Real Estate Landscape and Investment Potential

Nigeria, with a population of over 160 million, is currently under housed. Its real estate potential is largely untapped. The housing deficit in Nigeria presently stands at 18 million, according to the National Bureau of Statistics. This means 11.25% of the population presently lacks basic living facility. However, major cities in Nigeria are currently experiencing massive economic growth. This comes at the back of an influx of residents from rural regions in search of work and better standards of living. It is estimated that more than 30% of the country’s population will live in its cities by 2030. Urban infrastructures are more than ever before, under intense pressure to accommodate a growing population. The infrastructural gap and challenge therefore presents a unique investment opportunity.

The real estate sector has great potentials that can make it stand as a substitute to oil and gas as a major source of income generation to the Nigerian economy. Nigeria has one of the fastest growing economies in the world with great prospects for investors. Growing urbanisation, demography, technological development, natural resources and financial deepening are five trends powering Nigeria’s appeal to foreign investors and it is therefore imperative that these are harnessed positively in the interest of the country’s economic development.

Access to land, high cost of finance alongside soaring cost of construction, dearth of qualified/skilled professionals, the lack of use of innovative and appropriate building techniques, up-to-date market data and the unclear legal frame work in the country are some of the challenges facing the real estate sector in the country. These challenges have limited the real estate sector’s contribution to the nation’s Gross Domestic Product (GDP) to just about 1.8% as opposed to an average of about 7.1% contribution in other emerging markets.

The Nigerian real estate is underweight in asset value of real estate relative to other geographies; thus making the sector an attractive prospect for investible funds. The sector will experience exponential growth through the inflow of much needed capital from both local and offshore investors if the Real Estate Investment Trust structure is encouraged to thrive.

Housing Need and Effective Demand
There is a gap between need for housing and the capacity to acquire the desired housing type, resulting in an effective demand crisis for affordable housing in the country. While it is clear there is a housing deficit, it is crucial to recognise that people can only acquire what they can afford. The National Bureau of Statistics says Nigeria needs to provide 720,000 housing units annually for the next 20 years to address the housing deficit. It is estimated that the housing deficit in Nigeria has increased to 16-18 million units and the well built units that are available are usually out of the reach of low income earners.

Demand outweighs supply in the low-income segment and most people live in rented housing units. As the ranks of the Nigerian middle class swells, they place demand for the top grade units in choice city areas thereby driving up rent prices. According to estimate, about 85% of urban population rent properties, spending over 40% of their income on rents. This brings to the fore the need for a rental housing model in the country. Rental housing in Nigeria is largely provided by individuals who rent out their own properties. There is no policy focus by the government on rental housing in Nigeria. Private sector real estate developers have either not identified the rental housing model as a commercially viable model, or they do not have the capacity to provide rental housing in large scale.

Addressing the Industry Challenges
The building practices in urban areas still borrow some from home-stead practices of local village communities. About 90% of homes are self built, most of these done with personal/family resources or rotary finance mechanisms –such as cooperative scheme. Mortgage and advances account for less than 5% of housing financing. This model for achieving property ownership cannot solve Nigeria’s housing need.

Commercial banks are unable to solve the real estate financing problem because the predominantly retail banking operations are designed to solve problems of commerce and meet short term personal and business needs. When loans are extended to real estate developers, they are usually done in the form of bridging loans or interim loans with competitive interest rates and on short term basis. The property financing culture in Nigeria has to be redesigned at all levels of government and at financial regulatory bodies in order to correctly position interested bodies to source for funds and invest in real estate.

The major challenge to local finance is liquidity driven by poor oversight over the years from regulatory bodies like the Central Bank of Nigeria and the Securities and Exchange Commission. As administrations come and go, programmes are put in place to address these problems; not much success has been recorded. A Mortgage refinancing company announced by President Goodluck Jonathan in March 2013 is another initiative by the present administration intended to solve the problems of mortgage financing in Nigeria; how successful this will be is yet to be known. Commitment to providing cheap and accessible facility for real estate development has to be demonstrated and sustained for a lasting solution to come to the housing debacle.

House Improvement Loan
Available funds can also be directed not to starting housing units from scratch, but to improving currently substandard units. This is an important point because not only the number, but the qualities of housing units are of importance.

Housing Finance through Bond
This is a mechanism used to encourage the building of lower income housing as against luxury apartments. Some countries require the payment of bond values equivalent to a certain percentage of the construction cost above a threshold value. It also discourages the importation of building materials and stimulates local industries.
Banks/Insurance Companies Legislation
Legislation can be drafted to mandate banks and insurance companies to dedicate a percentage of their loans and life funds to the real estate sector. Even though such legislation exist, enforcement and implementation is obvious lacking.

Building Industry Support
Apart from the fact that most of the building materials used in building projects are imported, there is little control over the cost of the materials since they are dependent on prevailing international market forces. This situation is however improving. Government support is helping local industries move in the direction of supporting real estate development in Nigeria. The local cement production companies are currently producing enough cement to supply the building industry in the country.

Building Associations
Corporative funding can go a long way to enable participants fund buildings as they are able to access funds from banks and negotiate favourable interest rates. The legislative framework through which this practice is regulated is of uttermost importance.