Demand for real estate will remain weak, says Akintunde
In this interview, the Managing Director, Alpha Mead Facilities Management and Services Limited, Mr. FEMI AKINTUNDE, an engineer is profering robust structure and stategy to guarantee provision and efficient management of the public infrastructure. He also spoke with CHINEDUM UWAEGBULAM on the prospects of the real estate market in 2016.
AS you know, 2015 was a very challenging year for most companies. How did your company fair during this period?
I must start by thanking all our media friends. I believe that whatever we must have achieved if it was not well presented to the market especially our target customers and the public in general, the value would have been less and we must continue to appreciate what the media is doing. Nigeria went through a lot of turbulence last year but the participation and the contribution of the media are very vital.
As a business, I will be very ungrateful to say that it did not turn out well for us. We came out very strong. Last year was a very good year for us. It was an election year for Nigeria and politically we went through a lot of challenges in the country.
Right from the last quarter of 2014, the election activities started and that ran through to March 2015 and eventually government was sworn in May 2015. That was already half of the year and during that period a lot of political uncertainties affected business activities; things were generally dull. As we finished the election, we expected the government to hit the ground running but that did not happen until around October 2015 when the ministers were appointed.
After the ministers were appointed, it took till November before we got a clearer direction who handles which portfolio. The whole of 2015 was spent significantly on political activities; government was at a standstill and when that happens, the private sector will feel it most.
The economy suffered, no doubt. Everything slowed down and there were two fundamentals that drove everything. First is the fact that Nigeria is still a mono-product economy, depending solely on oil. The oil market was severely affected last year, which led to significant reduction in its price.
From mid last year around June/July, a barrel of oil was selling for $110. As at today, it’s below $30, which is over 70 per cent reduction. No doubt, that has affected the disposable income of the government because 70 per cent of what comes to us, comes from oil. So, oil price has affected the spending capacity of government.
The second fundamental, we need to consider, which also affected everything and did not get attention last year is the issue about our balance of trade. If you look at the value of the naira against the international currency, naira has lost the discount value and we witnessed more of it towards the end of the year when the official rate of naira got to as high as 197 to a dollar. Today, naira is exchanging for above 300.
Real estate development activities were really affected because we didn’t see a lot of activities in that area. Construction activities dropped significantly last year. What that means is that the supply of residential, retail and commercial offices reduced significantly. And because the economy witnessed some challenges, it affected both the public and private sector.
Perhaps, if we were not able to raise money on our own through internally generated revenue and through the sale of oil products, perhaps another area we can look at is the foreign direct investment into the country, but again on the social and securities side, we have major issues in the North East where Boko Haram has affected everything.
So, socially we were not having a good reputation outside; Nigeria became a high-risk region for anybody who wants to do business. So on all these angles, the economy suffered, manufacturing capacity dropped.
There was now a case of how will the real estate sector move forward. Because of reduction in oil price, demand for real estate was very weak. The impact of oil price fall affected the oil industry and the oil industry happens to employ a very high proportion of expatriates who are live in luxury apartments.
That reduction made the demand for real estate drop. The real estate service industry also had major issues. There was less demand and significant pressure on the little remaining because cost of doing business generally went up. Service cost went up especially because we also have the problem of infrastructure development, which the government has not invested in a lot over time especially the economic infrastructure like road and power that will drive the economy.
Real estate service cost today is about 60-65 per cent power-related. When power alone takes 60-65 per cent of the total service cost, there is a big problem and that puts pressure on the people who are benefitting from the services. We are experiencing high cost of input for our services and loans from the banks are not there because liquidity in the banking sector was also affected.
There were less income; there were a number of government fiscal policies last year that also affected banking sector and because the banking sector was affected, we were automatically affected. Cost of input was going up and that put a lot of pressure on profitability. So most businesses suffered.
The economy was severely impaired and that was what affected last year. There were no new developments and demand for existing ones was weak; supply dropped; cost of services went up, people were demanding more for less payment.
Cash flow was another problem and people were not paid for services delivered. This was what characterized the real estate industry last year and the facility management services sector, which is a service industry within the real estate gives.
You’ve really painted a scary picture of the out-gone, yet you said your company had a good outing. How did it happen?.
We went back to the drawing board to reflect on how we can position ourselves in the midst of all these because we don’t have control over those happenings, but we have control over how we respond to them. So, we analysed the market and took a view that waiting time is preparation time.
