.

Luxury properties attract high net-worth individuals who can afford luxury lifestyles. Because of luxury living in prime locations, there is a strong demand for luxury homes, which is why investors scramble for the limited space in the upper-end locations to cite their investment.