EDIDIONG IKPOTO and JOSEPHINE OGUNDEJI report that post-COVID economic realities have resulted in an upsurge in real estate costs
Over the past few years, there has been a gradual decline in building activities in Nigeria and perhaps, other parts of Africa and the globe.
With a global pandemic that engendered a re-engineering of society as we know it, the attendant economic consequences of the COVID-19 pandemic have naturally forced a number of real estate companies to take a ‘haircut’ on their businesses, while others have been taken out of business altogether.
The same impact is true of individuals embarking on development projects for personal use as they have also had to either postpone or rescale such projects due to the adverse economic realities birthed by the post-pandemic era.
Indeed, it goes without saying that Nigeria’s economy, more than ever, has experienced the most austere and challenging times within the past six years in the nation’s history.
With two recessions in less than half a decade, a consistent uptick in headline inflation, an alarmingly growing debt profile, and an increasingly snarling supply chain, it is safe to say that all the indices reflective of the lethargic economic growth experienced in the last few years have pervaded all sectors of the economy, prompting the disparate elements of the supply chain to either ‘adapt or perish.’
One sector that has experienced its fair share of the sectoral inflation that has contributed to Nigeria’s headline inflation is the real estate industry, a development that has continued to exacerbate an already dire property sector buffeted by an uptick in the price of rented apartments across the country.
Today, in Nigeria, the cost of cement stands at nearly four times what was obtainable 10 years ago.
Timbre, iron rods as well as other basic building materials, have not fared differently, as the indiscriminate increase in prices has taken many real estate development firms out of business.
For those who have survived the unyielding inflation experienced in the industry, a massive injection of capital has become a hard choice and line of action to survive the austere environment that has been further stifled by the stringent stipulations of regulators and the unscrupulous tactics of land grabbers, popularly known as the omo onile.
With a land mass of 923,768 square kilometres, Nigeria, as a country, boasts of a great deal of real estate to compensate fairly for the over 200 million people spread across its 356,376 square miles.
However, the perennial problem of providing affordable housing to this teeming population has continued to be exacerbated over the years.
According to a 2018 Nigeria Living Standards survey conducted by the Nigerian Bureau of Statistics in collaboration with the World Bank, 62 per cent of Nigerians own their own homes, while roughly 21.8 per cent live in rented apartments.
That number further declines when the stats are taken from a less holistic point of view to capture only those who reside in urban areas where most of the country’s productive people live.
“Findings show that 62 per cent of households own their dwelling and 21.8 per cent of households rent their homes. This shows there has been a slight decrease in homeownership and a slight increase in renters between Waves 2 and 4,” researchers at the NBS said.
With countries like Kenya boasting of 78.7 per cent home ownership rate, it goes without saying that a lot of work has to be undertaken in Nigeria to improve its present statistics, even though the size of its population would imply that achieving the stats of a country like Mexico, which has about 80 per cent home ownership rate, will be near impossible.
With a significant fraction of Nigerians holed up in densely congested cities presently boasting of about 20 million units in housing deficit, the post-COVID inflationary trends experienced in the sector could turn out to be a launch pad that would hoist affordable housing out of the reach of many.
Further aggravating this problem is the dysfunctional mortgage system in the country.
To begin with, the average Nigerian could barely dismiss his most basic needs with the current minimum wage let alone contemplate the bottlenecks, hurdles, and more importantly, the high-interest rate charged by commercial mortgages which happens to be the most inaccessible in the country.
Post-lockdown inflation
In an interaction with some industry leaders in the real estate sector, there was a general feeling that the inflationary trend that trailed the post-COVID lockdown restrictions caused a significant uptick in the prices of building materials.
Other longstanding challenges like access to forex or the lack of it, inordinate regulations, as well as the insatiable appetite of land grabbers, were also cited as putative reasons for the increase in the overhead cost of real estate development.
The brunt of the exponential rise in the cost of real estate ultimately falls on consumers, since real estate developers still enjoy the convenience of increasing their cost price to maintain or even stretch their profit margins, regardless of the trends.
