This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.
The real estate opportunity in Nigeria is enormous, as Gbite Oduneye put it to me – “The real estate opportunity is almost as exciting as the economic potential itself”. In economical upturns, real estate is one of the best investment options, with a guaranteed demand in retail and offices spaces.
In the 2000’s there was little to none real estate market or development happening in this sector. This has picked up strongly in the last 7 years and is still going strong. For projects such as Victoria Garden City, it took a while for people to get used to the idea of living 15 miles away from Lagos, but it has now taken off.
The real estate landscape in Nigeria
Real estate contributes around $41bn to the Nigerian economy. While a lot of development and building is done, it’s mostly done for the expensive luxury flats in trade hubs like Lagos, not particularly where there is the most demand – affordable housing for the middle class.
Financing for projects is mostly coming from South Africa and the developing countries. The yield in the Nigerian market can be very high, there is also plenty of demand and the flats sell quickly. This has attracted a lot of interest from investors from across the globe, but the main investors remain South African funds. This is expected to change – Asia and the Gulf region will likely be the main source of new capital in the next 12 months.
There is a non-existing mortgage culture, for a country of 180 million citizens, there are only about 50,000 mortgages. The real estate landscape is expected to change once the mortgage culture takes more traction. It’s not expected to happen anytime soon though, as Africa is quite unbanked – only about 15% of Nigerians have a bank account. The banking sector has to develop before any mortgages can be introduced.
There is development of Real Estate Investment Trusts (REITs), they are expected to create much needed exit opportunities for the primary market players and create a secondary market. REIT’s are also expected to provide a better option for long term funding.
The development segments have seen un-even growth pace, for example there is a shortage of high quality office space, affordable housing and formal retail outlets. Most development has been at the high quality flat houses. The demand for these flats has slowed down due to the economic developments over the last 12 months, but will likely pick up soon again – someone is always making money. The high returns seen form the high end housing are perceived as sustainable by developers.
While there still is demand for high quality offices, it’s slowing down due to a sudden over-development as the economy has slowed down. The office rental prices in 2016 are expected to go down due to loads of supply.
The market is regulated by multiple bodies – the situation is similar as it is in infrastructure, with each state having their own ministries and many different government institutions looking over different things, increasing uncertainty and bureaucracy. The private sector however has proven to organize itself quite well – construction companies have professional organizations and influential private sector entities. Building is done by international standards and building codes.
Property or land ownership hasn’t been very popular amongst Nigerians due to the land documentation issues – people simply don’t trust the established structure. This is changing now however, as a lot of the land that’s being developed is coming from Government Residential Areas, making the process a lot safer. Government efforts at developing the affordable housing market by means of PPP, and the generally growing prosperity in Nigeria, are expected to drive the sub-sector of affordable housing in 2016-2017.
The informal sector has proven to be dangerous, the slums in Africa, often times a prime real estate land, is tough to develop as people are suspicious of government’s activities. In some instances at other African nations, people that have been given newly build houses have rented them out and returned to the slums. Slums are dangerous for the overall population, they can see diseases spread very easily, as well as a lot of ethnical tension driven aggression.
The cost of building is very high – domestic materials, such as cement, costs a lot to manufacture. Many cement factories are run on diesel generators, resulting in very high prices for their outputs. Imports are cheaper, yet pricey as well, especially considering some of the import tariffs.
Land is the biggest cost for projects. Land can cost up to 60% of the total project expenses.
Financing a project is also very expensive – a bank will charge 15%-18% minimum interest, in some cases even as much as 35%. The financing usually comes from abroad.
The high costs get paid by the end users, it’s not uncommon to pay $100,000 a year for a luxury rental apartment in Ikoji or Victoria Island in Lagos.
Public projects is one of the main segments for construction companies, especially for infrastructure projects. Construction companies have to provide all the documentation of where the construction inputs were sourced from. In projects at the North East states, security is another added cost.
Many of the developers assume currency risks, as they work with Naira, yet their financing is in Euros or Dollars.
Hotels and retail
The Lagos hotel market is generally perceived to have space for more players, as there is a lack of quality hotel rooms. In 2013 there were 30,000 hotel rooms with an occupancy rate of 67%. For a comparison, the UK has an occupancy rate of 45%. 7,000 more hotel rooms are expected to open in the coming years.
Big projects, such as Transcorp Hotels Plc $140 million Lagos Hilton hotel, are being built to satisfy the demand for luxury hotels. Transcorp Hotels Plc are listed on the NSE as of January 2015, providing an opportunity to invest in the hotel sector.
Nigeria has a lot of growth potential in formal retail outlets and malls. In Lagos, there is only 1 mall per every 1.7 million citizens, compared to 49,000 in Johannesburg. The demand for malls is driven by the increasing demand of international brands and popularity of mall tourism.
While there is a lot of demand for these formal retail outlets right now, they might however be a great longer term opportunity, similarly to the high-end flats. There were no malls whatsoever in Nigeria 10 years ago, the industry is just now starting. The successful development of this industry is dependent on the formalization of the informal sector – street trading.
Street trading is a very common way to distribute goods and a chance for income for the low economic classes in highly urbanized areas in the developing economies. The fundamental driving forces of street trading might take decades to tackle and it will happen gradually. This will create a stable and constant demand for formal retail outlets. The growing middle class is also increasingly creating a demand for more malls.
Challenges and concerns in Nigeria’s real estate sector
There is a mix of challenges developers face in Nigeria, from the overlapping organizations and regulations to finding financing. If something gets to the stage of being fully build, it will sell quickly and create high returns. The very tough Nigerian environment shows itself in operating at the real estate market. The sector is considered to have very high risks – it ranks 96th out of 97 nations in transparency. Projects take time to get finished and if they do, they return high returns. The main issues faced are property ownership laws, lack of transparency, political uncertainty and for the developers that are looking to attract domestic capital, any bank regulations result in increased uncertainties. The demand for affordable houses is not fulfilled by the developers, as they can make greater returns by working at the more higher-end projects. The informal settlements, houses that have been self-build, are occupied by the majority of Nigerians – around 75%. It’s considered that for a nation to industrialize, it has to tackle its informal housing and provide affordable housing. A PPP is considered one of the only few ways this gap between profitability for developers and demand for affordable housing can be closed. The political risks are felt by construction companies doing various government projects, with the decreased budget some projects have stopped and in some instances are still waiting for payments from the government.
Playing the real estate market
There are many opportunities in the real estate sectors, from investing in construction and other development companies, to investing directly in the development projects. The REIT’s will be great for secondary market investors.
To enter the market as a developer, you can’t do without trustworthy local partners. Nigerian developers are keen to work with foreigners as they always provide the better option for financing.
Projects have a tendency to go very slow, they take time to pick up and start going. Once it’s developed, they sell quickly. For relatively safe returns, financiers should be looking for later stage projects that need some more funding.
Some companies, such as Transcorp Hotels Plc and a construction company Julius Berger, are listed on the stock market for investors to invest in.
The formal retail units are a great opportunity as well as hospitality.
With an estimated 17mn housing unit deficit, investors should definitely keep their eyes on how the government’s plans to tackle the housing deficit pan out. Affordable housing will be the main sub-sector in 2016 and 2017. Depending on the developments of the PPP’s, this might be a bigger opportunity than imagined.