February 13, 2012

Real estate: Economic impact in 2011, expectations for 2012

By Yinka Kolawole
Nigeria’s economy slowed down marginally in 2011 with real GDP falling to 7.4% in the third quarter of the year compared to 7.7% in the corresponding quarter of 2010. Inflation was unsteady throughout the year – 12% in February, up to 13% in May, and by November at 10.5%. Foreign Direct Investment inflows into the country fell from $8.65 billion in 2009 to $6.09 billion by the end of 2011.

Alitheia Capital Limited, an impact investment firm based in Lagos, noted in a report that by end Q2, real estate transactions and construction borrowing picked up slightly. Sector growth fell (by 0.2%) compared with the corresponding period in 2010. Its contribution to real GDP however increased from 1.62% in the third quarter of 2010 to 1.67% in 2011 arising from increased volume of activities at the low end of the residential market.

The over-supply of the high-end residential housing continued into 2011 as several projects which had stalled due to the economic crisis were completed. It is reported that more than 300 additional residential apartments were delivered in Ikoyi between 2010 and 2011.

This further helped to soften rental prices in 2011, with rates falling by between 10% and 15%. Real estate valuers report that in high-end residential areas of the city such as Banana Island, Ikoyi and Victoria Island, land and property values were stable throughout the year. However, several transactions were consummated at discounts ranging from 10% to 15%.

In emerging middle income neighbourhoods on the city’s mainland, land values increased by up to 30% and in the relatively new gated communities along the Lekki corridor, property prices appreciated by between 20% and 40% (rental rates) and up to 40% on sale values.

There is no information to support the assumption that insecurity issues in the country affected the real estate sector, however, it is noted that a number of large scale projects in partnership with international developers/investors failed to take off in 2011.

Other factors which contributed to inactivity in the sector include a diminished effective demand for housing, insufficient resources available to developers and other operators in the sector, including the lack of debt funding which continued throughout 2011.

Although the construction of large infrastructure projects under PPP arrangements in cities such as Lagos continued in 2011, many government backed programs were adversely affected and many projects have been suspended or had their terms and tenure altered in recognition of the new economic realities.

Research conducted by Alitheia Capital revealed that there are a few events which have taken place that will have an impact on the real estate sector in Nigeria this year. Asset Management Cooperation of Nigeria (AMCON) commenced the purchase of banks assets in 2011 in the process acquiring a real estate portfolio said to be valued at N500 billion.

While it is not clear how AMCON intends to deal with this portfolio, it appears to be working toward the creation of the largest property development/management company. The company recently engaged 70 professional valuers to determine the appropriate value of assets of borrowers transferred to it.

Increasing tariffs and taxes. Lagos State has introduced a tax on rent collected, electricity tariffs have risen by 50%, and more roads are expected to be tolled. The partial removal of the subsidy on fuel and the attendant increase in the cost of goods and services will impact the cost of construction – material and labour.

Increasing PPP activity – as more governments recognise the benefit of private sector involvement in key projects, bringing to bear better implementation discipline, and projects are successfully delivered under such arrangements, we can expect to see significant injection of private funds in government projects.

Housing micro-finance – the emergence of housing products in the micro financial services sector is set to make available relatively small amounts of money to the underserved specifically for home improvement and extensions.

It is expected that as this product develops, larger loans will become available for affordable housing developments in conjunction with NGOs and other institutions that currently focus on this sector but are hampered by a lack of funding.

Further consolidation of banks is expected to go on. It is hoped that with bigger stronger institutions, lending will resume to the real and private sector, including real estate.

Effective mortgage structure – the Federal Government (FG) targets for the sector to contribute 15% to GDP as part of its Vision 2020 agenda as against current contribution of 1.8%   It also promises to recapitalise the Federal Mortgage Bank of Nigeria (FMBN) to the tune of N250 million, which should help create a foundation for FMBN to access capital market in the future for subsequent fund raising without having to rely on the FG for funds.

Other factors envisaged to impact the real estate market in 2012 are related to government’s intention to ban the importation of cement (a major component of any construction project) by the end of Q1 in 2012. Current cement consumption is about 17million tonnes per annum, 50% of this requirement is delivered by Dangote Cement.

Based on expansion plans put in place in 2011, it is expected that Nigeria will become a net exporter of cement. However, this may not result in a reduction in cost (a 50kg bag of cement costs 120% more than in South Africa, Gambia or Senegal) as the inefficiencies in the economy including transportation and distribution logistics continue to plague the country. In practical terms, a March date may not be realistic and could result in the price of cement skyrocketing.