Why it may take real estate sector next 2yrs to become productive, profitable

Since the last quarter of 2015 when the slowdown in real estate sector started with low demand and supply glut, investors in this prime asset class have been licking their wounds and it may take as long as the next 24 months for the sector to become productive and profitable again, analysts have said.

This thinking is predicated on the present state of the economy and the rate at which already built houses up for sale or rent are not occupied. Apart from the default in rent payment for the occupied houses which is already at 72 percent, vacancy rate is escalating across various regional markets.

Tayo Odunsi, CEO, Northcourt Real Estate, recalls that on account of the challenges in the economy, the real estate market ended 2016 with low demand, supply over glut with Lagos leading the pack with 33 percent vacancy rate in the residential segment followed by Abuja,28 percent and Port Harcourt, 13 percent.

Real estate is one of the indicators of the state of the economy which explains the assumptions by Doyin Salami, an economist and Lecturer at Lagos Business School, that looking at the present economy, investors are not likely to get yield or return on investment from this sector in the medium term.

He says that challenges in the property market, especially with low demand, are to persist in 2017 on account of shrinking income which he links to rising inflation and the imbalance between population growth at 2.8 percent and government’s projected economic growth at 2.5 percent.

“With Nigeria’s population growing at about 2.8 per cent annually, the projected 2.5 per cent economic growth still represents a reduction in per capita income. In other words, income per head of the population is still set to fall in 2017.

“Beyond that, government’s assumptions are that inflation—the rate at which prices rise— will be 13 per cent. In 2016 inflation rate ended at a little less than 19 per cent which means at 13 percent there is an improvement, but when you add these together, by the end of 2017, we would be talking about 131 for prices which started at 100 in 2016”, he explains.

What this scenario means is that if income does not rise at the same pace, the real value of income continues to shrink and therefore the capacity for demand/spending continues to diminish.  “And once the capacity for spending diminishes, demand falls”, Salami posits.

Though Debo Adejana, CEO, Realty Point, sees a bright outlook for the real estate sector in 2017 on the back of seeming certainty and clarity in government’s economic direction, Salami reasons differently.

According to him, the outlook for the sector is such that it is now better to invest in government Treasury Bill which guarantees close to 20 percent yield and without risk, than to build houses which are associated with a whole lot of risks like government approvals and consent, non-payment of rent by tenants and managing the houses. “In addition to that, capital appreciation in housing is one of the slowest; it’s long term and it is not something that is rapid or liquid”, he notes.

On the supply side, the real estate sector has a major challenge especially with lack of data which is why the 17 million housing deficit which seems not to change since more than 10 years even with the increased growth in population continues to be quoted everywhere and every time.

The macro-economic challenges posed by high interest rate is going to affect supply significantly this year and Salami says “what we do know about the national economy and what will happen in 2017 gives a bit of concern as far as the supply side of real estate is concerned”.

Continuing, he explains, “looking at the federal government budget for 2017, there is an inbuilt deficit of over N2 trillion. For any economist, there are only two ways to solve this which are borrowing domestically or borrowing internationally. In 2016, the government tried to borrow but it was unsuccessful; all they could get was $600 million from African Development Bank (AFDB).

“This year, government is looking for much more money to borrow. If it finds it difficult to borrow internationally, then they will borrow domestically and borrowing domestically will increase the interest rate which is presently at 16–18 per cent for companies and, for individuals, it can go as high as 27 per cent and so the big question will be: Is real estate still attractive as at today?”

Without a doubt, this has far-reaching implication for the real estate investor who has to source funds locally to develop and supply housing to the market and, at the prevailing interest rate, borrowing will be difficult and, if that is the case, construction will slow in 2017.