Though Nigeria is said to have exited its 13-month economic recession following a 0.55 percent growth in GDP after five consecutive quarters of negative growth, the impact of that recession is still much pronounced in the various segments of the Real Estate market.
In the past 18-24 months, property developers/investors have been going through enormous challenges arising from an unfavourable macro-economic environment and it has been such that those of them playing at the high end market are now counting losses.
Analysts say this is expected in a market where costs are rising, but income is either falling or has remained stagnant because products are sold below production cost or not sold at all.
On account of inflation, building material costs have gone up. Iron rod is leading the pack as a ton of 8mm iron rod which was selling for N150, 000, a few months ago, now sells for N250, 000, representing 75 percent price increase.
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The Managing Director and Chief Executive Officer of economic consulting firm, Financial Derivative Company (FDC) said that most construction and real estate firms are underperforming because the replacement costs of property are higher than the market value.
Replacement cost is the estimated cost to construct, at current prices, a building with equal utility to the building being appraised.
“Price of building materials such as Iron rod, cables and cement and interiors have risen as a result of an economic downturn,” said Rewane.
The trend is confirmed in the results of UAC Property Development Company (UPDC), Nigeria’s leading real estate developer, which recorded a loss after tax of N2.21 billion for the nine months period through September 2017, representing a 21,028 percent surge from a loss of N10.50 million it recorded in the previous period.
Drilling into the UPDC figures shows the loss was due to 241.49 percent and 364.49 percent surge in cost of sales and finance costs or interest expense to N2.79 billion and N3.91 billion respectively.
The company said the average interest rate for facilities during the period was 22.1 percent in 2016, which industry watchers say is high as they blame the spiralling interest expense on the high interest rate environment.
The Central Bank of Nigeria (CBN) has kept its monetary policy rate (MPR) elevated at 14 percent in a bid to support the naira.
Apart from high interest rate on loans, Adetokunbo Ajayi, the CEO, Propertygate Investment Limited told BusinessDay in an interview that lending to real estate dropped by 10-12 percent early this year.
Added to this, most of the building materials were imported at a time when naira exchanged at N467/$.
But demand for the products have fallen just as sales have plummeted. “Today in Nigeria, people are more concerned about eating food and getting well, not buying houses”, Omo Aisegbonhi, MD/CEO, Omais Homes confirmed in an interview, stressing that sales have also crashed in the market.
Rent default is on the rise and Orimalade Olurogba, chairman, Lagos State Branch of Nigerian Institute of Estate Surveyors and Valuers (NIESV), affirms that “about 80 per cent of all properties under my care have defaulting tenants who were previously meeting up their obligations.”
Nigeria’s real estate sector contracted by -3.53 percent in Q2 from -3.1 in Q1, 2017 according to a recent report by National Bureau of Statistics (NBS).
The lack of access to foreign exchange on the interbank market and the continuous depreciation of the Naira on the parallel market resulted to higher costs for retailers looking to fit out and restock their stores, according to the 2016 audited financial statement of UPDC Real Estate and Investment Trust Securities (REIT), a subsidiary of UPDC.
“This also resulted in higher costs for the required periodic maintenance for a commercial building,” said UPDC REIT. UPDC REIT was affected negatively by the challenging macroeconomic environment as VMP 1, which was occupied by Mobil Nigeria Limited until October 2015, is currently vacant and not generating income,” said UPDC REIT.
Virtually all segments of the property market have different levels of vacancy rate.
Udo Okonjo, CEO, Fine and Country, estimates vacancy rate in high end residential neighbourhoods, especially Ikoyi in Lagos and Asokoro/Maitama in Abuja, at 50 percent as “many of the mansions are empty.”
Foot traffic has dropped significantly in retail malls; rents have also dropped with high vacancy rate.
While the big malls in Lagos and Abuja are leading the vacancy rate, averaging 50 percent, there are vacancy rates also in Port Harcourt malls averaging almost 10 percent as the three malls in the Garden City namely Big Treat, Genesis Centre, Port Harcourt Mall have recorded 14 percent, 6 percent and 8 percent vacancy rates respectively.
The commercial office space market is, arguably, the worst hit, struggling with oversupply, high vacancy rate and rent drop.
In 2015, asking rent for prime office space was between $900 and $1,200 per square metre; in 2016, it dropped to between $700 and $800 per square metre; now, it is between $600 and $750 per square metre.
This represents about 32 percent rent drop in just three years.
Despite the economic challenges, analysts are optimistic that the country’s growing population that crave for accommodation will drive the demand for properties in the future.
CHUKA UROKO & BALA AUGIE