The Chief Executive Officer, Denaro Properties, Jide Ogunleye, in an interview with Saturday PUNCH, said the industry had fallen on hard times since the post-pandemic economic situation that cringed almost every sector of Nigeria’s economy.
According to him, developers have had to grapple with a 50 per cent increase in the price of building materials in less than two years.
He said, “In our own firm, what we do is undertake a market survey and come up with a material schedule that contains current prices of materials in the market. We monitor the average rate of increase or reduction in price. What we have discovered from our study is that prices have gone up by like 50 per cent, primarily as a result of devaluation after COVID. COVID indirectly affected the prices of building materials because during COVID, there was no production in many industrialised countries, and the revenue from oil dropped, and once the revenue from oil drops, the reserve of the Federal Government cannot really hold.
“COVID impacted housing. There was a project we were doing before the lockdown in Lagos State. As soon as the lockdown was over, prices went up by about 20 per cent. Before you knew it, the prices went up by about 50 per cent. But the beauty of it is that whatever you build is what you sell, especially in high-brow areas in cities.
“A study that was recently released showed that for projects under construction, their prices went up by about 21 per cent. That is, those who had even bought materials before prices went up. So definitely, the housing market follows the inflationary trend.”
Speaking on whether real estate developers have had to scale down the number of planned projects due to the present economic situation, Ogunleye said, “From what I can gather, developments are even increasing but in different areas. Traditionally, the high net worth areas which include Banana Island and Ikoyi, people are scaling down in those areas.
“But when you come to places where you can do gentrification, places like Yaba, old areas where people can buy houses, demolish and rebuild, you discover that developments are springing up. For example, Magodo-Shangisha has gone beyond the buying power of a lot of homebuyers. You discover that development in Magodo-Isheri has gone up by like 30 to 40 per cent. So, constructions, more projects are coming up, because real estate has been discovered to be one of the safest forms of investment.
“You can’t sell at a loss in most cases because the demand is there, especially in the cities; and it will continue to be there because everyday people are trooping into Lagos, Abuja, Port Harcourt, Kano and the rest.
“Yes, it has been challenging, but for developers who can still do it, they transfer that cost in terms of materials to the end-users, who are the buyers.”
Similarly, the Chief Executive Officer of Sparklight Development Company, Toyin Adeyinka, identified lack of access to forex as well as the soaring prices of materials as a uniform challenge for the real estate sector.
He said, “Of course, when you plan a project, you plan based on the current price of building materials. A good example is cement which has increased by over 25 per cent. That actually distorts your plan. Your delivery cost will jump up. That of course affects the number of houses that one can deliver.
“There is a need for us to develop local building materials. That was what informed Sparklight to diversify into manufacturing clay bricks. Until we start manufacturing things locally, our cost will be dependent on forex. The exchange rate has negatively affected us in such a way that the totality of a building is dependent on the foreign exchange element. The tiles are imported, the WCs are imported.”
Also, the Chief Executive Officer of Lucent Homes, Ohis Asein, did not hold back his criticism of the inflation that has gripped the post-pandemic real estate sector.
He said, “It’s difficult for you to do a lot of things: taxation, prices of things just skyrocket without any explainable reason, devaluation of our currency. Now, cement is going for about N4,200 as against the N2,000 plus that it was sold two to three years ago. If you now look at the cost of buying those things, you’ll discover that the cost of production has increased extremely. If your cost of production increases extremely, somebody must pay for it, and a businessman is there to make a profit.”
Since real estate operators are in business to make profits, Ohis said, “So, to come out with a profit, they have to shift their cost to the end-users. For example, some lands that we sold for N2m some years ago, today we sell them for N6m. Why? When you look at the time value for money, if you equate the N2m to N6m, you’ll see the difference. In Nigeria, the salary structure is not very good and the cost of living is increasing by the day. So, this really affects real estate development seriously.”
