Addressing rising cost of building materials

Last week, two critical macroeconomic developments emerged that have come to bear a significant impact on Nigeria’s real estate sector. The first was the report by the Nigerian Bureau of Statistics (NBS) that the headline inflation rate soared to a record 29.9 per cent in January from 28.92 per cent in December 2023. According to British multinational media company Reuters, the inflation rate is the highest in 28 years, since mid-1996.

The second development is the report by Nigerian financial news and data media company Nairametrics, that the price of a 50kg bag of cement has risen to as high as N9500 in many parts of Lagos. According to the report, a 50kg bag of cement which was sold for between N6000-N6500 in January, now sells for a minimum of N9500 in Lagos and potentially higher in several parts of the country, by the time you factor in transport and logistics costs.

The two developments, though isolated, are not unconnected with current macroeconomic realities. The recent monetary and fiscal policy reforms of foreign exchange float and fuel subsidy removal, have created unintended consequences for individuals and businesses. This is in addition to other ancillary reforms, instituted almost simultaneously by the government. This according to analysts partly explains the reason for the sky-high inflation in the price of goods and services, decline in household income and savings, falling living standards and an unprecedented cost-of-living crisis.

The soaring price of cement is a pointer to the fact that the construction and building sector has not been insulated from the stark reality that the sector is heavily import-dependent and remains susceptible to macroeconomic fluctuations. For example, the cost of a ton of iron which was hitherto N570, 000 has sharply increased to N1, 200,000. The price of other building materials such as tiles, ceramics, plumbing materials and glass have also changed dramatically over the period. It would be recalled that last week, the Naira recorded a new low to close at N1534.39 to a dollar at the Nigerian Autonomous Foreign Exchange Market (NAFEM).

The Guardian, Nigeria in a report earlier this month estimated that construction costs have gone up by 200 per cent, as a result of the currency devaluation and this has led to a disproportionate increase in the cost of building materials, as most of the items are imported into the country. The Newspaper also estimated that the prices of building materials, such as blocks, reinforcement rods, sand, timber, paints, roofing sheets, glass and tiles have risen by over 75 per cent over the last 12 months.

The challenge here clearly is that Nigeria at the moment is unable to meet its rising demand for building materials because the country has failed to achieve self-sufficiency in the local production of construction materials. The weak value of the naira as against the dollar has also led to a disproportionate increase in the cost of construction and invariably, the unit value of houses in Nigeria. There is no doubt these realities do not bode well for the building and construction industry, especially for investors in the construction sector.

I have interacted with some investors over the last week, and there is a consensus that the uncertainty and speculation will continue to slow down activities and generally hamper investment in the sector. Most of the investors have instead decided to halt their projects, to a later date in the future in a wait-and-see approach.

This reality, I am afraid does not help our current situation, when you consider the fact that more than 28 million Nigerians lack access to decent and affordable housing and an average population growth of 2.6 per cent, making Nigeria one of the fastest growing populations globally, and also expected to double over the next 25 years to about 400million. To close the housing gap, every day must count.

Recently, the Minister of Housing and Urban Development, Arc. Musa Dangiwa decried the consistent and disproportionate rise in the cost of building materials and promised to engage stakeholders. While this is commendable, I believe that the government must go beyond just naming the problem to taking specific and concrete action that can address the challenge.

In addressing the situation, it must be considered from a short- and long-term perspective. In the short term, the government should provide foreign exchange support for investors and lower import barriers to enable investors to bring in more construction materials at lower prices, this would no doubt lower the cost of construction.

In the long term, the government must bring down the high level of inflation, and address the liquidity challenge in the foreign exchange market, so that the Naira can stabilise and find its true value. There is also a lot of work to do on the fiscal side. To ensure that Nigeria is able to achieve self-sufficiency in local production of building materials, discourage imports and also gradually drive down the cost of construction materials.

Shobowale is Co-founder, Dukiya Investments.