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Why Foreign Direct Investment in property sector dries out

By Chinedum Uwaegbulam (Property & Environment Editor) and Matthew Ogune (Abuja)
20 May 2021   |   4:35 am
The allure for all things foreign coupled with government’s struggle to keep rising inflation and escalating insecurity at bay have put investment in the real sector in jeopardy.

(Photo by Pierre FAVENNEC / AFP)

• FDI into UAE climbs over 44% against UN estimates
• ICPC: Over 800 properties worth $400m linked to PEPs
• Malami: Africa loses $148b through IFF yearly
• Nigerians investing offshore to secure foreign passports
• No investor will come to a volatile environment
• Experts blame govt policies, archaic land administration system

The allure for all things foreign coupled with government’s struggle to keep rising inflation and escalating insecurity at bay have put investment in the real sector in jeopardy.

In same vein, foreign investors’ appetite for real estate sector is taking a back seat. The sector had been worse hit in recent years due to recession and unhealthy economic policies that have stifled investment. This unconducive environment has led to the shrinking of industry operations and weakened housing supply.

Closely linked politically-exposed persons’ (PEPs) penchant for safe haven in offshore property investment. Some weeks back, more than 130 choice assets reportedly bought with looted funds in Dubai, United Arab Emirates (UAE), were traced to some ex-governors, ministers and senators.

These assets are among the over 800 traceable to Nigerians in the UAE, including top security and military officers.

But back home, foreign investments in real estate is almost non-existent, save for a handful of investors that were invited for property development in some major cities like Lagos and Abuja, as well as those participating in retail property market, where South African firms play key roles.

In a reversal of fortunes, while Nigeria’s real sector is recording losses, Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and ruler of Dubai, said Foreign Direct Investment (FDI) into the UAE grew by 44.2 per cent to $19.88 billion in 2020, despite the economic turmoil caused by the global COVID-19 pandemic.

In a tweet, Sheikh Mohammed said: “Despite the UN’s estimates that global FDI flows decreased by 42 per cent in 2020 due to COVID-19, the UAE witnessed 44 per cent growth in FDI flows in 2020, compared to 2019. Good crisis management is a guaranteed investment.”

In contrast, foreign investors are absent in buying properties in Nigeria. Those that work in oil firms and telecommunication companies prefer luxurious serviced apartments in highbrow areas of Ikoyi and Port Harcourt. In rare cases, companies purchase these properties and use them as staff quarters. Yet, Nigerians in their thousands, especially the wealthy, are grabbing opportunities in the property market abroad and rushing for additional citizenship in foreign countries, which stakeholders say is due to the insecurity situation, political instability and unfavourable economic policies.

While some of the property investments abroad by Nigerians are genuine, others in real estate and education sectors are traced to Illicit Financial Flows (IFFs) such as money laundering by politically exposed persons (PEPs).

According to the Independent Corrupt Practices and Other Related Offences Commission (ICPC), most of the properties by Nigerian politicians in London and Dubai are held by proxies, families and shell companies. About 800 properties worth over $400 million have been linked to Nigerian PEPs.

The breakdown of PEPs linked to properties in Dubai shows proxies (226), Nigerian law enforcement agency suspects (216), PEPs –link business persons (91), security sector leaders (71), governors (69), legislators (45), department agency heads (25), ministers (24), Nigerian National Petroleum Corporation officials (19), presidency staff

THE Attorney-General of the Federation and Minister of Justice, Abubakar Malami, said Africa is estimated to lose $148 billion or about 25 per cent of its Gross Domestic Product (GDP) to corruption through IFF. The minister stated this at an international conference on IFFs and asset recovery.

According to him, “the World Bank and the United Nations Office on Drugs and Crime has reported that the cross-border flows from proceeds of criminal activities is estimated between $1 trillion and $1.6 trillion yearly.

“The high-level panel report of the African Union and the Economic Commission for Africa (AU/ECA 2015 IFF Report) on Illicit Financial Flow found that IFF in Africa was growing at 20.2 per cent yearly, with an estimated $50 billion lost and this was as a result of weak national and regional capacities to stem the tide. No doubt, the impact of such criminal flow of funds means lack of health and education services, low levels of growth, high level of poverty and lack of infrastructure in many African countries.”

ICPC Chairman, Prof. Bolaji Owasanoye, said: “ICPC’s increasing focus on IFFs is directly related to her anti-corruption mandate and its role as the secretariat of the Inter-Agency Committee on stopping IFFs from Nigeria and Implementation of the Thabo Mbeki Panel Report. It is common knowledge that corruption is a source and contributor to IFFs from Nigeria.”

Also speaking, the Minister of Finance, Budget and National Planning, Zainab Ahmed, warned that unless checked, IFFs will continue to erode domestic revenues and threaten economic stability.

She said: “Nigeria and across the African continent, we continue to suffer various forms of IFFs, including tax evasion and other harmful tax practices, illegal export of foreign exchange, abusive transfer pricing, trade mispricing, mis-invoicing of services, illegal exploitation and under-invoicing of natural resources, organised crimes and corruption.

“In particular, commercial activities (particularly aggressive tax avoidance and tax evasion, through trade mispricing, abusive transfer pricing, profit shifting and tax arbitraging) account for approximately 65 per cent of illicit financial flows across Africa.’’

The Guardian learnt that many Nigerians also got their properties by way of citizenship through property investment, either directly or indirectly (residency). It was learnt that some Nigerians have to sell their properties back home to register for the scheme due to the high cost of registration.

