At no other time have real estate sector operators faced more pressure than now, when high interest rates and depreciated naira value have presented them with a huge challenge in building the future.
The cost of building has changed, and everyone, including tenants, buyers, developers, sellers, and landlords, is impacted.
Olajumoke Akinwunmi, co-founder, Alitheia, and chairman, Purple Group, who provided these insights, stressed that these are the current realities in the sector, lamenting that it is happening at a time when “globally, Nigeria faces a real estate investment opportunity worth $13.5 billion.”
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Akinwunmi was the guest speaker at a breakfast session hosted in Lagos recently by Ubosi Eleh & Co with the theme, ‘Stretched Wallets, Stalled Plans: The Real Estate Dilemma.’
According to her, rents have doubled in 24 months in major cities, and it is such that the average rent-to-income ratio has now exceeded 60 percent contrary to the UN recommendation of 30 percent. There has been a significant decline in mortgage affordability as well as a sharp drop in outright purchases.
The challenge in Nigeria’s rental market is worrying because, according to Roland Igbinoba, president/CEO, Pison Housing Company, over 70 percent of city dwellers live in rented accommodation, citing Lagos as an example.
Igbinoba, whose views are contained in a recent report on ‘The State of Lagos Real Estate Market,’ revealed that these city dwellers spend over 50 percent of their income on house rent. He blamed all these on surging population figures and high urbanisation levels.
Akinwunmi noted that developers and sellers are experiencing project delays due to fluctuating costs, and there are early signs that inventory is sitting on the shelf longer than usual, and this applies to both high-end and middle-income assets, just as borrowing costs have gone up with the monetary policy ratio put at 25.5 percent.
For landlords, she noted further that operating expenses have surged, as reflected in security, water, diesel, and maintenance costs. She stressed that rent payment defaults are increasing, especially in commercial leases, while landlord-tenant relationships are strained.
“As for banks and lenders, while it may seem like a boom season for lenders, with the high interest rates, it is a vicious cycle of fewer deals packaged, smaller loan portfolios, for the sector at least, and then there are tighter terms and conditions due to heightened perceived and real risks,” she said.
Talking about industry professionals, Akinwunmi noted that though they cannot negotiate the cost of cement, they can negotiate fees, pointing out that the number and volume of transactions that are closed are thinning out.
She noted that for financial institutions, the high interest rates regime might seem like a boom on paper, but for real estate, it’s a significant hurdle.
“For potential property owners and investors, cost of mortgages and property financing have become prohibitive on account of high development cost, putting ownership or investment plans on hold,” she said, noting that because building materials, technology, and expertise are imported, the cost of these imports skyrockets, leading to pressure on project budgets— cost overruns, delays, and stalled projects.
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“For developers, it’s a constant battle against an unpredictable cost base; for financiers, it amplifies the risk associated with real estate lending. Although we’ve moved from volatility to stability, it is a costly stability – one that has re-priced the fundamentals of construction, development, and product pricing.”
She pointed out that, beyond stretched wallets and stalled plans, a more fundamental issue is at play, “which has exposed structural weaknesses in how we design, finance, implement and manage real estate. And, here is where we have to think differently, plan differently, implement differently, and control differently.”
