Lender-apathy persists as banks credit to real estate drops 5% in Q3

Nigeria’s real estate industry is among the least attractive sectors to the country’s commercial banks as it got one of the smallest portions of loan in the 3rd quarter of 2018.

The figures compiled from National Bureau of Statistics (NBS) last week, shows that Nigeria’s real estate sector was only able to attract N710.2 billion in the third quarter of 2018 as against the N744.56 billion and N784.2 billion it got in Q2 and Q1 in 2018 respectively.

Responding to the report, Olurogba Orimalade, the current Chairman of the Nigerian Institution of Estate Surveyors and Valuers (NIESV), Lagos State Branch, said a lot of banks got into trouble months back because of their heavy funding of real estate projects.

“For the banks, before it was more of let’s take a bit of risk by investing in the real estate sector but now it is about let’s not even take any risk at all,” Orimalade told BusinessDay.

A breakdown of the NBS report in the period under review showed that mining & quarrying and education also made the list of sectors that were least attractive to commercial banks in Q3.

Mining & quarrying received credit of N6.2 billion and education sector got N6.5 billion, as against N10.17 billion and N71.8 billion reported for the mining & quarrying and education sectors in Q2 respectively.

Rafiq Raji, the chief economist at Macroafricaintel Investment, said the sectors “are not good credit for banks at the moment.”

On the other hand, Oil & Gas and Manufacturing sectors got credit allocation of N3.59 trillion and N2.15 trillion to record the highest credit allocation in the period under review.

Analysis of the bank credit to the real estate sector revealed that commercial lenders’ borrowing to the property industry has a record high of N798.3 billion reported in Q3 2017, as compiled by BusinessDay since it started tracking bank lending data in Q1 2015.

Orimalade said a lot of the real estate assets banks invested in are now under the custody of Asset Management Corporation of Nigeria (AMCON), because there was default by the clients.

“The truth of the matter is, why would banks even want to lend to the real estate sector when there is Treasury Bills that can generate as much interest as they want,” Orimalade queried.

Meanwhile, a previous survey by BusinessDay showed that the property and construction market in Nigeria seemed to depend heavily on commercial bank’s lending to fund its operations, as the decline in lending to these sectors affected their performance in 2017.

According to the survey, total bank lending to Construction and real estate sector declined by 11 percent from 4.81 trillion in 2015 to 4.2 trillion in 2017.

“As a result of the recession in Nigeria from 2016, lending to most sectors declined. Also, banks saw other sectors viable enough to give credit because they were more certain to get their return from those sectors in order to prevent bad debt which is not good for their books,” an analyst noted on condition of anonymity.

The most recent Q2 report by the state stats reveals that Nigeria’s  real estate sector reported Gross Domestic Product (GDP) growth of -3.88 percent in the second quarter of 2018 compared to the -9.40 percent rate recorded in the previous quarter, in what is the 10th consecutive contraction since the last quarter of 2016.

Although the Q2 figures reported for the industry in the review period is 5.52 percent points better than the contraction reported for the sector in the first quarter.

Ayo Akinwunmi, Head of Research at FSDH Merchant Bank, says “the Q2 figures that seemed like an improvement in the sector is not actually good for the country in real term.”

Bank lending to construction and real estate sectors in Nigeria have remained dismal when compared to South Africa’s, the continent’s most-industrialised economy.

With a population of about 55 million, mortgages in South Africa account for almost 30 percent of total credit, the largest component of banks’ assets, which amounted to about 5.14 trillion rands ($382 billion) at the end of January, according to central bank data.

“Spreads between bank rates and MPR on approved new loan applications for all business sizes narrowed in Q3 2018, but are expected to widen for all business sizes in Q4 2018,” the NBS report said.

Nigeria Monetary Policy Committee (MPC) decided to leave its key interest rate at 14 percent to fight inflation and has kept rate unchanged since 2016. Eleven members of the MPC voted to retain the interest in its last meeting in November 2018.

Speaking on the way forward, Orimalade said until Nigerian government, through the central bank, starts to set out loans like it’s doing to the agricultural sector, there will not be progress in the country’s property industry.

“Until the government takes real estate and housing in particular, as a critical element that can stimulate the economy, we will remain the way we are,” he stated.

“I do not see bank lending to the sector improving; I actually see it getting worse. Considering that we are getting to an election cycle which may or may not lead to the change of government, a lot of these banks are playing very safe,” he noted.

 

 Endurance Okafor