FUEL SUBSIDY: Its effects to the Nigeria real estate.
AS agitations continue to swell over the Federal Government’s policy that effected removal of petrol subsidy, the implications on the real estate and construction industry are coming to the front burner with professionals within that sector saying that the policy will further nosedive construction activities and invariably provision of affordable housing for all in the polity.
Signs that the policy was coming showed towards the end of last year, as many filling stations were not readily selling the PMS. And as anticipated, on New Year Day, the deregulation took off.
Different stakeholders have equally decried the policy through several means. While some took to the streets in utter rejection of the move, others have named the policy makers in different ways. In fact, organised Labour has also decided to slug it out with the government by starting a nationwide industrial action today, if President Goodluck Jonathan’s administration decides to stick to its guns.
Though, the government has severally said the policy is meant to improve the lots of Nigerians, that postulation is yet to convince the generality of Nigerians.
From the professionals in the real estate and building sectors of the economy came frightening implications of the subsidy removal, which majority of those, who spoke to The Guardian described as “not only premature, but also borne out of lack of ideas on how to tackle the menace of corrupt practices that have bedeviled the oil industry over many decades.”
Concern expressed ranges from certainty of high cost of production, high cost of transportation, with the tendency of sharp practices introduced into the building industry by the developers, contractors and other stakeholders, whose primary interest is profit maximisation.
The results of this scenario, according to some of the stakeholders, is the likelihood of using sub-standard building materials, or reducing the size or volume of these materials in building construction, the outcome of what the nation has been grappling with, incidences of building collapse!
Besides building collapses, it was argued that the reaction from the removal of petrol subsidy, if not well managed, is capable of making nonsense of housing plans by the various governments and developers as well.
Indeed, the argument is that while government may have the financial wherewithal to weather the storm, the same cannot be said of private developers, or individuals who want to build their own houses. To some, the decision is an invitation to strangulation of the real estate sector and building industry in general.
The following are reactions from the professionals, manufacturers and major marketers of building materials.
Mr. Francisco Bolaji Abosede is a town planner. He was the immediate past Commissioner for Physical Planning and Urban Development in Lagos.
According to him, these are not the best of times for Nigeria and Nigerians, especially, when it comes to the issue of accommodation. The construction industry including infrastructural development will be seriously affected ranging from high cost of materials such as cement, iron rod, wood, nails, sand, granite, bitumen, all will be affected.
Labour cost will increase, machinery cost also will increase, consequently, the cost of production of housing and infrastructure will be affected, with escalated costs that make them become scare.
Yes, government did say that the recovered cost will be channel into development but what did they do with Petrol Trust Fund (PTF) during the late Abacha (Gen. Sani Abacha, the former military head of state) period? They said they would provide Mass Transit (transportation policy), construct health centres across the country, construction of schools and so on.
Several years after, did the removal of subsidy achieve anything? In fact, the subsidy accruals were channeled for the development of certain parts of the country and some privileged individuals to the detriment of others.
This removal cannot be different from that. When you remove subsidy, surely, the private sector should be allowed to operate the system. What is the relevance of PPRA to publish price template afterwards? I will advise government to first evaluate and publish the reports and achievements of past subsidy removals.
Mass transit vehicles were imported and distributed then, did it achieve anything? Health centres were to be developed in each local council. Was it built?
Schools were to be developed, and this was not achieved before the Education Trust Fund (ETF) took over. Roads and infrastructure were to be built, how many highways were constructed? No single rail for any urban centre like Lagos, Kano, Kaduna, Port Harcourt, Enugu, Ibadan, Maiduguri and other, neither provision for water transportation.
Besides, most Nigerians are in the informal sector that depends on fuel to sustain their businesses and also for transportation.
What will be their fate? I appeal to the government of the Federal Republic of Nigeria, Through President Goodluck Jonathan to think this process through and make it gradual to provide for all the reasons raised.
Mr. Wasiu Akewusola is a quantity surveyor and former Chairman, Nigerian Institute of Quantity Surveyors (NIQS). According to him, “we should be expecting a multiplier effect in the real estate sector of the economy.