Opportunity will meet you at the point where you keep yourself. You don’t work for opportunity, you create the opportunity. In the midst of all those difficult times, we decided to continue to invest in capacity. We were building capacity and shopping for talents; we trained over 200 facility managers last year.
We deepened our training programmes, building more competences. We were investing in technologies, we restructured the company; we got our people to be more focused and used the opportunity of pain to leverage gain for ourselves. As we were doing all these, when the big opportunity started coming, we were among the very few, the corporate saw to be ready and very good projects were coming our way.
While reviewing the previous year, you noted that Nigeria being a mono-product economy poses a challenge for the country. What alternatives. Do you think, we have that could help to cushion the impact of oil price fall?
Why are we continuously importing refined products? We will export the crude, we pay to transport it out and pay for their labour over there yet we have unemployed vibrant graduates here. We will pay to bring it back here, pay them profit, pay their overhead, reflect their own economy and deflate our own economy and yet we are complaining of poor development.
This is a very big challenge we can see and take advantage of. Yet Nigeria will go out and import refined products. The whole of West Africa and most parts of Africa will also go and import the same time. Why can’t Nigeria improve its refining capacity? When we do that, there is less pressure on dollar to buy refined products, we will generate more employment by having refineries that work.
We will waste less money on having capital assets that are idle; we will satisfy our domestic demand and still export to other neighbouring African countries. One way or the other, we are also helping the economy of those African countries because it costs them less to buy from Nigeria than to buy from Europe and America.
Immediate opportunity I see is that government should look at; focus on how to bring up our refineries. If the current ones are not working, let’s go for new ones. We licensed about 18 or 19 private refineries a couple of years ago; we should ask ourselves why none of them is currently producing except those guys in the creeks that are refining crude oil illegally. We should be asking what can we do to harness that industry but instead we want to fight them and we don’t have alternative.
Another area I will propose as a solution is for us to take a second look at our international trade policy. We currently import anything in form of finished goods, ostentatious goods, fabrics, toothpicks and food. We have enough locally to make some of these things. We need to reduce the importation of those items significantly. Government has to discourage them.
Let us import input materials for our manufacturing sector because we consume more than we produce currently. We are not a producing economy and that is part of the problem that we have.
What do you think real estate and the facilities management sector have to offer in 2016?
I heard and read a lot of stories in the newspaper where people are painting a very robust and optimistic view of the economy. I like everything to work, but I have looked at the fundamentals that will bring about what should happen in the economy. These are the perspectives on which I will pitch my analysis of what we should be expecting in 2016.
We pegged budget at N6 trillion naira on a benchmark price of $38 per barrel. As we speak, it is $28 per barrel, and government has not started implementation of the budget. Predictions from international experts on the oil market, say between now and December, average oil price will be in the range of $25 per barrel. IMF has advised that we should be ready for between $10 -$15 per barrel further reduction.
Fundamentally, the strength of the naira is not likely to improve immediately. Capacity utilisation of the manufacturing sector is not likely to improve immediately. The cost of services, and running businesses in Nigeria will continue to go high. Because there is less inflow into the economy, government will spend less, and if government spends less, there is less liquidity in the system to touch the private sector.
There is every likelihood that cost of funds will go high. If we don’t improve production capacity, we should not deceive ourselves that things will get better in 2016. But the good news is that because we have a new government that has a lot to proof to Nigerians, they are under pressure to deliver the dividend of democracy to us. The political will is there, whether it can be matched with the available resources, it desire to do, I’m too sure.
Due to its inconsistent monetary policy, Central Bank of Nigeria has left the private sector in the dark. On that basis, foreign investors would be careful of Nigeria. The inconsistent policy is making it difficult for businesses to plan and have a sustainable strategy that can adjust to the harsh economic realities that is facing us. The foreign investors want to see some degree of stability in the economy. If there is no money in money and capital markets, how would business get funded?
In the real estate and facility management, it would affect some variables. One: Demand for real estate will remain weak. There would be less people who will purchase and pay for services. Two: Supply will reduce. Currently, we have over supply of space. We are expecting 150,000 square metres of commercial office space to come into the market. Who is going to let these offices?
And because cost of doing business is going up, the cost of services is also going up, but the businesses that would pay for the services will continue to price down the services, thereby reducing the capacity of the service industry. We will see more of companies in the service industry folding up. If the primary customers cannot afford your service, they either ask you to bring prices to un-stainable level or pull out of the service.
If infrastructure investment is not high, real estate will continue to bear the brunt. Value of real estate would remain low due to inaccessibility of roads, power and other amenities.