2012 Real Estate Outlook: Between Projections and Reality

The year 2012 is winding up its seventh month; and for players and observers in the Nigerian Real Estate who approached the year with much enthusiasm; it is becoming obvious to that there is little to cheer about.  In this report, Olusesan Ogunyooye takes a look at the half-year developments in Nigeria’s Real Estate and concludes that there still a wide gap between the projections and current realities.

The 2012 market year of course opened with loads of ‘carry over’ challenges from the previous years. At the outset of the year, deplorable infrastructure, poor and declining capacity utilization, insecurity, high inflation, weak and fragile economic structure; as well as bag-loads of challenges in policy formulations and regulations are the nightmarish realities of doing business in Real Estate.

However, in spite of the challenges, experts made impressive projections about the year under review. For example, commercial real estate, infrastructure and housing were considered the ‘bull eye’ in the course of the year.

Submissions were based on reforms in the mortgage sector, technical assistance from the World Bank and international donor agencies, increase in the Foreign Direct Investment, FDI portfolios, housing and urban development policy awaiting approvals as well as other factors such as bills currently in advanced stages before the national assembly.

But with the first half of the year gone, these projections seem utopian compared to the reality on ground.

Housing

This sector of the economy seems to be the ‘beautiful bride’ of the Industry as ‘affordable housing’ seems to be the key word. Almost all strategic round tables, conferences and meetings that have held in the sector this year have housing as a unifying arena.

Worthy of note nonetheless is the apathy with which experts discuss the issue; concluding more often that it is only government that can operate in the affordable housing space. Government on its side keep gonging for Private sector to join in its Public Private Partnership initiatives. Of course, we have seen more talks than actions.

Whatever angle one wants to look at housing in the past months, the truth remains that besides the 500 units inaugurated by the housing minister around the second quarter of this year; there had been no significant delivery, except for few delivered by private sector which is plagued by ineffective demand.

Experts have attributed this snailneering to the kind of funds available to both developers and home buyers in the sector. Also strangulating government regulations, cumbersome approval processes, insecurity and unavailability of in skilled artisans are anti-Christ that have distracted investment in the housing sector.

However, states like Lagos, Cross River and Rivers are formulating viable policies for the housing space; while technical assistance from international donor agencies are also looking at unlocking the sector to generate employment and create wealth.

The Mortgage Sector.

Housing and mortgage can hardly be divorced from each other. But this special feature is against the back drop of the proposed mortgage reform by Central Bank of Nigeria, CBN.

In February, the proposed reform which was core to the projections by industry experts early in the year was extended to 2013 by the apex bank on entreaties from Primary Mortgage Institutions, PMIs.

Under the fresh guidelines, mortgage firms have been categorised into National and State mortgage firms, while the National PMIs are allowed to operate in any or all parts of the federation after the payment of a new N5 billion minimum paid up capital, the State PMIs are restricted to only one state at the payment of N2.5 billion.

The policy thrust of the latest document is to rejig the housing finance market, where the ratio of mortgage finance as a percentage of GDP stands at 0. 5 per cent and lags behind emerging markets like compared to South Africa 29 per cent, Mexico 10 per cent and Malaysia 29 per cent.

Commercial Real Estate.

This sector showed great potential at the beginning of the year. According to Niyi Adeleye, Head, Property Finance, Stanbic IBTC, factors such as Entry Barrier, Buyers’ Power, Supply Power, Intensity of rivalry and availability of Substitute; which are the major market indicators in the industry, favour the retail real estate market this year.

Chu’di Ejikam, Director of Real Estate at Actis West Africa described it as ‘Retail Revolution’ saying that Nigeria’s retail real estate is particularly compelling because it has factors considered as primary drivers in this market place. These drivers, according to him, include; a rapidly urbanising population, a growing middle class and an increasing spending power and consumerism.

In spite of these submissions, the activities in the retail space are still greatly hampered by overpriced land, which in some cases cost as much as 10% of the total construction cost; huge project cost, high inflation and availability of long term funds.

There are however on-going constructions in Places like Abule Egba, in Lagos, Enugu, and Abuja; with places like Kano, Oshogbo, Ibadan, Iwo on the map of investors between now and 2014, we can hope that works will commence in most of these centres sometimes in the year.