“Everybody knows that if the economy sneezes, the construction industry will catch the cold. The type of cold this time around may not be easily treated immediately.
Basically, there are three major economic inputs in the industry, labour, materials and overheads.”
The effect on labour is the demand in increment in wages, which will naturally occur as a result of all other commodities which prices have been hiked. The artisans will demand for increase in their daily wages.
For materials, they will be influenced by the cost of production and haulage. These are not linear incremental but geometrical in nature.
The overhead cost is the indirect cost on the activities that will also increase astronomically, while the cost of land will be hiked by land speculators and vendors.
Generally, these numerous effects would be gradually felt and rise as time goes by from the moment the subsidy is removed till when the economy finds its level. This translates to the fact that “housing for all” at any particular period is not something to hope for any longer.
“We will have a low level of development in the real estate sector of the economy. All the advertised prices of the proposed housing units will be increased since the cost of all the required input on the production process will be increased. The current rates of property in terms of rent will also be hiked.”
These are just direct effect on the real estate sector as a result of the removal of the subsidy.
Alhaji Waheed Kadiri is a town planner, was also a former President, Nigerian Institute of Town Planners (NITP). He said, “I will try to look at the issue of the removal of petrol subsidy from the practical and realistic angles of increase in fuel price, at least PMS.
“The likely, immediate impact will be appreciated if it is realised that over 99 per cent of movement of goods and passengers in this country is by road. The implication is that there seems to be no running away from the impact of the recent and sudden increase of pump price of petrol. What we are left with is one option – adaptation or strategies that enhance capacity to cope with the anticipated effects.
“To proffer any adaptation strategy we need to first know what the anticipated effects are. How will these options affect the real estate sector? I will, however, like to put emphasis on the housing sector within the real estate sector.”
One of the characteristics of the real estate sector, in recent times, is movement to the peripheral areas of the established and growing settlements.
Many examples abound - Lekki Peninsula area, Ikotun, Igando, Mowe, Ibafo, Okokomaiko and Agbara in Lagos mega city area; Ologuneru, Apete in Ibadan; Karu, Nyanyan, Lugbe and Kuje in Abuja to mention a few. This had been possible through improved and affordable access.
The unfortunate issue about all these sub-urban development is that they are dependent on the “mother” towns for almost everything except shelter. In other words, they are dormitory settlements with high commuting level.
With increase in petrol price and high dependence on road transport through either the inefficient public transport system or the expensive private cars, the cost of movement will rise as had been seen in the few days after the announcement of the hike in petro pump price.
With high cost of transportation, not only of passengers but also of goods, there is likely to be a cut back on budgets for other household commitments due to the unavoidability of paying for movement by individuals from residence to work or even school. When this happens the first victim will be the housing sector.
Rents are not likely to fall, building materials will cost more, labour will cost more and there will be less savings and disposable income. The result will be less demand for new housing units with the implications of more households chasing fewer units. Landlords will become dictators even in the face of rent control regulations.
“I envisage a situation where more people will move to the urban centres due to increased hardship in the rural areas. Manufactured goods will cost more in the villages and relatives in the urban areas will visit less. As more people move into the urban area, the result will be higher level of slum formation.”
On the other side, environment in urban areas is likely to get worse as more people are forced unto it, beyond its carrying capacity.
With higher transport fare, two things may happen. The suburban area, which had hitherto afforded more serene residential atmosphere, will be invaded by activities that could no longer support the transport cost of operators to the urban centres.
Artisans will set up shops to the detriment of the sought after peace and space of the sub-urban area. The other possibility is the densification of the urban centres, especially around the employment zones. There is likely to be conversion of large housing units into smaller ones, while at the lower level of the economic class, more people will occupy less unit space resulting in higher occupancy rate.
Unfortunately, the housing sector had not been targeted within the “safety net” of the subsidy removal. We have to wait and see how measures on infrastructure, maternal care, jobs, roads and rail taken to ease the effects of the removal of subsidy will positively affect the real estate sector, especially the housing sub-sector.