They assess the schemes through Citizenship by Investment (CBI). The concept, which is becoming increasingly attractive, allows wealthy individuals fast-track to second citizenship with passport in return for investment into real estate or a donation to government fund.

Nigeria has been named among countries, where the scheme is becoming attractive to the rich and creating demand for property-based citizenship programmes. The scheme appeals to Nigerian politicians, top-flight businessmen and industrialists.

Findings show that Nigerians’ holdings are more in Spain, Malta, Portugal, United States, Greece, Germany, Ireland, United Arab Emirates, Turkey, Bulgaria, Cyprus, Seychelles and Austria.

For instance, the United Arab Emirates (UAE) offers long-term visas valid for five to 10 years to property investors, entrepreneurs and people with exceptional talents without the need for a local sponsor. A minimum investment of $13,61,225 is needed to obtain a five-year visa, and double that amount is necessary for a decade-long visa.

Before now, $500,000 business investment (in real estate projects approved by EB-5 regional centre) in the United States qualifies for immediate permanent residence (Green card) in the U.S., including for family.

In 2019, the United States government implemented changes to the EB-5 investor programme as part of a comprehensive EB-5 modernisation law passed by Congress. The most notable change was the increase in the minimum investment amounts from $500,000 to $900,000 for Targeted Employment Area (TEA) investments and from $1 million to $1.8 million for non-Targeted Employment Area (TEA) investments.

FOR Nigeria, the reverse is the case. There has been lack of programmes to attract foreigners. The Foreign Direct Investment through the real estate sector is almost zero. The lack of impact of FDI could be felt in the National Bureau of Statistics (NBS) figures released recently that shows the real estate sector grew by 9.15 per cent in the fourth quarter of 2020.

The sector contracted by 3.55 per cent in the full year 2020. In nominal terms, real estate services in the fourth quarter of 2020 grew by 9.15 per cent, or 6.64 per cent points higher than the growth rate reported for the same period in 2019 and 17.21 per cent points when compared to the preceding quarter. Apparently, this marginal growth has nothing to do with foreign investment in the sector.

Experts say why foreigners are not interested in the Nigerian real estate market is due to lack of enabling environment for investment.

A former African president, International Real Estate Federation (FIABCI), Mr. Chudi Ubosi, said: “The Nigerian space is most unfriendly for local businesses. From poor infrastructure, to policy instability, high interest rates, low purchasing power, lack of mortgage facilities and archaic land administration system. ”

Ubosi, an estate surveyor and valuer, explained that real estate couldn’t be isolated from the rest of the economy that suffers from serious maladministration, adding that as investment in other sectors suffers, so also does real estate.

He enumerated three major attractions for Nigerian investors abroad. “Nigerians are looking for stable investment. With a national currency that loses value almost daily and an inflationary rate that is in double digits, many purchase real estate outside the country as a store of value.

“There are a group of Nigerians who buy second homes for the purposes of having a home for their children who are schooling abroad, which also affords them a place to stay when they are on vacation or on visits.”

The senior Partner/ Chief Executive Officer, Knight Frank Nigeria, Frank Okosun, said Nigerians invest heavily in real estate in these locations because of the opportunity for capital gains and also to meet their needs for a second home. “The locations provide quality tertiary education and most Nigerians purchase real estate to cater to the needs of their children studying abroad,” he said.

For him, foreign investors shun Nigeria due to the provisions of the Land Use Act, lack of transparency with land transactions, instability with government policies and multiple taxations.

According to Okosun, the sentiments for foreigners not investing in real estate in Nigeria are largely affected by government policies and the land tenure system.

A professor of estate management, University of Lagos, Timothy Nubi, explained that Nigeria’s economy is volatile, that the value of the naira is depreciating and government’s only solution to solving the problem was to further devalue its currency, which has caused inflation and increased the cost of doing business.

Nubi said the instability in the polity; violence, kidnapping and banditry will not allow any businessperson to think of investing in Nigeria or making the country an investment destination.

The President, Commonwealth Association of Surveying and Land Economy (CASLE), Segun Ajanlekoko, in his submission, linked the problem to inability to repatriate returns on investment, bureaucracy associated with obtaining land title and high cost of construction.

He noted that Nigerians yearn for foreign investments as a result of the significant appreciation in the value of the property as well as returns in foreign currency and easy disposal of assets.

He recommended that government should ensure easy access to land, improvements of infrastructure and amend policy, which will guarantee investors ability to repatriate returns.

“This is redeemable though not in the short term. There’s need for some difficult decisions. Among others, these are: a frontal, sincere, purposive and single-minded desire to fight terrorism. The whole country needs to be mobilised as in a state of war.

“Decentralisation of government maybe six regions with each region having concurrent responsibility for finance, security, and agriculture, except foreign affairs, customs, telecommunications, military, mint and a few others, which should be the exclusive preserve of the Federal Government, a single rate of exchange for the naira. An aggressive drive for export and encouragement of agro-based industries especially those that will derive their raw materials from local sources.”

Ubosi, who is the managing partner, Ubosi Eleh and Company, said reform should start with leadership. “A committed government that is willing to provide the enabling environment that business, local and international needs to thrive. Policies that are stable and investors can plan on and take long-term decisions on,” Ubosi said.

The government needs to provide adequate infrastructure and services to reduce the cost of housing production, he said.

“With good leadership and good economic environment, it is possible that the financial sector will find good footing and lend itself to long-term mortgages for housing investment,” he added.