The Managing Director of Propertygate Development and Investment Plc, Mr Adetonkunbo Ajayi, described the challenges facing the real estate sector as a post-pandemic reality that had gripped virtually every sector of the economy.
According to him, after two years without tangible hope in the offing that this adverse economic environment would change for the better, Nigerians had to improvise to cope with their new reality.
He said, “The devastating social impact of the COVID-19 pandemic has been waning since the beginning of 2021 compared to its peak in 2020 in Nigeria. This gave room for the resumption of real estate development, transactions, and other related activities. Notwithstanding this positive turn, the pandemic continues to impact the sector directly and indirectly.
“The global supply chain is yet to recover, translating to challenges for construction materials in development activities. Escalating prices and delays in procurement are some of the unpleasant experiences. Sadly, new variants of the virus continue to emerge, leading to the resumption of lockdowns and travel restrictions. The situation undermines confidence, creates uncertainties and impacts trade and investments.
“Therefore, the global economy, including Nigeria’s, is under pressure, resulting in slow growth, sometimes recessions, rising inflation, dwindling purchasing power and demand, among others. Many sectors globally, including the Nigerian real estate sector, are facing the brunt of the fallout of the pandemic in varying degrees. After two full years and the exit of the virus is not in sight, effective management appears to be the reasonable approach if meaningful life is to go on. Fortunately, Nigeria is on this lane. The hope is that the real estate industry will continue to innovate to handle this current challenge.”
Land grabbing factor
Land grabbing is a scourge that has plagued Nigeria for years, leaving behind a trail of injustice, destruction, pain and poverty.
This phenomenon involves the illegal seizure of land by unscrupulous individuals, corporations or even government officials, often without regard for the legal rights of the rightful owners.
According to an earlier report published by The PUNCH, the Real Estate Developers Association of Nigeria decried the spate of land grabbing in the Federal Capital Territory, saying it had assumed a worrisome dimension.
The association asserted that the situation was causing untold hardship to genuine landowners and destroying the original master plan of the city.
The President of the group, Aliyu Wamakko, while speaking during a press briefing, claimed that the spate of online land scams in the FCT had made many innocent people to be evicted from their homes and forced to forfeit their land.
The association also distanced itself from the activities of land grabbers, urging residents of the FCT to be wary of the fraudsters.
He said, “The attention of the Real Estate Developers Association of Nigeria has been drawn to online publications with respect to land-grabbing syndicates in the Federal Capital Territory. These are people that encroach on land that does not belong to them with impunity.
“A recent case was the ugly incident where seven suspects were arrested within Guzape II over land racketeering, bent on grabbing land that does not belong to them. There are other pockets of cases where land-grabbing issues occur.
“As a self-regulatory organisation for real estate and organised real estate firms in the business of housing and estate development nationwide, we hereby state emphatically and categorically that we detest such anomalies.”
The association expressed concern that the land grabbers were disrupting the Abuja master plan.
Wamakko advised that anyone who was interested in getting land should procure it genuinely by approaching the government or the owners.
He said the association had often asserted that it had zero tolerance for any member involved in any form of unethical dealings in the business of housing development.
“Accredited members found to be involved in any messy transaction would be brought to book, as we shall not harbour or condone any land grabber or racketeer in compliance with extant laws on money laundering and Nigeria Financial Intelligence Unit.
“Members should note that any established deviant behaviour shall be met with a stiff sanction, which may involve removal from the registry of REDAN and blacklisting, and such report escalated to government agencies for information, record, and further action,” Wamakko warned.
In the same vein, human rights activists under the platform of the Centre for Human and Socio-Economic Rights urged Governor Babajide Sanwo-Olu of Lagos State and security agents to prioritise action against the menace of land grabbers across the state.
Speaking at a news conference on Tuesday in Lagos, the President of CHSR, Alex Omotehinse, said the security and welfare of the people should be more paramount to Sanwo-Olu.
He said, “We are deeply concerned by the continuous threats to public peace as a result of the unlawful activities of land grabbers in Ojomu community otherwise referred to as Ajiran Land, in the Eti-Osa Local Government Area of Lagos State.
