How weak bank loan slows real estate performance
The real estate industry in Nigeria seems to depend heavily on commercial banks’ funding, as the decline in lending rate to this industry has contributed in pulling it in downward trajectory.
Total bank lending to construction and real estate sector declined by 11 percent from N4.81 trillion in 2015 to N4.2 trillion in 2017.
On the reasons for the decline in lending to the sector within the period under review, analysts attributed it to the nation’s five quarter recession which was experienced between first quarter of 2016 into the first quarter of the following year.
“The economy was in recession, and even the sector is still in contraction. So, lending to most sectors declined. Banks saw other sectors viable enough to give credit to 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 commented on the condition of anonymity told Business Day by phone.
Like other commodity-dependent countries, Nigeria has had to weather the storm of declining petrodollars, following a lengthy collapse in oil prices which started mid-2014 and production disruptions caused by disgruntled militants who damaged oil pipelines in their clamour for better compensation for the oil extracted from their region.
This resulted to the country’s longest contraction in more than 25 years, although it emerged from the negative growth when oil prices increased, and as such has expanded for four consecutive quarters into 2018.
Bank lending to construction and real estate sectors in Nigeria has remained dismal when compared to the likes of South Africa, the continent’s most-industrialized 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 ZAR5.14 trillion ($382 billion) at the end of January, according to central bank data.
Negative and weak growth in construction and real estate sector of Africa’s largest economy continues to drag growth in the country’s GDP even as it slowed down in the first quarter of 2018 to 1.95 from 2.11 in the previous quarter owing mainly to weak bank lending to the sector.
Meanwhile, Africa’s most populous nation has a housing deficit of about 17 million units and its mortgage rates ranging between 7-10 percent for the National Housing Fund (NHF) and between 15-25 percent for commercial mortgage institutions which is considered by industry experts as one of the highest in the world.
Another analyst however pointed out the importance of bank lending to the real estate sector, saying, “this sector of the economy is the kind that is in steady need of liquidity and long term capital; when not available , it will continue to be in the position it is now,” the analyst who asked not be quoted said.
The economy, he added, needed to grow more in order for the property sector to feel the impact. “However, the economy has to expand more as this will rub off on the purchasing power of the citizens and, as such, there will be the demand for the products produced by the sector; so making funds available to the sector is not just enough, because if there are no demands to meet their supply, the sector will still be doing as badly as when it lacked funds,” the analyst added.
According to the National Bureau of Statistics, real growth rate of the real estate sector, real GDP growth recorded in the sector in Q1 2018 stood at -9.40 percent, lower than growth recorded in Q1 2017 by 6.30 percentage points and lower by 3.48 percentage points relative to Q4 2017. Quarter-on-quarter, the sector grew by -30.57 percent in the Q1 2018.
It contributed 5.63 percent to real GDP in Q1 2018, lower than the 6.34percent it recorded in the corresponding quarter of 2017 and lower than the 7.03 percent in the preceding quarter.
This has been ascribed to the constraints placed on foreign exchange access that affected the construction and real estate industry, which is profoundly import-based, and the unbalanced economic climate, which has affected the general inclination to invest in the country’s real estate sector.
“The government has a larger role to play in the aspect of policy. If the government is able to develop and implement policies that are favorable to these sectors, definitely, they will see a boom. The prevalence of a lot of taxes and additional charges that are being put on construction companies and real estate developers is not helping and it frustrates the entire process of being able to initiate and complete a project,” Hakeem Sadiq, Founder of Zama,a real estate advisory firm, said.
Meanwhile, according to a recent report by the International Forum of Sovereign Wealth Funds (IFSW), the number of direct real estate and infrastructure investments made by sovereign wealth funds in 2017 declined from a total $25 billion in 2016, split between 77 in property, and 33 in infrastructure, to $23.2 billion, comprising only 42 deals in real estate and 28 in infrastructure.
An analysis of the industry review report shows that lower volume of real estate deals in 2017 looks to be the main reason for the slowdown in allocation to private markets, as this sector has been favoured by sovereign wealth funds for some years.
The federal government has disclosed plans to intervene in the real estate sector (specifically in the mortgage industry) with a N100 billion which will last for a period of five years.
These developments are seen as catalysts that will make the sector expand further away from its current state, considering that the various initiatives will make funds available for the sector, as noted by industry experts.
Dangote pledges collaboration with FMBN, supports N500bn recapitalization
Africa’s richest man and President/CEO, Dangote Group, Aliko Dangote, has pledged collaboration with the Federal Mortgage Bank of Nigeria (FMBN) in the bank’s renewed drive towards affordable housing delivery for the largely un-housed Nigerian citizens.
Dangote who was at the apex mortgage bank’s office in Abuja on courtesy visit along with Isyaku Rabiu, chairman/CEO, BUA Group of Companies, expressed preparedness to partner with FMBN to boost affordable and social housing delivery for Nigerians.
This development has brought both excitement and hope in the nation’s housing sector given that the two business moguls are frontline cement producers. What they can do to the housing sector using their cement product which is a major component of housing development can only be left to the imagination.
“Dangote, who ranks as Africa’s richest business man and investor, and Rabiu, a leading Nigerian businessman with vast investment in manufacturing, infrastructure and agriculture, are Africa’s two largest producers of cement, a critical input in the housing construction industry”, a statement from FMBN obtained by BusinessDay at the weekend noted.
Dangote told members of the FMBN board during the visit that he was in total support of the proposed N500 billion recapitalization of the bank, explaining that it was a much needed development that would help power FMBN’s efforts at more effectively discharging its mandate.
Recently, the federal government announced plans to inject N500 billion (about $1.4 billion) into FMBN over the next five years in an effort to spur homeownership that has failed to take off in the country.
Expectation is that the inability of the mortgage industry to bridge the huge housing deficit estimated at 17 million units may soon turn the corner following this intervention. The support for the fund coming from Dangote has given fresh hope for the fund and its purpose.
Experts in the mortgage industry expect the N100 billion annual fund intervention to make housing more affordable as it is expected to encourage Nigerians to take mortgage as a preferred choice of raising fund for owning homes.
Interestingly, Dangote also assured that his company was ready to collaborate with FMBN towards reducing the housing deficit by increasing the tempo and scale of social housing provision across the country.
“Count me as a friend of FMBN. We are open to collaborating and supporting the good work that your bank is doing towards ensuring the provision of affordable housing to medium and low income earners in Nigeria”, he said, advising the management of the bank to consider adopting mass housing models that have worked in other countries such as Ethiopia.
In the same vein, Rabiu also said he was committed to a close partnership with FMBN. “I am committed to forging a partnership that will add value to FMBN’s work and I look forward to further engagements in this regard”, he said.
Adewale Adeeyo, FMBN’s board chairman, commended the two business moguls for their visit and good intentions to partner with FMBN, assuring that the bank would work closely with them towards the consolidation and implementation of the partnership.
Endurance Okafor