The real estate sector is still struggling despite its potential as economic challenges hinder business activities in commercial markets, while inflation has driven property prices upwards, especially in residential markets. Regardless of the current challenges, the real estate landscape presents opportunities for local and foreign investors, writes CHINEDUM UWAEGBULAM.

Halfway through the year, the real estate outlook is largely positive – residential markets continue to perform, and the commercial real estate sector exhibited a mixed performance despite challenges that still lie ahead.

Overall, market fundamentals suggest a long-term optimism in the outlook for the real estate market, contingent on a more favourable regulatory and business environment, which include favourable interest rates, stable foreign exchange rates, and stable prices of building materials.

Major city residential markets have shown strong fundamentals, driven by population growth, urbanisation, and a persistent housing shortage. However, despite these factors, current price appreciation is largely influenced by broader economic conditions rather than intrinsic market strength.

Conversely, the commercial real estate sector exhibited a mixed performance, while prime office spaces, despite a surplus, maintained occupancy through landlord adaptation strategies. However, the retail sector wrestled with inflation and currency concerns, strengthening the shift towards smaller local projects and naira-denominated rentals.

The industrial sector, while not without its obstacles including the struggling manufacturing sector, security concerns and currency depreciation, holds promise for growth, especially in special economic zones.

The Chief Executive Officer, Knight Frank Nigeria, Mr Frank Okosun, who revealed this explained, “Nigeria’s real estate market is shaped largely by prevailing macroeconomic conditions. Economic challenges have hindered business activities in some commercial sectors, while inflation has driven property prices upwards, especially in residential markets.

“Rental prices for residential properties have increased by an average of 15-20 per cent, while some well-known brands are leaving the country, leading to a drop in industrial footprints. This has however not deterred the continuous investment in real estate developments.”

According to him, the retail sector is facing challenges due to a combination of inflation and foreign exchange concerns, reducing consumers’ purchasing power, who have gravitated towards affordable essential goods rather than luxury items and making it difficult for businesses to operate profitably.

“This has strengthened the shift towards smaller, local projects and rentals denominated in the local currency (naira) for better financial stability.”

For him, the current real estate landscape in Nigeria presents opportunities for foreign investors (FIs) with a long-term perspective, a willingness to innovate, and a suitable risk tolerance level. While the market presents certain challenges, these can be navigated by FIs who adopt a strategic approach.

Okosun stressed that the residential sector holds significant potential across its various spectrums. “The substantial housing deficit, coupled with urbanisation and a growing population, creates demand for both affordable housing solutions and premium developments in prime city locations. Beyond residential, the logistics sector offers lucrative potential due to the growing e-commerce industry and overall economic activity.”

He said the expectations will be predicated mostly on the economy. “Investments in residential and industrial (logistics) properties are likely to continue. Rents will continue to rise, particularly in choice locations, while commercial spaces and retail segment of the market will experience slow growth in rentals,” he added.

The Director, School of Environmental Studies, Moshood Abiola Polytechnics, Dr Samson Agbato, said the real estate industry has been significantly impacted by economic uncertainty and has grown in large cities like Lagos and Abuja. “Urbanisation, the expansion of the middle class, and occasionally speculative investments are the main drivers of this growth. This growth hasn’t always been spread fairly, though, and as a result, the market is now marked by both substantial housing shortages for lower-class groups and opulent constructions.”

According to the estate surveyor and valuer, Nigeria is becoming more and more popular as a real estate investment destination, especially for those looking for large profits. But there are hazards involved too, because of unstable economies and volatile currency exchange rates.

“The opportunities nevertheless abound for those who are prepared to strategically traverse the environment and adjust to the shifting dynamics despite these obstacles. Upscale residential projects and commercial assets in major cities are popular investment sites.”

He said the major obstacles confronting the industrial real estate market is lack of infrastructure improvements and urbanisation, unstable economic conditions, high operating expenses, red tape and bureaucratic obstacles, and security concerns. To boost the industrial real estate market performance, he appealed that the government resolve these issues.

However, he said the year is being shaped by ongoing urbanisation, economic pressures, and technological improvements, which present opportunities, as well as problems for developers and investors. Among them are rising labour, material costs, and high rates of inflation, which have raised the value of real estate, as well as currency fluctuations, which have further affected construction costs and real estate prices.

Notwithstanding the difficulties experienced by some market segments, Agbato stressed that the real estate industry offers many prospects that may draw in foreign investors, which include high return potential, prevailing demographics, and continuous infrastructure improvements.

He predicts a moderate increase in activities of the real estate industry due to the need for affordable housing, technology improvements, and sustainability activities. “Although issues like inflation and complicated regulations still exist, smart investments in the residential, and commercial, industrial sectors combined with encouraging government initiatives can create an atmosphere that is welcoming to both domestic and foreign investors,” he added.

The former Chairman, Nigerian Institution of Estate Surveyors and Valuers (NIESV) Faculty of Estate Agency and Marketing, Mr Sam Eboigbe, said the real estate sector experienced an increased volume of activities, especially in residential and homeownership segments, except for the humongous challenges posed by the unstable exchange market where the dollar gained uncommon advantage over the naira.

“The market has been quite impressive in some areas and relatively stable in others. Lagos and Abuja have consistently remained preferred destinations for different categories of investors over time and even the period under consideration,” he said.

According to him, some aspects of the commercial segments, especially the retail and low-density office developments, have not been consistent in posting impressive numbers. The work-from-home culture, which started during the COVID era, has come to stay.

“Most offices have reduced their spaces, and some relocated to smaller spaces. This has resulted in an increase in the vacancy rate in that segment and culminated in the reduction of the rent since it is a function of demand and supply.

“The current situation in the market space is a huge challenge to foreign investors as transactions are also benchmarked in dollars and other foreign currencies. The instability in the foreign exchange market made foreign investors record huge negative numbers, and reconsider their options and decisions to invest at the moment,” he said.

Going forward, he advised that the various policies of government should create an enabling economic environment. “The policymakers should assist in restoring confidence to the sector and reducing tension. We look forward to a favourable interest rate, stable foreign exchange rate, and stable prices of building materials.

“The issue of fuel subsidy should be looked into holistically, and other forms of private initiatives and interventions that would bring about harmony in the prices of the products. This would significantly make the economy rebound and assist stakeholders in making informed decisions in the sector,” the principal partner, Sam Eboigbe and Company said.