‘Government should give incentives to local building materials’ producers’

Gbenga Olaniyan is an estate surveyor, valuer and principal partner, Estate Links Limited. He spoke to CHINEDUM UWAEGBULAM on issues in the housing industry, especially as it pertains to agency practice, property investment and housing finance.

The infiltration of quacks has done great damage to real estate profession. How do the industry players tackle the issues of perception and branding of estate agency practice?
The Nigerian Institution of Estate Surveyors and Valuers is doing a lot about this. The first thing is with regards to training of its estate surveyors and valuers. One of the strategies the institution is deploying is to ensure that a lot of trainings are done and when these trainings are done, best practices are imbibed in the heads and minds of people. Another has to do with the estate surveyors themselves, as we need to differentiate ourselves by our practice and the information we pass to people. For instance, when you are advising someone who wants to buy an investment, you need to tell him what his yield would be and not only the price, as you are not selling him a house, you are selling him an investment. You need to let people know that there is a difference between the professionals and the quacks; you need to let them know what your background training is. For those of us, who are valuers, we are the only ones who are allowed to do valuation, so the public of course needs to be educated and sensitized to the fact that quacks cannot legally perform functions in some parts of our profession. In a nutshell, while our institution is doing a lot, individual practitioners have to ensure that they do their own branding and differentiation.

The real estate sector is facing tough times due to economic downturns, leading to low purchasing power. What are the options available to property owners and agents to curtail high vacancy rates for residential and commercial property?
I will talk about commercial properties first. For so many commercial properties, especially the A grade and high-end commercial properties, one of the practices that professionals now do is that we give fit-out allowances that we never used to give and this would attract tenants who normally would not leave old properties to move into your property because the cost of moving is reduced. We also attract tenants by allowing rent-free periods where this flows with the financial projections for the property. There are some properties where we actually give tenants as much as six months rent free so that it gives them enough time to settle in. Another way is to drop rents until the market turns around. I remember in one of the properties we manage where a tenant was paying a rent of N8, 000,000, the tenant then told us he was moving out because business was bad and then we asked him what he could pay, he said N5, 000,000. We negotiated N5, 000,000 for the next year and when he had a turnaround he went back to be paying N8, 000,000 with this we were able to avoid a void period. The high vacancy rates in the major business cities such as Lagos, Abuja and Port-Harcourt for instance is mainly at the high end of the market so landlords have started becoming more realistic dropping rents as a calculated strategy in lean times.

Many reputable developers and agents are eying foreign property investments and marketing. What are strategies to adopt in property investments abroad? What are legal implications for would be investors?
We have done a lot of this and we have been fortunate enough not to meet people who have stolen money. Lots of our buyers are regular people who have done well and who want to invest funds like $100,000 and $150,000 which is the entry level for investors in most countries where we operate. For people who want to do volume in this, they need to look into locations where you have low hanging fruits where they are able to buy properties that are inexpensive and easy to rent out, which would be the lower-medium income end of most markets. These properties tend to give you high returns with long-term capital appreciation potentials. The other option of course is that you need to also work with banks to tap into the power of leverage in real estate. For instance, we work with banks that give up to 70 per cent loan to value ratio so if you are looking to invest abroad there is an opportunity for foreigners to take mortgages. Talking about the legal implications, in most countries, especially the four main countries Nigerians generally invest in as far as I know (United Kingdom, United States of America, South Africa and United Arab Emriates), any foreigner can own a property. We however recommend that anyone who wants to invest abroad, especially in a society like the United states of America, where it is easy for someone to be sued even because someone falls at your doorstep because of ice on your stairs, it makes more sense to invest using a special purpose vehicle (SPV) for protection.