CEMENT

Cement is integral to construction, a major component of the built sector. Thus what happens in this space is of great importance to how the industry fares.

This first half witnessed significant milestones, with the commissioning of the Dangote Ibeche and Obajana Cement plants. And in addition to increased production from other manufactures such as Larfage Wapco, Bua Cement and others; local production has risen significantly to about 28 million metric tonnes from 17 million in 2011.

However, it has had little or no effect on the price of the commodity which was the prediction of many analysts. Poor and inconsistent power supply and deplorable infrastructure have been identified as the bane of this high price.

The high point in this sector is local demand being adequately satisfied with the prospect of exporting cement as the year progresses.

Roads.

Roads are critical to price, demands and appreciation of real estate. Also, it is major aspect of construction and with recent National Conference on Exploring Cement Based Option for Sustainable Road Construction in Nigeria, organised by the Cement Manufacturers Association of Nigeria (CMAN) in conjunction with Business Day; the importance of road construction to raise growth in the industry cannot be over emphasised.

With the on-going transport sector reforms in the country, the government has adopted a Public Private Partnership framework in alignment with global trends in transportation infrastructure development as well as regulations (PPP Policy Framework, National Transport Commission Bill which is in progress) to revamp the sector.

However, with the introduction of a new subsidy regime in January; there have been a number of contract awards in the sector, though many of them still far from completion as a result of lack of funds. Also some states are also doing road construction but most of them are still on site.

Nonetheless, while the Lagos-Ibadan Expressway concession arrangement is yet to translate to any meaningful experience for commuters, the Lekki-Epe Expressway Concession has recorded marginal success though with huge costs to users.

INSECURITY.

There is no doubt that the spate of bombing, armed robbery; kidnapping and sundry vices have significantly affected the business environment. Many investors have developed cool feet to put their money in the Nigerian market because of the uncertainty hovering over the country.

Nigeria has shown great economic potentials but insecurity has been a major setback, especially to FDIs. The entire business environment in the north is on its kneels and the fear has of course spread to other parts of the country with huge slur on Nigeria’s diplomatic image.

The deaths were not limited to local construction workers but also expatriates, hampering construction projects on the axis and, indeed, the entire country as the private sector was reluctant to invest in the sector - adopting a-wait-and-see approach.

“Worried by the development, most foreign companies withdrew their workers from construction sites leading to project abandonment and huge lost to the hospitality sector”, a report has said.

Operators’ PERSPECTIVE.

There are conflicting submissions from the operators; but the nucleus of their submissions is that the sector has underperformed in the past six months.

There submissions are crux on the insecurity in the nation which according to them has eroded investors’ confidence and the rate of illiquidity in the system has remained high as the purchasing power of the populace remained at its lowest ebb.

Former president of the Nigerian Institution of Estate Surveyors and Valuers, NIESV, Bode Adedeji, in a report in The Nation News Papers said “Effective demand is scarce and the private sector cannot make significant impact as the public sector remained the dominant player in terms of the availability of financial resources. Except government has a rethink on its fiscal and monetary policies and programmes, the situation may be with us for a longer period even as foreign interest in investing in the sector wanes.”

Adediji predicted that the construction sector may remain comatose except government acted fast to restore confidence in the economy.

In the same report, President, International Real Estate Federation, Nigeria (FIABCI), Chief Kola Akomolede, however has a different opinion.

He confirmed that property prices are picking up in some upscale areas of Lagos such as Dolphin Estate where duplexes that were priced in the region of N65 and N70 million last year are going for between N75 and N80 million and even more; while flats which hitherto sold for N18 million is now N22 million.

However, he revealed that Old Ikoyi has an oversupply of luxury apartments and multi-storey buildings, leading to a glut as there is no liquidity in the system.

He said: “The economy is improving as banks tend to have sorted out their liquidity problems as the Asset Management Corporation (AMCON) bought over most of their bad loans. People are buying up properties as the elections are over and new people get elected into positions.

The middle to lower property market prices have gone up as property in this bracket is never enough for those who need them. For instance, in Surulere, Agege, Palmgrove and Ikeja, there can never be a glut, no matter the challenges in the country,” he said.