The recession ravaging the country has spared no sector. Experts say it has disorganised short and long-term plans. Particiapnts at the International Real Estate Federation (Nigeria Chapter) annual dinner in Lagos have warned of a further dip in investment in the built sector this year. They say unless urgent measures are taken, the woes of the industry will worsen, dashing any hope of it contributing significantly to the country’s Gross Domestic Product (GDP). What is the way forward? Stakeholders are, however, divided over which sector offers better returns than real estate. MUYIWA LUCAS reports.
Dr. Doyin Salami, a lecturer and member of Faculty, Lagos Business School (LBS), is not a man who minces words, especially when it concerns the economy. When he ascended the podium at the Metropolitan Club Hall, Victoria Island, Lagos, last Friday, it was time for another confrontation with the stark reality of what obtains in the real estate sector, viz-a-viz the nation’s economy.
Delivering an address at this year’s annual dinner of the International Real Estate Federation (FIABCI) Nigeria Chapter, with the theme: “Real Estate: It is All About the Economy”, he warned that although the real sector is about eight per cent of the nation’s economy, it has been in decline, contracting so many times.
“The data are very clear. The real estate sector contributes between seven and eight per cent to the nation’s economy, but it has contracted consecutively for five quarters. In other words, for more than a year, the sector in which we operate have been shrinking. “What will happen to it in 2017, will depend on what happens to the economy generally because housing / real estate takes its cue from the general economy,” Salami said at the dinner.
Lagos State Commissioner for Housing Gbolohan Lawal agreed no less with Salami. According to him, the sector needs to wake up fron it deep slumber because “we have noticed no growth in the real estate industry”.
He, however, assured that the state would inject private capital into housing delivery as it now has 10 private developers, and several stakeholders across various layers in the real estate sector participating in housing delivery.
Lawal further said the time was ripe for the government to reflate the economy with increased activities in the real estate.
Budget 2017 vs real estate
Salami noted that unlike last year, the Federal Government has projected that the economy would grow by about 2.5 per cent this year, representing a turnaround from the past. “Last year, we shrank, this year we will grow. The extent of the growth, however, is what only time will tell,” he said.
With the country’s population growing at about 2.8 per cent yearly, a 2.5 per cent growth, therefore, still represents a reduction in per capita income. In other words, according to Salami, income per head of the population is set to fall this year. Beyond that, the government’s assumption was that inflation would be at 13 per cent, although 12.92 per cent was the actual assumption.
Housing supply and purchasing power
Salami said if income did not increase at the same pace with inflation, it means that its real value would continue to depreciate and the capacity for demand/spending wwould equally continue to diminish. And once spending capacity diminishes, demand will fall and create difficulties for other sectors of the economy.
On the supply side of housing, he regretted that the figure most regularly brandished was a housing deficit of about 17 million, which he said, seemed not to have changed in the last 10 years, irrespective of the growth in the population. This, he noted, gives a bit of concern about the accuracy of the data in the sector. “As far as the supply of the real estate side is concerned, if there is no construction, then supply suffers,” he said.
FIABCI-Nigeria President Joseph Akhigbe said in the short period the economy took a downturn, operators and other stakeholders witnessed the good, the bad and the ugly of the devaluation of the local currency, rising inflation, excess supply of property as a result of the economic downturn and surprising stable prices despite the fall in the demand for property.
Prospects
The stakeholders are concerned about the attractiveness of the sector this year. For this year, both the federal and the state governments have a combined budget of N14 trillion. In his analysis, Salami explained that the over N2 trillion deficit in the Federal Government budget this year, could only be made up through borrowing – either domestically or internationally.
“Therefore, if the Federal Government finds it difficult to borrow internationally then she will want to borrow domestically. The effect of borrowing domestically will lead to an increase in interest rate, which presently is at between 16 – 18 per cent for companies and for individuals, and it can go as high as 27 per cent.” He then asked: “The big question will be is real estate still attractive as at today?”
Treasury bills and housing
For Salami, given the evolving scenario, a discerning investor is better off buying government treasury bill than building a house. He will base it on the return-on-investment (RoI) because treasury bills will give 20 per cent returns and no risk to the investor- the risk of inflation and looking at standard economic parameters such as yields, inflations and interest rates. An investor in housing will have to face a whole lot of risks such as difficulty in getting government approvals and consent; non payment of rent by tenants and managing the house as a whole.
Besides, to Salami, capital appreciation in housing is one of the slowest because it is a long-term investment. It may probably take another two years for the housing market to become productive looking at the present economy and the rate at which already built houses up for sale or rent are not occupied.
“The housing sector needs to look at how to capture more information and data to help those who want to invest have a holistic approach on the sector; it is a major challenge that the professionals in the sector needs to solve. During inflation, the sector also suffers because it becomes difficult for suppliers to get commodities at reasonable prices, which create another fundamental issue,” he said.
However, a former president of the body, Kola Akomolede, carpeted Salami on the RoI submission. Drawing example from the value of properties in Dolphin Estate, Ikoyi, Lagos, Akomolede said the theory of treasury bills having more RoI than real estate did not arise.
“When we sold Dolphin estate in 1990-1992, it was just under N500,000 per unit of duplex. Now each unit is worth several millions of naira. If you kept your N500,000 in treasury bills since 1990, what will it be worth now? Certainly your principal investment would just be worth about $1,000 now. So, RoI on real estate is better,” Akomolede said.
During the dinner, stakeholders were equally rewarded for their activities in the sector over the years. Notably, two journalists- Chuka Iroko of BusinessDay and Chinedu Uweagbulam of The Guardian, who were awarded certificates of merit for their journalistic contributions to the real estate industry in the country.
