There has been, in recent times, a heightened and renewed interest in foreign investor appetite for the Nigerian Real Estate Market.
Naturally, as in any other market, these foreign investors are looking for investments with attractive yields, yields that are far greater than they might receive at home.
There has, however, been a disconnect between foreign investor expectations and our local market offerings due, mostly, to a tendency for us to suppress and frustrate these potential and new investors into our markets,
There is an inherent irony for while we have seen, on one hand, a steady increase in the supply of commercial and residential units in Nigeria’s commercial centre of Lagos and the capital territory of Abuja, with standards and benchmarks being surpassed across the board and with some of the very best property developments we have ever seen enter the market, it is becoming increasingly difficult to guarantee positive occupancy rates, even with the very best Grade A, commercial and residential buildings.
In 2014, property prices across some parts of Lagos increased to the highest levels ever seen since early 2008 and as a result investors are finding making the decision to purchase property at a premium rate increasingly complicated, intricate and knotty when viewed against the uncertainties of timelines, occupancy rates, and rental yields,
With the steady increase in supply, high purchase prices and resulting uncertainty in demand, we have unwittingly created an emerging and critical need nay necessity to forge new property asset classes.
There is high demand from both foreign and local investors for property assets that can be purchased with existing tenants, ranging from occupied commercial office buildings, residential buildings, retail spaces or even university hostel accommodation. The market for tenanted accommodation as an asset class is completely untapped and could open up the industry to a huge capital injection from both local and foreign institutional investors.
It is rare to find (fully occupied with blue chip tenants) Grade A commercial and residential buildings available for sale, meanwhile, for a real estate investment, this is the most secure and attractive investment class that is open to investors with attractive and measurable rental yields that can be tied into the initial investment from day 1. Most investors are not looking for huge returns of up to 40 percent , but lower returns between 10- 15 percent, which is still highly competitive against most developed economies, and they are prepared to pay a premium to achieve this.
In more developed economies there is far greater participation from institutional investors where investment products and instruments are less volatile. In the current Nigerian market institutional investors are limited in their options with many leaning towards fixed income banking products and Government bonds which not only attract high interest rates but are guaranteed by the Federal and State Governments and top tier financial institutions. This has led to a very low concentration of investments in the real estate sector. So, because the traditional financial institutions have limited market liquidity, access to capital funding for the real estate sector through debt has become extremely difficult against pressure from other growing industries in need of capital from the same sources.
Nigeria has one of the fastest growing economies in the world with a growing population in hot pursuit adding pressure for jobs. The potential for job creation within the real estate sector and the housing gap is a strong indication of much needed Government support and access to funding to this industry. The current situation has forced the industry to grow at a rate that can only be described as a mere shadow of its true potential. A developing industry like the real estate industry should grow in sophistication and improving standards, while enabling more investments with less dependency on heavy debt financing. This will ultimately lead to lower project costs and lower purchase prices within the reach of the intended target market.
The vast majority of Nigerian professionals ask themselves this question everyday; how can we get on the property ladder in Nigeria with interest rates up to 25 percent per annum and strict collateral requirements for borrowing in excess of 120 percent against debt?
Yet every day we see cranes being mounted for further development right next to dilapidated ‘To Let’ and ‘For Sale’ signs on new buildings that have been vacant in excess of two years.
The answers to this question are all around us and finding sustainable solutions require the collective effort of all stakeholders. While we all agree that government and other regulatory bodies need to do more to support the industry with transparent policies, you can’t do that by fiat. For example, how feasible is it to ask that we change the laws on advance rent payments to a minimum of one year when you consider a developer or investor who has high debt repayments?
This a good point to note because common practices in developed markets with low single digit borrowing spread over 20 years cannot be compared to a market with 25 percent annual borrowing costs to be repaid over a 2-3 year period.
Typically in this market those who qualify for mortgages should be intelligent enough to see the impending repayment trap where they have to cover their principal repayment over a 4 year period in interest repayments alone for a 10 year period. They are better of looking for an alternative source of funding and using their industrious nature to do what I call ‘waiting for the container to arrive’ rather than face bankruptcy all in the name of home ownership.
To further develop the industry we need to define the different asset classes that would appeal to different types of investors that currently exist and therefore open up the market to satisfy their needs. These asset classes can be further buffered by a tier system supported by the regulatory bodies’ i.e. insurance and financial regulators creating the criteria for institutional investment within the industry. This is currently non-existent.
With different risk factors associated with the different asset classes, each investment group can make a decision according to their own regulatory guidelines and personal risk appetite. With a clear definition of these asset classes and risk profiles we would enable much needed capital injection into the industry therefore creating the added benefit of much needed stability required for true exponential growth.
There is a clear case for tenanted accommodation as an asset class, which minimises investor risk with a guaranteed yield on their investment. The upside for investors is a guaranteed rental yield that can be tied into their initial investment and still have an appreciating asset. There will be a better spread of capital across the board, when we start to see these new asset classes being created and hopefully, our local and foreign pension funds and other institutional investors would be more comfortable injecting much needed capital into the industry.
This would surely lead to real growth within the industry.
LEYE TAIWO
