‘Trend pushing investors to exit property market’

With Nigeria’s naira dropping to a record against the U.S. dollar following several policy summersaults by the apex bank, the real estate sector is feeling the heat as foreign investors are experiencing huge losses in the value of their investments, and struggling with diminishing potential returns when repatriating profits to their home country, writes CHINEDUM UWAEGBULAM.

These are not the best of times for foreign real estate investors as ongoing currency devaluation is harming the property market by reducing rental income and prompting huge decrease in their return on investment due to higher cost of living.

The situation has reached a crisis point as investors are exiting the economy, especially the real estate sector because the investment climate is no longer attractive. The exchange rate since the end of last year 2023 till now has been quite unstable, with a dollar being exchanged close to N1, 500 in the black market. Exchange rate is one of the factors usually considered by the international real estate investors in their quest to build wealth from investment properties in a foreign country.

This has affected all the segments of the market as the prevailing inflationary economy has rendered prices all-time high. It is expected since the prices of goods and services went up uncontrollably in the country after the Federal Government announced the removal of fuel subsidies. In the Lagos area, the prices of properties, residential, commercial, and industrial have gone up by unimaginable proportion and the same for the yearly income by way of rentals and leases.

The impact of exchange rate fluctuations is particularly pronounced in the construction phase. This is primarily attributed to foreign exchange (FX) policies contributing to the devaluation of the naira. It has affected all aspects of the real estate industry as property development involves raw materials like cement, paints, bitumen, equipment, doors, and roof cover, which are either imported or used in production.

The exchange rate is also affecting labour costs as the workers, including consultants’ purchasing power, are declining daily. Construction projects often involve sourcing materials from abroad, and the devalued currency means that a larger amount of domestic currency is needed to obtain the same quantity of imported building materials. The exchange rate problem has also affected cost of construction and impacted on developers practicing off plan and forward sales as price changes will affect their contract with their customers.

“As a result, the construction industry experiences increased costs and challenges in budgeting thereby leading to delays and disruptions in the delivery of various projects. This dynamic underscores the significant influence of exchange rate policies on the construction sector and its overall operational efficiency,” according to the Chief Executive Officer, Knight Frank Nigeria, Mr Frank Okosun. He explained that a devalued local currency initially attracts foreign investors to the real estate market due to increased affordability.

“This heightened demand drives property prices up. However, if the currency depreciation continues, it poses a challenge for long-term investments, as it diminishes potential returns when repatriating profits to their home country. This erosion of returns discourages the enduring investment appeal traditionally associated with real estate,” he said.

According to him, the impact of FX and currency devaluation on foreign direct investments and inflow from Nigerians abroad is a nuanced situation.

“Initially, investors are drawn by the value and volume their currency can yield, making the country an attractive investment destination. However, challenges arise during the repatriation of profits.

“Unfortunately, we’ve observed a continuous year-on-year decline in capital importation, particularly in foreign direct investments. This decline stems from low investor confidence, primarily influenced by the difficulties faced in accessing foreign exchange for profit repatriation. The naira’s volatility and the associated challenges in securing foreign currency act as significant deterrents to potential investments.”

One of the major effects is that foreigners are exiting the sector. Okosun said foreign brands are strategically adjusting their presence across various real estate sectors, with economic challenges playing a significant role, especially foreign exchange fluctuations affecting the repatriation of their profits. “In the retail subsector, a notable example is a major institutional investor who, in response to these challenges, listed their retail assets for sale last year. This demonstrates a dynamic response to market shifts,” Okosun said.

He said that foreign exchange fluctuations are a macroeconomic challenge that reverberates across various sectors, including real estate. Addressing this issue requires comprehensive measures at the macro level. To address this, Okosun said government should stabilise the currency, support local production, improve the ease of doing business, attract foreign investment, and create a transparent regulatory environment, adding that a well-rounded approach to improve balance of trade is crucial for sustained growth in the economy before the impact trickles down to real estate sector.

The former Chairman, Nigerian Institution of Estate Surveyors and Valuers (NIESV) Faculty of Estate Agency and Marketing, Mr Sam Eboigbe, said with the recent trend, foreign investors are intentionally watching with caution, save those buying for other purposes like family occupation. “The foreign investors in benchmarking the value or the worth of their investments in view of the prevailing exchange rate are recording huge losses in the value of their investments and rate of returns.”

He cited a typical case, where an international investor in a closure of property deal worth N450 million last year April when the naira was exchanged at about N550 against the dollar (black market) sold the same property in January 2024 for about N600m. “Now, in analysing this transaction and benchmarking in foreign currency like the dollars, and in view of the prevailing exchange rate, it is obvious that the foreign investor would not be delighted with the outcome of this transaction.

“In April last year, the worth of his investment was in the neighbourhood of $818,000, while the same investment that has appreciated significantly in naira as of January 2024 is in the neighbourhood of about $400,000. The same applies to the rate of returns by way of yearly income from the same property investment. Your guess is as good as mine, while foreign investors would not be willing to go by the prevailing exchange rate to invest in the real estate sector.”

Eboigbe, who is the Principal Partner, Sam Eboigbe and Company, disclosed that foreign investors are presently minimising their losses and waiting for a favourable economic climate that would restore a remarkable level of confidence to the value of the naira against the dollar. “The grievances of international investors are essentially due to an unstable foreign exchange market, thus making their investments experience a downward slide in value. The investors have lost a huge amount of their resources channeled into the real estate sector,” he said.

He advised the government, as a matter of urgency, to declare emergency in the sector and take tough measures in reducing the pressure on the foreign currency, especially the dollars from the government quarters.

“The Federal Government that was courageous in the removal of fuel subsidy should similarly ban all forms of foreign trips embarked upon by the officials of the government. We will make savings in foreign exchange when the president places embargo on such foreign trips. The ambassadors should be representing the president and others in such foreign outings.

“The official vehicles of all elected and appointed officials should be locally supplied. The entourage of all categories of elected and appointed officials should be scaled down drastically to reduce the cost of fuels. The government is further advised to demonstrate sound political will to revamp our refineries and save us the huge amount of foreign exchange required to bring in refined petroleum products.”

A Professor of Estate Management, University of Lagos, Austin Otegbulu, stated that the steady declining value of the naira against major currencies has attained a crisis dimension. “It’s really trying to choke the economy to death. The exchange rate crisis has affected all sectors of the economy, including real estate. This is so because inputs to real also have foreign components triggering cost push inflation and cost over-run in real estate related projects,” he said.

According to him, with the steady fluctuations in exchange rates, it’s difficult to budget for real estate projects as the cost of construction inputs is changing frequently without a corresponding increase in investment returns and value. Secondly, with scarcity of foreign exchange, it will be difficult to repatriate earnings related to real estate investment, while the purchasing power of citizens is on a downward trend, and this will likely diminish or erode effective demand.

Otegbulu said the Federal Government needs to, through the Central Bank of Nigeria; develop a blueprint that will save the economy. “We need to discourage wastefulness in the economy and fund more of the activities that will increase the inflow of foreign exchange into the country. The rescue mission should be total and comprehensive. It will not be easy to rescue one sector like real estate and leave the others because all the sectors are inter-connected,” he added.