It is becoming, increasingly, imperative for investors and developers of real estate products to realize that demand is now driven from the bottom up, meaning that time is now for them to create the right products that can satisfy domestic demand, which is much deeper and broad-based, rather than focus on the high end market which is supported by international oil companies (IOCs)-driven demand that has continued to weaken.
The real estate market, until the last quarter (Q2 of 2017), when a glimmer of light was seen, had been struggling with low activities, falling demand and prices, growing vacancy rate, among others. But even with the rising hope, challenges occasioned by hash macro-economic environment remain at the high end.
Oil price has taken a plunge, putting the economy in tatters while inflation, until last May, when it came down to 16.25 percent year-on-year, was as high as 17.24 percent in April. In June, it dropped 15 basis points to 15. 35 percent and this represents the fifth consecutive decline in the rate of inflation since January 2017 when it spiked to 18.72 per cent, the highest rate since 2005.
Though it is currently moderating on a year-on-year basis, on a month-on-month basis, inflation returned to a negative trend as it increased by 1.88 per cent in May, indicating that upward inflationary pressures are still at work. This, coupled with falling oil prices and other factors that have combined to create a volatile business environment, have forced the IOCs out of business.
“The upshot of this upheaval in oil economics is that Nigeria needs to diversify into alternative revenue sources to sustain economic growth and the real estate sector needs to look beyond oil-driven demand and particularly beyond the expectation of a return of IOC-demand to the high end residential and office leasing market”, notes MCO Real Estate (MCORE) in its Q2 Report on the real estate market
MCORE is a real estate investment and advisory firm that offers services to a global audience of investors, developers and other third party institutions. It offers professional assistance to individuals and institutions seeking real estate investment advice or a professional feasibility study or those that wish to sell or acquire institutional assets or fund the development of projects.
The high costs and risks of doing business in Nigeria and falling production costs and relative stability involved in doing business in other regions are reasons for the gradual withdrawal of the IOCs from onshore to offshore fields. Munachi Okoye, MCORE’s chief executive, adds that these are also reasons for the selling off of assets by the IOCs and their moving to alternative zones where there is greater stability and risks are lower.
The high inflation rate coupled with volatile foreign exchange movements and lingering doubts about foreign exchange liquidity and convertibility remain deterrence for international investors. The high inflation rate means that building material prices will continue to rise, making material purchases at a fixed price a challenge. This coupled with historically volatile foreign exchange rate movements means that there are uncertainties on both entry costs and exit prices with an expectation of rising costs and falling exit values, both negatively impacting returns.
The MCORE Report reveals that high risks to investment were reflected in weak capital importation figures with the Q1 2017 total capital importation of US$908m being the second lowest value recorded since 2007. This figure, it says, is made up of portfolio investment, Foreign Direct Investment (FDI) and other investments. Of this amount, a paltry sum of US$211m was FDI within which international investment into real estate falls and 99.4 percent of this amount or US$210m was equity FDI.
“Foreign direct investment (FDI) is currently at historical lows on the back of foreign exchange volatility, high inflation, a fragile economy and weak demand”, Okoye noted in the report. But pointed out that prime land prices have remained relatively strong over the year with an average 9 percent appreciation in naira terms.
Udo Okonjo, chair/CEO, Fine and Country West Africa, corroborates this. According to her, the price of prime land has remained quite high and that is because it is in short supply. She agrees further that the high end market is struggling even with the little improvement seen in the macro-economic environment.
“The high end luxury residential market is now almost non-existent. It has always been a narrow market, serving a tiny percentage of the population. But we have seen pockets of opportunities in the market, especially within the commercial prime office space segment”, she said in an interview, citing the new co-work destination which, she said, is gaining traction and being embraced by mid-end entrepreneurs.