“Activities of land grabbers should be curtailed. The governor of Lagos State must rise up to the occasion to secure the people of the state and their property; that is the primary responsibility of the government.
“There is land grabbing all over Lagos: in Ikorodu, Epe, Lekki, Eti-Ota, Lekki, and Badagry axis. Government and law enforcement agencies are not acting as expected. For land grabbing to be a lucrative business in Lagos State, some state actors are involved.”
However, this menace is not exclusive to the Federal Capital Territory and Lagos, as it is currently being experienced everywhere in Nigeria.
Real estate regulation
On the role of regulatory agencies, Adeyinka cautioned that relevant agencies must step up action to ensure that developers did not resort to circumventing procedural checks before carrying on with developmental projects.
He said, “Regulation is key. In any industry, the regulatory agencies have to play their roles. But then, it must be done in such a way that will not be too restrictive or stringent. There has to be a balance. It’s very important. I am not preempting anything but look at the cases of building collapse, for example. The regulatory agencies have to do their jobs properly to make sure that the buildings are properly designed and the necessary approvals are obtained. When construction is going on, they should come in to check what is being done. At the same time, it should not be to the extreme that will frustrate the developers.”
His counterpart, Ogunleye, did not view regulators as a major problem facing the industry, but rather as a symptom emblematic of a larger problem, which is a weak housing policy that has created several problems for the sector.
He said, “Regulators and omo oniles, who are also known as land grabbers, are just the symptoms. They have not gone to the roots. In our system, we don’t have a working housing policy. You cannot say this is housing in Akwa Ibom, this is it in Lagos, Abuja. There is no consistent policy. The system is faulty. If the policies are very strong and the government is ready to back it up, you’ll discover that all these other symptoms won’t really be there.
“Once you have a weak housing policy and a weak housing system, you’ll discover that you’ll have a lot of problems. Omo onile can be one of them. The regulatory agencies can be one of them. Mortgage can be one of them. Getting funds to build can be one of them. The cost of building materials and people inflating prices can be one of them. It is the system itself. We don’t have a working system in the country. Fix the country and the housing sector will be fixed.
“In the USA, for example, you can’t buy land without a title. Every land is already titled. Secondly, there is the security of the title. Look at what happened at Magodo-Shangisha, where some people got a Supreme Court judgment and wanted to evict people who had been staying there for almost 25 years. That is what we call insecurity of title. Even when you have a title, it is not secure. A governor can wake up tomorrow and say he wants to acquire it and use it for overriding public interest and at the end of the day he will just allocate it to his cronies. It is a weak system. The symptoms we see, those issues are deeper. The housing sector is one area the government can really develop to push Nigeria’s GDP because the population is there, the market is there.”
Unending mortgage conundrum
In most civilised countries of the world, mortgage is a feasible alternative for working-class people to devise a system of home acquisition that allows them to pay fragments of the total cost of purchase at a percentage interest over an extended period of time.
However, in Nigeria, this sub-sector of the real estate industry has, for a long time, remained above and beyond the reach of the average resident.
When the military government of Olusegun Obasanjo dissolved the Nigerian Building Society in 1977 to give birth to the Federal Mortgage Bank of Nigeria, there was a sense of renewed hope that a fledgling mortgage industry would evolve to meet global best standards in the industry.
However, 40 years later, access to a mortgage for the average Nigerian is no more than a pipe dream.
In an interview with Saturday PUNCH, the Chief Finance Officer at the Nigerian Mortgage Refinance Company, Kanayo Mba, described the chances of a working-class Nigerian having access to mortgage as significantly low.
He cited factors such as low wages, high unemployment and an implicit culture averse to taking mortgages as reasons Nigerians are unable to use this means of home acquisition.
He said, “On a scale of one to 10, I think I’ll put it at four. First of all, I’ll look at it from a cultural perspective. You know we are in a cash economy. We like buying our assets or building our property rather than taking up mortgages. So, looking at it from a cultural perspective, I think we prefer to buy cash than take mortgages. Secondly, we have a whole lot of challenges in the industry, looking at the affordability of the house itself and the affordability of the housing finance.
