Following a downturn in economic activities, especially the real estate market, experts have called on investors to adopt land banking as a hedge against depreciation of the naira.
The experts, who spoke last week at a Business Forum organised by Ubosi Eleh and Company on the “Current Economic Realities and its Impact on Nigerian Real Estate Market” in Lagos, said, opportunities still exist in trade-related real estate projects, Real Estate Investment Trusts (REITS) and house flipping among others.
One of such opportunities include buying and remodeling of outdated houses in budding neighbourhoods that are attractive to the middle income class.
The lead speaker and Group Managing Director, Meristem Securities Limited, Mr. Oluwole Abegunde, advised investors to explore opportunities in the outskirts that has proximity to Lagos, such as Epe, Ogun border towns, where average land prices could increase by 61 per cent.
Also, the Financial Analyst, Meristem Securities Limited, Oluwakemi Akinde, said residential real estate in locations that afford greater flexibility in rent review could also prove attractive.
According to Abegunde, the economy registered 10 quarters of growth in a row in Q2: 2023, but a subdued pace of 2.51per cent; in 2023, real estate Gross Domestic Product (GDP) has been underperforming the overall economy, discretionary nature of real estate makes the associated spending highly postponable in tough times.
The services sector, recorded 58 per cent of economic activity, and has been the key driver of growth, while trade, about a third of services, has registered 6 per cent post-pandemic average growth, dwarfing the 3 per cent nine-year pre-pandemic average. He said: “Notwithstanding, the pace of expansion, trade is weakening.
“There is weak consumer and business spending due to pressured real incomes, mounting business operating costs, elevated uncertainty, and tighter financing conditions, while worsening flooding impact on agriculture. “Industries have been a drag with mining and quarry, which is 99 per cent of industries, declining for 13 consecutive quarters,” he said.
Abegunde traced the drivers of inflation to PMS subsidy removal, exchange rate liberalisation, insecurity challenges, and rising food cost (excessive flooding in south, rainfall deficit in the North). He said higher inflation has caused real income to be under intense pressure as nominal wage growth lags general price increases and shifting consumer preferences in favour of non-discretionary spending.
He stated that dollar denominated bond issuance, foreign investment inflows, and oil sales are breather from anticipated foreign exchange liquidity. “However, they are temporary fixes and are unsustainable, leading to a weak anchor for the naira, and fueling speculations of further depreciation, as well as higher FX revaluation losses for companies with Foreign Currency (FCY)- denominated loans.
“Interest rates have rapidly repriced upwards to reflect monetary policy tightening. Yields on Treasury Bills drastically jumped from average of 6.7 per cent (Oct 27) to 10.3 per cent (Oct 30, 2023), as CBN sought to aggressively attract foreign portfolio investment (FPI) via issuance of open market operation (OMO) bills at 17.5 per cent yield,” he said.
With higher yields going into the year-end, he predicted higher cost of capital for new projects – narrower project pipelines; tighter financing conditions as banks reprice loans; unfavorable environment for new corporate debt issuance and treasury fixed income instruments becoming more attractive than most other asset classes.
Abegunde said the impact on real estate include tighter financing conditions, which will worsen financing for new real estate projects and depresses returns on highly-levered on-going projects, pricing flexibility – rent review that will not adequately compensate for spiraling inflation.
“There will be an upsurge in building materials inflation, which will be positive for merchants, negative for real estate project return on investments, as well as naira depreciation leading to higher construction costs via more expensive imported components.
“Rising cost of operation is triggering hybrid work culture making the low vacancy in commercial real estate to persist, depressed hospitality sector due to rising construction cost, increased operating expenses, and lower profitability, as well as mixed impacts of migration, weak consumer spending power, favourable mortgage policies/regulation, which would leave residential real estate performance on the sidelines,” he added.
