Advice and Opinion

Housing deficit, Covid-19, recession – the way forward for Nigerian real estate

Noah Ibrahim, CEO Novarick Homes and Properties.
Noah Ibrahim, CEO Novarick Homes and Properties.

As a developing nation, the Nigerian real estate market continues to evolve at an impressive rate. This is owing to the growing concerns over Nigeria’s alarming population growth and the upward surge in the emergence of a more energetic, goal-driven and technology enlightened young working population.

Young Nigerians are becoming more audacious in the pursuit of independence, channeling their energy into taking risks and establishing companies of their own. With the advantage of moving fast ahead of traditional, commercial, and residential shelter arrangements, they are quire adept in adopting the flexibility and economic benefits provided by shared living and working spaces instead. As a result, the real estate industry is forced to follow the trend and to restructure as technology increases the power of consumers.

Nigeria’s needs and preferences will always change in response to economic changes, inflation and property developers are expected to adapt their developments to meet the needs of this market. The growing demand for alternative real estate options for a new demographic-based economy like co-living spaces, crowdfunding and build-to-rent are new trends that cannot be ignored. Evolving the industry will require a collective effort from all stakeholders.

With a projected population of 263 million by 2038, Nigeria’s housing situation calls for immediate intervention. Its real estate sector is faced with a housing crisis and the housing deficit is estimated at 17 million – and growing – at an average of 20 percent yearly with the bulk of pressure on urban communities. The housing sector estimates an output of no more than 100 000 units per year to an optimistic 200 000 units per year which covers only a fraction of at least 700 000 units required per year to keep up with the growing population and urban migration. Most new housing production caters to upper-income households, leaving an acute housing shortage for middle and lower-income households.

The challenge for the provision of affordable housing in Nigeria can only be addressed by strategic planning to sustain growing communities. The Nigerian government is depending on several strategies to deliver affordable housing and the public housing provision remains a common approach, as states are looking to the private sector to address the housing shortfalls through Public-Private Partnerships (PPP) and targeted interventions.

With Covid-19, recession and inflation, the Nigerian housing sector struggles even more. World economies are experiencing a downward slope that has caused a recession in many nations and affecting thousands of businesses, real estate included. A downward slope of the general business economic cycle is usually accompanied by a decline in the demand for properties; this means fewer people can afford to buy or to build houses. Though the resulting effect is that prices of houses on sale drop gradually and as the economy gets tougher and demand slumps but interestingly, the prices of rental houses increase. The recession forces the populace to pause all property purchases and to focus on property rentals instead.

A rise in the inflation rate usually results in a reduction in the selling price of properties, mostly due to the slow turnover process, that is, fewer properties are being sold which leads to a higher volume of properties on the market and a corresponding increase at a competitive rate. The rental market almost always experiences growth. As the buying power of Nigerians reduces with the growing inflation, more people would rather continue to rent and to wait for a more stable time to buy property.

As more people seek rental options the demand for rental properties increases and we know that from the concept of demand and supply that when demand goes up, supply reduces, and prices increase. The average property owner is likely to increase rent simply because there are more people willing to rent his property and he will have to deal with the price hike of other products and services.

Another major reason for the dwindling performance in the property market may be the unstable nature of the disposable income amongst buyers. GDP development over the last three years has been consistently listed below the population growth, implying decreasing per capita income.

On the part of the developers, the property development sector is extremely responsive to economic changes and surviving in a recession can be a challenging task. There are varying factors that interfere with the pricing of a property, Infrastructure, land cost, cost of securing building approval, cost of construction materials, as well as labour cost. All these costs are ultimately transferred to a buyer purchasing the property.

The way forward

The boom-bust cycle of real estate prices has caused developers and investors alike to consider a new residential scheme: ‘build to rent’. Build to rent has been around for a few years now, but, in the grand scheme of things, it is still a relatively new concept. The build to rent scheme is designed with the intention of appealing to investors looking to play in the rental property market as opposed to long-term homeownership. This scheme can range from commercial to residential and industrial property. In residential schemes, a developer builds mainly apartments usually close to commercial and business districts, with the sole purpose of selling to investors that intend renting it to people in exchange for monthly or annual rent.

The build to rent scheme focuses on delivering housing solutions to renters across all demographics. The current situation of the country has made homeownership difficult, the recession and inflation have caused a scarcity of funds and purchasing a home has become an afterthought for the populace. Nigeria’s annual inflation rate rose to 13.22 percent in August 2020 from 12.82 percent in the previous month accompanied by high and volatile interest rates. Among the varying problems caused by inflation is the reduction in pricing power.

Development of affordable housing, transitional housing, and apartments rather than luxury duplexes, accommodates more housing units thereby making the houses more affordable to a larger group of middle-class buyers and home investors.

Also, with the provision of better mortgage financing by our financial institutions, investors will not have to break the bank to purchase developed properties that they can easily place back in the market for rental returns. When the inflation rate is high and buying power is low, investors will naturally drift towards long term payment than outright purchases.

Following these footsteps will help address the needs of renters, investors, developers, and all stakeholders in the Nigerian real estate market.

By Noah Ibrahim, CEO Novarick Homes and Properties