Why real estate is fundamental to growing an economy

At the just concluded West African Property Investment Summit (WAPISummit) in Lagos which featured more than 90 speakers and 500 delegates from over 200 companies, economists offered insights on real estate and the economy, insisting that reforming the real estate sector was key to propelling economic growth and alleviating poverty in Nigeria.

Andrew Nevin, Partner and Chief Economist for PwC, made a presentation at the summit on ‘The Global View On Geopolitics, Oil & Macro-Economics: How are these impacting investment in West African Real Estate?’ and besides his thematic commitment to this topic, Nevin will also be providing answers to a number of real estate-retalted questions, especially on why this sector is fundamental to growing an economy.

Apparently, the Nigerian government is in denial of the fundamental role real estate can play in growing the economy and that is why, in the hoax called economic diversification programme of government, real estate is not considered a possible growth sector.

But Nevin reasons differently. “Real estate makes up 60 percent of the world’s global assets and in developed countries, real estate buttresses the financial sector, enabling for the creation of asset-backed loans and securities”, he explains, contending that Nigeria’s real estate system cannot work without a proper land registry while banks cannot lend against a property without evidence of ownership.

“The current land titling system is onerous and excludes many people from formal ownership. Based on these facts, real estate is one of the most critical sectors that, if reformed, will propel growth and alleviate poverty in Nigeria”, he posited in a release obtained by BusinessDay.

Global volatility, as exemplified by Trump, China and Turkey factors, are in a way impacting the local economy and, by extension, the real estate market. Foreign exchange and inflation have stabilized in Nigeria amid emerging market pressures, but crude reliance continues to leave the country vulnerable to external shocks, creating persistent uncertainty for investors in the country and affecting all sectors in the economy, including real estate.

Nevin noted that in urban areas, commercial real estate occupancy has declined as a result of low demand in an underperforming economy. Consequently, office rent has declined by 20 percent over the last 3 years in the high-end market while co-working spaces are becoming more popular, consistent with the growing number of tech start-ups and entrepreneurs.

“In the premium residential market, demand has shifted to less expensive semi-detached houses and apartments. There is also persistently huge demand for affordable housing in Nigeria”, he added, forecasting that “Nigeria’s population is set to exceed 250 million people by 2030 (roughly 50 million households), and by 2025, our housing deficit will be approximately 20 million. We are not building enough houses for people to live in”.

It is common knowledge that global volatility has increased oil price, which has benefitted the immediate public sector coffers, but, according to Nevin, this is not a good thing as it has been argued that a lower oil price will drive economic reform, but won’t $70 – $80 oil keep reform at bay?

Unarguably, the Nigerian economy is benefitting from rising oil prices which is good, because the country requires capital to invest in critical sectors and fund long-term structural changes. Over the last three years, Nigerians have seen government debt grow from 12 percent of GDP in 2015 to 20 percent in 2017. A further indication of the high demand for government revenue is the Voluntary Asset and Income Declaration Scheme (VAIDS), which was implemented to grow tax revenue.

Failure to diversify the economy is a result of bad policies and poor implementation of good policies. Oil prices have fluctuated since the first quarter of 2016 (over 2 years ago) and the country still has not achieved a diversified economy. There is no reason to believe that persistently low prices in the future will make this happen.

Significantly, though in a negative way, macro-development factors have impacted the real estate sector in terms of less transactions and low investment. The sector has not seen positive growth since the start of recession in 2016. It has continued to lag behind overall growth, recording a growth rate of -3.88 percent in the second quarter 2018. This is, however, an improvement from the -9.4 percent growth of the preceding quarter.

Tight monetary environment, reflected in high interest rates and currency restrictions, are huge contributors to the slow growth in the real estate sector. Heavy government borrowing has crowded out the private sector, making it difficult for investors to finance the capital-intensive projects of the real estate sector. This issue reinforces the need for the government to undertake structural reforms that will improve capital stock and business environment.

For real estate and other sectors of the economy, 2019 elections raise major concerns. The elections will revolve around the economy. There is growing frustration over slow growth, high unemployment, low liquidity and poor infrastructure. Foreign investors who have low confidence in the economy are also keeping close watch. Thus, the election outcome will have some effect on Nigeria’s economic health in the short run.

The investment case for Nigeria and West Africa in the next 12-18 months which will lead to economic growth, according to Nevin, is rooted in structural reforms. “In the absence of sweeping structural reforms, Nigeria will continue to experience slow growth through 2022”, he stressed.

“The critical takeaway here is that income per capita will decline each year over the next five years as population growth exceeds GDP growth, if no action is taken. Investor-confidence will be largely determined by the elections and the ongoing security situation in Nigeria”, he said.