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Liquidity squeeze depresses construction, real estate companies

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Sector down 13.78% year-to-date

By Nkiruka Nnorom

THE on-going liquidity crisis that has affected virtually every sector in the country is taking a toll on the construction and real estate companies listed on the Nigerian Stock Exchange, NSE, as the sector currently ranks one of the worst performing sectors in the stock market. The sector is the only one that posted negative returns for the three consecutive quarters this year.

Specifically, activity in the sector went down by 13.78 percent year-to-date though it outperformed the NSE All Share Index, ASI, which is down by 16.34 percent year-to-date (y/d). Though almost every sector in the market recorded dismal performance in the third quarter (Q3) ended September 30, 2018, the real estate and construction sector has maintained poor outing in three consecutive quarters this year. In the first quarter ended March 31, 2018, the sector declined by 15.97 percent. The performance improved in the second quarter, but maintained a down-trend to 13.79 percent, while it closed the third quarter with 13.78 percent decline.

The lacklustre performance has also spread to other real estate related products, including real estate funds – a mutual fund that focuses primarily on investing in securities offered by real estate companies – and Real Estate Investment Trust, REIT.

Financial Vanguard’s analysis showed that investment in REIT declined by seven percent between January and October 2018, according to data from the Securities and Exchange Commission, SEC. Capital market operators opine that the state of the sector is reflective of the general state of the economy, saying that once the economy picks up, the sector will be revived.

Hakeem Ogundiran, a former Managing Director of UAC Property Development Company, UPDc Plc, and Founder/Chief Executive Officer of Eximia Realty Limited, speaking at forum by stakeholders in real estate, said that the slow progress in the sector is attributable to inconsistency in government policies and high cost of construction. Additionally, he said that access to long-term funds is very limited hindering progress in the sector.

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Construction/real estate vs other sectors

Financial Vanguard’s analysis of performance of the 11 sectors on the local bourse so far this year showed that the oil & gas sector appreciated the most, rising by 8.63 percent, followed by the agriculture sector, which rose by 7.84 percent and services sector that notched up by 4.69 percent. The financial service sector recorded a marginal increase of 0.89 percent.

However, the natural resources sector, the information and communication technology, ICT, and the healthcare sectors led the laggards, dropping by 24.85 percent, 15.94 percent and 13.78 percent respectively. The real estate sector placed fourth with 13.78 percent decline, while the consumer goods and industrial goods sectors were down b 2.48 percent and 2.31 percent respectively.

In the second quarter of the year, the consumer goods sector appreciated the most, rising by 31.27 percent, followed by the financial service sector with 27.03 percent increase and the agriculture sector, which rose by 25.46 percent. The services sector placed fourth, rising by 20.46 percent; industrial goods sector appreciated by 12.59 percent, while the oil and gas, conglomerates and healthcare sectors were up 4.58 percent, 3.01 percent and 2.38 percent respectively.

The natural resources sector led on the flip side, depreciating by 18.05 percent, followed by the construction/real estate sector, which fell by 13.79 percent and the ICT sector with 10.08 percent.

Companies’ performance in construction/real estate sector

Further analysis showed that the share prices of the four companies listed in the sector ended the period in red. While two of them, Arbico Plc and Roads Nigeria Plc stagnated, UAC property Development Company (UPDC) Plc and Julius Berger Nigeria Plc recorded price decline of 41.22 percent and 23 percent respectively.

Similarly, out of the three REITs trading on the Exchange two of them – Skye Shelter Fund and UPDC REIT – recorded price depreciation at -5 percent and -10 percent respectively. However, Union Homes REIT appreciated by seven percent during the period.

The performance of the share prices is largely reflective of the financial positions of the companies as the three companies that have released their Q3 and nine months financial statement indicate a bad financial state.

UPDC Plc’s revenue, for instance, slumped by 36.6 percent to N1.989 billion from N3.136 billion in Q3’18, while it recorded a worsened loss before tax dipping by 138.05 percent. Specifically, the company recorded N4.530 billion loss before tax (LBT) compared to N1.903 billion LBT in the same period in 2017.

In the same vein, Arbico Plc’s revenue went down to N3.270 billion from N3.899 billion, representing 16.1 percent decline. Its profit before tax (PBT), however, improved by huge 320 percent to N174.29 million from N41.46 million in the corresponding period in 2017.

For Julius Berger Nigeria Plc, it was a mixed performance. The company’s revenue rose by 12.3 percent to N118.47 billion from N105.485 billion in 2017, while its PBT nosedived massively by 93.8 percent to N5.056 billion from N81.562 billion in 2017.

Operators react

Tola Odukoya, Managing Director/Chief Executive Officer, FSL Asset Management attributed the poor performance to liquidity problem within the economy.

He stated: “The real estate to a large extent is not doing well, even within the economy just because of liquidity issues. Though it is still a very good investment outlet, but for the fact that there is no liquidity generally within the system, investors are shying away from the sector because they need a sector that will guarantee them return on investment.

“Most people are also putting off their projects because they are finding it difficult to finance those projects. So, that dryness of liquidity affects the performance of companies within that space also.

“It is a sector that has a strong positive correlation with the performance of the economy; so when the economy was doing well, this sector was also doing well. We just came out from recession and there is the likelihood of the economy sliding back into recession. So, in a situation like this, in terms of scale of preference, real estate and construction sector is not the first thing people think of. They will, first of all, think of the basic needs of feeding and clothing. Once the economy picks up significantly, you will see activity in the sector will also picking up.”

“If UPDC Plc, for instance, was selling 200 or 500 units daily when the economy was good, I am sure it will not be doing as much as that now because of the liquidity crunch and of course, that will affect their performance in the stock market.

“Julius Berger, (JB Plc) which is a key construction company, has been having issues for sometime and it boils down to the same problem of liquidity.

“Do not forget that some unlisted construction companies are also competing with Julius Berger in vying and securing government contracts that, typically, would have gone to Julius Berger and this is eating into JB’s market share, Odukoya asserted.

Also reacting, Mr. Charles Fakrogha, Chief Relationship Officer and stockbroker at Foresight Securities, said: “The performance of the sectors in the market reflects what is going on in the larger economy. If you look at real estate itself (construction and housing), we are not seeing any activity there. There is a serious lull in the sector and the companies operating in that space are not doing well at all and that is what is reflecting in the market where we are seeing their performance. Virtually all the real estate companies are not doing well in the market and it is just a simple reflection of what is happening in the general economy.

“The sectors that are doing well in the market, of course, comprise of companies that deal on essentials. The consumer goods sector, for instance, is doing well because they offer essential commodities and that is why it is performing well. Companies in consumer goods and agriculture sectors sell products that everybody needs and so despite the liquidity crisis in the economy, some of these sectors will continue to perform well and companies that are in the sectors will continue to sell their goods and services and people will continue to buy and you see that also reflecting in their prices.”


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