Why investors are confident in real estate amid sector’s negative growth
Since the last quarter of 2016 which is about nine consecutive quarters now, the real estate sector has been recording negative growth despite positive growth report in the wider economy.
The sector contracted by -9.40 percent in Q1 2018 from -5.92 percent in Q4 2017 and -4.12 percent in Q3 2017. The first quarter contraction was -6.3 percentage points worse than the -3.10 percent reported in the comparable period of 2017.
Analysts say the negative expansion recorded by the sector in the first quarter of this year is the worst contraction the property market has seen since Q1 of 2016. This, obviously, accounts for the high number of empty houses, delinquent tenants and unhappy landlords.
The Q1 2018 report by the Nigeria Bureau of Statistics (NBS) shows the economy expanded positively by 1.95 percent, a stronger growth when compared with the -0.91 percent in the first quarter of 2017, indicating an increase of 2.87 percentage points.
However, despite these negative reports from the sector, investors are still confident such that the cranes are still rising and falling in many construction sites, though not with the scale and number that were seen in pre-recession years when investment level was high and returns were robust.
“Real estate is not a trade. It is a long term game and when you are in it you have to look at cycles rather than any moment in time. When you are planning any real estate development, you have to do so in seven to 10-year cycle. Usually, when the demand side is strong, that is when the supply side is weak and vice versa”, explained Paul Onwuanibe, CEO, Landmark Group, in an interview with BusinessDay.
The Nigerian real estate market has very strong fundamentals which a savvy and patient investor with long term view of the market cannot gloss over. Such an investor should not be discouraged by down cycles as the market is experiencing at the moment.
This is because at the time an investor conceives an idea to develop a project, it probably takes him a whole year to go to the drawing board. From the drawing board to the regulatory environment will take him another year which means two years gone. By the time he goes into the supply chain and builds, about two years are spent, making it four years from conception. By the time the project is completed, it will be about five to six years down the line.
Onwuanibe argued that if the idea of this project was conceived during the boom years, the investor might go into recession when he deliver it and vice versa. “So, if you are planning real estate, you have to do so across both cycles—the boom and the recession and it is not common in any environment that you have both the boom and recession happening the same time”, he said.
This is the mindset that is nurturing the development of the ambitious Landmark Village, a one-stop- shop development with one-lifestyle destination. The Village, an expansive development comprising residential, commercial, hospitality and retail business, is a specific one-stop-shop market where the leisure, business and hospitality communities can meet and interact. It is a five-phase project that aims to offer spectacular opportunity for leisure, working, living, shopping and eating facilities.
“We are now in phase two of our five-year development. We have finished phase one which comprises the event centre, the Hard Rock and Shiro. The second phase is the retail. The third phase will be hotel and residential apartment. The last phase is another set of offices”, Owuanibe explained.
A major market fundamental that nurtures their confidence and drives the project is Nigeria’s strong demography or what Onwuanibe called “the people issue”. “Nigeria has a large number of people who are very aspirational. The same thing with Lagos. I understand that the median age in Nigeria is 19 years while the average age is 27; so we have about 75 million people between the age of 16 and 27”, he noted.
The implication of this is that the future is bright and promising for investors with long term view of the market. This is because 75 million young population of the country will have to live, work, eat and play; they will go to school and hospital somewhere and real estate envelopes all these.
Provisions have to be made for them and this translates into investment opportunities. This also means that, eventually, the real estate market, with the right government enablement and right financial dynamics, will always prevail.
Fabian Ajogwu, chairman, Novare Real Estate Africa, affirms, saying that as a company, they have very strong confidence in the Nigerian economy, especially in the retail segment of the real estate market.
“We are not deterred or discouraged by short term limitations because we are not here for the short term; we are here for the long haul”, Ajogwu, a professor and Senior Advocate of Nigeria (SAN), insisted. This, clearly, explains the company’s investment of over $500 million in retail development, creating over 5,000 jobs and direct tax revenue to both state and federal governments.
This confidence is however tainted by challenges bordering on regulatory framework, hash operating business environment and finance.
“The supply chain is a challenge but you can improvise some of the things that are not available locally; if you create a mega city, you must enable real estate; you must create a system that would enable developers to build, make it easy for them to bring in materials and the tax system must be friendly enough to enable development.
“The statutory environment must be enabling; there should be landlords and tenants laws, property registration laws and things that should enable property developers to finance their real estate has to get better. Considering that real estate is a long term business, you need a long term financing to deliver it quickly”, Onwuanibe canvassed.
CHUKA UROKO