Market rebound not in sight as 2016 leaves investors with sobering experience

For most investors in the various segments of the real estate market including residential, commercial, retail and office space, it has been a tale of woes as falling national revenue, liquidity squeeze, decline in foreign and local investment, high interest rate, weakening currency and atmosphere of uncertainty which defined the Nigerian economy in 2016 left them with sobering experience.

Falling demand arising from diminishing household income and low consumer purchasing power, left the market with not only low activity, but also a disquieting vacancy rate which, as at the end of the third quarter of this year, was estimated at 34 percent and 49 percent for commercial and residential real estate respectively.

As if that was not enough, the outlook for 2017 is not promising as vacancy factor index (VFIX) is seen increasing to about 80 percent, up from 74 percent in 2016. Bismarck Rewane, CEO, Financial Derivatives Company (FDC), in his monthly economic review recently, said the market would start witnessing gradual recovery from its present state by the fourth quarter of 2017.
“Forex scarcity will further increase cost of building, though it will also encourage innovation and import substitution, there will be gradual recovery of the market from Q4 2017, VFIX is likely to increase to 80 percent in 2017”, he predicted, noting that because vacancy rates are a lagging indicator, they will follow the trend of the business cycle.

It has really been a very tough year for developers and sundry stakeholders in this market. Adetokunmbo Ajayi, President/CEO, Propertygate Development and Investment Company Plc, recalls that the market as at the end of the third quarter of the year had recorded 8.20 percent sectoral contributions to GDP which was a decline compared to 8.74 percent recorded the same period in 2015.

“With lending institutions facing their own troubles, lending to the sector was anything but cheerful”, he noted in his review of the real estate sector in 2016, quoting a Central Bank of Nigeria’s report of November 2016, which says that interest rate on prime lending to real estate activities from 26 percent of lending banks is between 24 percent-29 percent per annum and 18 percent-23 percent per annum from 52 percent of lenders.

“The maximum lending rate from most of the lending banks (87 percent) was between 24 percent-36 percent per annum. Mortgage financing to property buyers did not fare better, with unpleasant consequences for dreams of potential property buyers and real estate operators”, he added.

Continuing, he noted that the report did not show mortgage lending in 50 percent of the banks, adding that the prime lending rate from banks that gave mortgage was 24 percent-29 percent per annum (42 percent of lending banks), and maximum lending rate was between 24 percent-32 percent per annum (83 percent of lending banks).

Ajayi pointed out that apart from the perennial problems that traditionally undermine the sector, rising production costs have added to the challenges, adding, “due to extreme volatility in the country’s currency and other economic challenges, foreign investment in the country, which has strongly benefitted the sector in the past, has slowed down considerably”.

This situation was however, not peculiar to Nigeria but the rest of Africa. “Construction in Africa suffered a decline from $375 billion in 2015 to $324 billion in 2016. Combination of global economic headwinds, low growth and lower commodity prices contributed immensely to this decline”, he said, quoting Deloitte’s 2016 African Construction Trends Report.

In spite of everything, Ajayi still sees hope in real estate, explaining that as an asset class with a hedge against inflation, it continues to enjoy attraction from investors. “The major, going for the sector, is the fact that the need for real estate remains extremely strong. Opportunities will therefore continue to exist”, he said, disclosing that tor them at Propertygate, “we are privileged to have people who have seen boom and burst eras; we have continued to navigate the ship of the enterprise forward; our domain expertise and disciplined management are some of our competitive edge. Without doubt, we see a better tomorrow”, he posited.

 CHUKA UROKO