One thing about emerging markets is that rapid growth in Nigeria’s economy would mean equally rapid growth in the demand for real estate.
However, the pandemic has affected the Nigerian economy and in turn, affected the real estate market in the process. Nigeria’s property market in the last few years has rapidly expanded and it is recording exponential growth; steadily increasing foreign direct investment, fast urbanization, and strong corporate demand. According to a January 2015 report by CBO Capital, the sector was valued at N6.4 trillion ($39 billion) and growing at 10% per annum.
In the wake of Covid-19, Nigeria’s real estate sector was one of the worst-hit. Its impact has radically altered the industry’s long-term expectations which were predicted earlier this year and, which resulted in an unusual impact on the sector because it was not felt immediately by stakeholders. Different sectors felt the effect of the pandemic on different levels with some more than others.
One of the biggest challenges the sector is facing is access to funding. With a growing middle-class population, rapid urbanization, and young demographics compared to stronger economies, Nigeria possesses all the key factors for real estate investment. Despite all of this, financing has remained a problem for property developers and prospective homeowners.
The cost of building materials in the country has experienced a spike in the past few months owing to the devaluation of the Naira. This is because the Nigerian construction industry depends heavily on foreign importation for the raw materials and equipment. With a devalued Naira, the cost of purchasing these raw materials and equipment will rise causing a domino effect that leads to inflation and making properties difficult to purchase by the average Nigerian. The real estate sector is facing a cost overrun and this would rest greatly on the shoulders of the consumers meaning an increase in the price of properties and people losing their buying power.
The development and sales of commercial and residential markets have been negatively affected especially the commercial and hospitality sub-sector due to several businesses having evolved into digitalization. The effect of this is that commercial centres would have less traffic as everyone is trying to shield themselves from the virus. The work from home experience has shown that businesses can operate with a sizable necessary office space especially the service sector. Meetings held online and little physical discussion is required resulting in reduced demand for office space.
The residential sub-sector has been tricky in terms of demand; more people are at home remotely working with more demand for rent. Many people cannot afford to buy property and would prefer to rent but since the inception of remote work which has led to salaries being cut and people being laid off, even the payment of rent has become difficult. Irrespective of these setbacks, the industrial property sub-sector has been a key focus among local developers during this period. A handful of global drug manufacturers of fast-moving consumer goods would need a location to store products which benefits local property developers and increasing space demand for warehouses.
Nigeria’s borders are currently closed. As a consuming nation, it has proven a difficult task to import building materials from China and other foreign countries. This means that available materials in the country would be almost inaccessible and expensive. As the prices of materials increase, the price of real estate increases too. The cost of construction materials was affected which has, in turn, caused a chain effect by affecting the real estate industry. Some investors and stakeholders do not understand the magnitude of the economic situation, but the economy was slowly crawling out of a recession before the pandemic struck.
Despite a range of pressing challenges, Nigeria’s real estate sector is set to continue expanding albeit a slower pace than over the past decade. The way forward for investors looking to invest in the market would be through the residential and industrial sub-sector. There would always be a need for shelter.
As mentioned, the industrial aspect would thrive during this period because of warehousing and storage facilities. Many small and medium scale businesses would need places to store their products. One certain thing is that Covid-19 would eventually pass as this is not the first pandemic or crisis although it might take a while for the commercial and hospitality sectors to bounce back. Hotels are reopening gradually, and people need to showcase their products, but developers and industry watchers are not expecting a positive outlay of investments in the commercial sector.
The pandemic has become one of the biggest tipping points for the demand for retail stores, office space and homes. The threat of e-commerce on brick-and-mortar retailers is not a new topic but the pandemic may have accelerated this discussion. The stay-at-home policy imposed on Nigeria has driven people towards online shopping causing the demand for retail stores to drop. Affording rents for stores might become difficult as gaining people’s trust to drive patronage is not an easy feat.
The office sector is the worst-hit in terms of demand. Many companies have found themselves operating in unprecedented ways to continue conducting business. Corporate offices have not been keen on the idea of working from home however, a large proportion of employees are working away from the office in the wake of the pandemic for an extended period. This sudden change in business practices has affected the hospitality sector. With the restriction of business travel, companies have discovered that video conferencing can be as effective as in-person meetings and, international travel might fall off if businesses increase their reliance on domestic supply chains which could boost demand for warehouse and manufacturing space. Generally, the demand for office space is low and there is an expectation for a bounce back in this sector, but things would never be the same. The need for office space is almost irrelevant, in terms of demand, it is quite low.
Developers cannot afford to take a wait-and-see approach to the coming changes in the real estate sector. There is a need for property developers to shield their business against the effect of this pandemic. One of which is the construction of functional spaces that would accommodate the work from home policy. In terms of the property prices developers are at the short end of the stick because the more devalued the Naira, the harder it is to build affordable properties. Support from the financial institutions and access to land would go a long way for developers during this period.
By Noah Ibrahim, Real Estate disruptor and CEO of Novarick Homes.