“The finance is quite expensive. So, we see an environment where the interest rate is double-digit, which is not friendly. Again, looking at the disposable income of the average Nigerian, it is quite low. Our income level per capita is quite low. The unemployment rate is also very high, so few Nigerians can afford a double-digit interest rate, especially in the formal sector where salaries are not impressive.”
Mba also said, “Today, commercial mortgages are between 13 per cent and 18 per cent. Prior to last year, we have seen double digits of more than 20 per cent. We have seen 22, 23 and 24 per cent on mortgages. The presence of NMRC has really influenced the interest rate downwards. We are currently refinancing on double digits. So, that has helped the institutions that were supposed to refinance their mortgages to bring down their mortgage rate from 20-something per cent to 17 per cent, some of them 15 per cent. It has been on a downward trend due to the influence of the NMRC in the market.”
On whether Nigerians would be more inclined to take up mortgages if adequate information on the reforms being undertaken by the NMRC was made available to the public domain, Mba answered in the affirmative.
“That is exactly what we are doing at NMRC. We have been trying to create that awareness so that an average Nigerian who needs a mortgage can know the benefits of mortgages and also know how to go about obtaining a mortgage. If you look at inflation, you might pay a high-interest interest rate but the capital appreciation on the house will always compensate for the high-interest rate you are paying on the mortgage. So, we’ve been driving a process to ensure that the average Nigerian understands the benefits of mortgages,” he added.
Similarly, Company Secretary and Head of Legal Services at Living Trust Mortgage Bank Plc, Timothy Gbadeyan, said administrative bottlenecks, corruption, and other problems would continue to make access to mortgage a mirage for the average Nigerian.
According to him, much work must be done to bring more Nigerians into the affordability bracket to enable the mortgage sector to function near optimal levels.
He said, “If you go to free rate updates and check the rates today in the USA, it gives an average rate as low as 1.7 per cent. In the Western world, all mortgage rates are single digits. The highest you will get will be in the region of six to seven per cent. This brings more people into the affordability bracket.
“That is also because the source of funds for the mortgage servicers enables them to do that. In Nigeria, people fix money with a mortgage bank for as high as 12 per cent; even the NMRC, when they are giving money to banks, their rates are as high as 12 per cent. So, is it possible for any mortgage bank to now give you a mortgage at a single digit? It’s impossible. The business of banks is the business of margins, of intermediation.”
Way forward
Having to grapple with high inflationary ceilings at the same time that a global post-pandemic situation is significantly impacting earnings across the board has been the bane of the real estate sector.
The attendant challenge it poses to home ownership calls for expediently effective means to cushion the telling impact on the populace.
For Jide Ogunleye, the savviness of deploying materials for optimum effect will be crucial if one is to maximise resources while undertaking a development project during these worrying times.
He said, “In the past year, with N4m or N5m, we could do a good three-bedroom bungalow. But now, you have to budget between N7.5 to N9 million. In finishing, people should focus on functionality. There are some things that people do that waste money but in the real sense are not really functional. You discover now that a lot of people, instead of putting walls between their kitchen and their sitting room, leave it open.
“A lot of people spend so much tiling the dining area; most people don’t even use the dining area, they don’t eat there. So, why spend expensive tiles for the dining area? Why don’t you look for something that is average? For the toilet, in times past some people would tile up to the ceiling. The question is, do you really need it? What if you do 2/3 and then you put some genesis to cap it and make it look good? Before, people would do wardrobes that are 3m wide. In the real sense of it, you don’t need more than 2m. So, you discover that developers are scaling down now.”
As things stand, there is a real possibility that within the next year, inflationary trends of astronomical proportion will prevail and continue to bedevil the sector, at which point real estate developers with the means to navigate through the austere environment will weather the storm only to jack up their prices to maintain their profit margins.
