Developers explore alternative financing as bank rates deplete ROI

With rising borrowing costs, which could be as high as 38 per cent in commercial banks, property developers are wary of bank loans for new projects. The inertia is hinged on the potential impacts of such facilities on their return on investments, VICTOR GBONEGUN reports.

With the rising cost of real estate projects, more property developers are cutting back on bank loans for funding as high interest rates from commercial banks continue to discourage local investments.

Nigeria has witnessed significant monetary policy tightening by the Central Bank of Nigeria (CBN) over the past few years to bring down the double-digit inflation regime.

However, this has resulted in high interest rates, making access to affordable housing funding difficult. Interest rate in Nigeria averaged 12.57 per cent from 2007 until 2024, reaching an all-time high of 27.50 per cent in November of 2024.

Findings revealed that among the top 10 banks in the country, the maximum rate of interest in commercial banks is between 23 and 38 per cent, which is considered not viable for financial planning in real estate.

The dearth of affordable finance is worsening some of the existing challenges developers face in providing decent and adequate housing for the people. These challenges include a lack of skilled artisans, substandard building standards, lack of access to land, a higher rate of urbanisation, inconsistent housing policy, and the high cost of titles.

The situation has aggravated the housing deficit estimated at 28 million and limited the sector’s contribution to Gross Domestic Product (GDP). Nigeria’s real estate sector is expected to increase in market volume to $2.25 trillion by the end of 2025, according to the Minister of Housing and Urban Development, Musa Dangiwa. The projection could be cut short if the funding challenge for operators is not tackled headlong.

Real estate projects, either residential, commercial, retail or industrial often need huge capital running into billions of naira. The Guardian learnt that only a few players in the sector still borrow from banks to keep to timely delivery of projects. Regrettably, the reality in this circumstance is that the project is delivered at a cost far beyond the affordable scale.

Besides, operatives are also worried about conditions and requirements often pushed forward to qualify for real estate loans. According to CBN data, the total credit extended by banks surged from N29.45 trillion in December 2022 to N44.54 trillion by December 2023, indicating a 51.23 per cent rise in lending activities between two years.

Affordable financing is crucial for infrastructure development, including roads, bridges, and residential and commercial buildings, contributing to the country’s urbanisation and economic growth.

The Guardian discovered that while Nigeria’s banking sector witnessed a substantial increase in lending activities to various sectors amid interest rate hikes, the construction industry ranked eighth among sectors accessing bank loans.

Construction activities received increased funding, with total borrowings reaching N1.82 trillion in 2023, reflecting a 56 per cent surge from N1.16 trillion in the previous year, supporting infrastructural development efforts.

The National Bureau of Statistics (NBS) has listed the real estate sector as the third-largest sub-sector in Nigeria’s rebasing exercise. The sector contributed 5.20 per cent to the GDP in Q1 of 2024, up from 5th position.

Specifically, the rebasing exercise has rearranged the order of Nigeria’s leading industries. Grain crop production and Trade remain the top and second-largest industries, real estate has surpassed crude petroleum and Natural gas to claim third place.

Currently, many investors rely on a combination of innovative financing models, which include off-plan sales, crowdfunding, public-private partnerships, sourcing funding for project promoters, and self-finance.

Others are co-funding, the capital market, blended finance approach, private foreign equity finance and bonds. There are projections that the proposed Federal Government interventions in the property market, through the Ministry of Finance Incorporated to leverage the Nigerian Capital Market and mobilise private sector funding for housing development may bring succour to the sector.

The Real Estate Investment Fund targets 12 per cent mortgage interest rates instead of the market’s 28-30 per cent and aims to provide bankable off-taker guarantees for developers.

Stakeholders also believe that more strong interventions are needed to address the funding needs of developers. Major concerns among operators are that the interest charge on loan facilities can wipe off projected investment profits.

The past president of the Real Estate Developers Association of Nigeria (REDAN), Dr Aliyu Wamakko, said the situation is not good for the construction sector.

With concerns raised on the increasing inflation rate in Nigeria, which rose to 34.80 per cent in December from 34.60 per cent in November of 2024, he noted that a developer cannot borrow money in the commercial bank at 38 per cent interest rate and earn a profit.

Wammako argued that such borrowing couldn’t be used to provide affordable housing, in a country where 80 per cent of the citizens who rely on rental accommodation need affordable housing for themselves and their families. He said: “It is not good for the economy because it is only when there are construction activities in the economy that the economy develops and creates job opportunities across the construction value chain.”

He stressed the need for the government to create a special window where the player can get funding at 10 per cent or a single-digit interest rate and build houses for Nigerians.

“Many developers end up using available resources to develop projects but at a snail speed, which slows down the ability to increase the sector’s contributions to the GDP. Since 2015, the real estate contribution to the GDP has not significantly increased.

“With the low purchasing power of the people, some developers are still using off-plan because they don’t have other options and buyers have to spread payments over some time,” he added.

The Managing Director of Prindex Properties, ToluBawa-Allah, said it makes sense for developers to cut back on bank loans due to the numerous challenges associated with it.

“The first challenge is the interest rate. We can’t transfer those cost of funds to our subscribers. Just as developers are struggling, the end-users and subscribers are also struggling.

“The market can’t accommodate that increase; hence, the developers are looking for alternative funds,” Bawa-Allah said. Bawa-Allah, who doubles as an architect, observed that innovative solutions that helped the situation include off-plan sales, and buying construction materials in bulk to beat inflation risks.

Also, FIABCI President, Africa and Near East, Adeniji Adele, said: “It is no longer encouraging to borrow money from the bank because of the interest rate. “I would rather leverage on alternatives like crowdfunding where people put their resources together or look at core investors from abroad, who believe in a developer.

“People can leverage legal frame structures in the country to access credit. Things are a bit awkward now people are cutting corners. You will see some developers’ end products lacking in standards and finishing, and not meeting international standards.”

On the government’s efforts to mitigate challenges in terms of housing sector funding, he said the Federal Government must remove impediments to access to funding by eliminating undue collateral and stringent conditions, as well as ensure transparency, and accountability in the process.

Adele said the government credit support for housing must be channelled to the genuine developers, while the interest rate must be in single digits and high volume, ensuring that access to land is prioritised.