For the effects to be supportive of the real estate sector, building materials producing industry (cement, paint, reinforcement rods, roofing materials and wood products) should be given more attention to lower cost of production than hitherto. Better infrastructure especially electricity and water if prosecuted diligently will enhance the sector.
Improvement of the railway will definitely lower transport cost especially of goods and whatever is saved can add value to housing quality of individuals not in terms of additional quantity but improvement of facilities – water supply, roofs, windows, toilets and immediate surrounding.
A developer of many years standing, Mr. Olumide Koya, who is the managing director of GlobalMix Capital Limited, Lagos, currently building Alcove Home in Ebute Metta, Lagos Mainland Local Council, Lagos, said the policy was not well thought-out.
The fuel subsidy removal will result in upward price movements in transportation for both humans and materials. Food prices will go up and artisans will have no choice but to demand higher wages to keep up with the resultant inflationary pressures.
Small and medium artisans that support the construction industry will be put under tremendous pressure in the area of fueling of generators to carry out their business.
In as much as prices of labour and materials go up, construction costs will follow and consequently, home prices are up for upward review.
In the short run, most ongoing projects will be at risks and a lot of re-negotiations and reviews will be undertaken. In the long run, unless disposable incomes match inflation rates, construction activities will slow down and housing stocks delivery will be further impaired.
The policy is not well thought out…the fallout of rising prices will more than negate the expected gains from the removal. I am not sure if the end result will not be a worsened economy from weakened demand for goods and services at least in the short run.
Well, we will do our best…lock down costs, strive for a more efficient construction process and come to terms with lower profit margins.
Even in the academia, fear of the policy hampering the construction industry reigns. A senior lecturer in the Department of Civil Engineering, Yaba College of Technology, Mr. Idowu Adebakin said the removal would further plunge the industry into a lull.
Fuel subsidy removal will definitely affect the construction industry. Particularly in the following areas:
• Materials haulage to construction sites is by vehicles that use fuel, hence increased cost of transportation will translate to triple increment in materials prices
• Labour transportation will increase and that will lead to demand for increase in wages and salaries
• Construction machinery uses fuels too, hence more money is needed to operate them and
• In most cases, construction equipment are powered by generators because of the erratic supply of electricity hence, more money will be needed for that.
Generally, contract sum of any project will likely double or even triple before the end of the year if this removal is sustained.
A fellow of the Nigerian Institute of Town Planners (NITP), Mrs. Kehinde George says the policy would have ripple effects on the housing and construction sector.
My response is based on the assumption that petro subsidy removal is sustained. If it does, the negative ripple effect on the urban economy will be tremendous. The initial, most easily recognised effect is about 100 per cent or more hike on transportation costs.
Now, let us consider the real estate sector. This sector is the hub of the national economy and it involves land and construction, sales, lease and letting of commercial, industrial and residential property. With fuel subsidy removal, there will be a distortion of the market process, a forced devaluation of the naira and resulting inflation.
Land is relatively fixed (except with situation of reclamation), therefore, land values will rise. This will have a resulting increase in cost of development for whatever purpose; and the entrepreneur prepared to pay the most gets the land.
On building construction, there will be an inflationary trend on cost of building materials, which is mainly imported or produced from imported components.
Similarly, the design and construction workforce made up of professionals, technicians, artisans, and other support staff will require higher income to cope with increased transportation costs and consequent higher costs of living. These issues will result in higher values of available industrial, commercial and residential property.
The housing stock cannot be easily increased because of higher costs of acquiring and developing land. Therefore, there will be an increase in rental values across board of all types of accommodation. There will be a forced shift when there is no corresponding increase in income.
Occupiers of larger accommodation will be forced to seek for smaller ones, and they also will shift from exclusive inner city areas to the suburbs, and those in the suburbs will shift to the fringes and those in the fringes will be forced outwards to outer fringes or seek solace in the slums.
On commercial and industrial property, the value of commercial and industrial property will be forced to rise, immediately affecting small and medium scale businesses. In their bid to survive, they may not be able to cope with payment of increased rent and lease of office, shops and industrial spaces.
In view of the above, it is certain that the effects that have been briefly highlighted are worrisome and should be a cause of concern to government.