Financing housing projects have been a major headache for property developers as banks shun long-term real estate financing. Do you think that offshore funding should be the way to tackle the problem? What are your recommendations?
Offshore funding is definitely a way to solve the problem. The problem we have is that a lot of offshore funders are afraid of the exposure of currency risk. We were consultants in a project where a huge sum was borrowed from a bank in the United States of America. It went very well and everything went well with that project because within the period the project ran, there was barely a five per cent drop in the value of the naira for three years so our financial projections were intact. The problem now is that imagine that someone got funding for a project in 2013 for a project at N160: $1 and in 2017 when it hit N500: $1 at a point before coming to settle at 360 to 1 (mind you property values did not change and dropped in some cases) if such an investor wants to recover that asset, he would have lost as much as 60 per cent of the dollars investment. I would say, yes offshore funding is a way to tackle the problem because even when locally you are able to get funding, you would be lucky to draw at a rate of 20per cent but many banks offshore are lending for as little as six per cent. I know some banks still give offshore funding for some projects but majority of them do not want to because of the currency risk.

Many lenders are also put off by the uncertainty in the land tenure system. I have encountered many situations where such banks will only accept a property with a certificate of occupancy in the name of the borrower as security, thereby discounting documents such as registered deeds of assignment with a good root of title for instance.

Nigeria real estate markets have potential to explode due to the population. What are the factors affecting demand for residential property, ranging from mass market affordable housing to high-end luxury properties?
Nigeria is said to have a housing deficit of about 17 million. The question is, if we put 17 million houses out there do you have the people for them? The answer is yes. Do you have the people to pay for them? The answer is no. We have the demand but we do not have the effective demand because we have the human beings chasing these houses but we do not have the finance backing these human beings. It is a challenge and until we have single digit mortgages that such people can afford, I am afraid to say that afford housing will lag behind high-end luxury properties. When you talk about high-end luxury properties you find a situation where one man owns about 200 flats in Ikoyi and Victoria Island so at that end of the market there is the funding to buy these properties when compared to affordable housing and this is the reason why you find people who can afford to execute affordable housing projects ending up doing high end properties because that is where they are able to make their returns. I recently ran into a friend who decided to do social housing but when he did the first project and could not sell it, I dare say he has changed his strategy and stepped up to the next segment delivering projects at N60 to N80 million, which of course do not qualify to be called affordable.

The housing industry challenge is enormous and traverses the building materials and mortgage services. What is your advice to the government on ways to better the sector?
Honestly, there a lot of building materials not made in Nigeria and I think the duties on these materials should be reduced and also heavy duties can be put on the high-end luxury materials. For instance, regular taps (talking about taps you find in the market for about N3500) should have lower duty than the brass taps or gold plated taps which should attract a very high duty .If you are able to do this at least the people who are unable to ordinarily afford to build would be able to do so as the cost of building materials at the lower end would drop. Even the local manufacturers of building materials need to be given support by the government.

Incentives like tax holidays and lower duties for the little raw materials we need to import to manufacture locally will be a good boost. Unless the government supports the building material industry, we have a long way to go. Nigeria needs a stable economic environment to better the sector and it behooves on the government to be more proactive in providing an enabling environment. High inflation rates and interest rates as they are today are typical characteristics of a volatile economy. These features have strong effects of reducing the affordability of mortgages. A volatile economy severely impacts on the supply of funds and the types of mortgages to be offered by lenders. In such an environment, lenders are concerned about various risks and are reluctant to offer long term loans needed for housing delivery.

The process of building plan approval and issuance of certificate of occupancy should be made faster and less cumbersome. The cumbersome property registration processes are major barriers to housing development and home-ownership, leading to the country’s huge housing deficit.

The Federal Government has been mooting some concepts such as the social housing scheme. How can the programme work in Nigeria as the authorities rarely provide infrastructure, developers face building approval and land documentation challenges in housing projects?
 Over the years, in advanced countries housing associations and cooperatives have made laudable impact in the provision of social housing and this should be encouraged by the government to come on board if social housing will head towards the desired destination. In the UK for example, a lot of the properties we manage for clients are leased to housing associations that in turn rent this out to those who require housing support. Sometimes, the people who rent these properties pay as little as 50per cent of the rent while the government subsidizes the rest. The question is whether or not the government can afford such a programme with the state of the economy right now. There are many models of social housing both from the rental and purchase angle that will take a whole newspaper to explain.

The lack of infrastructure in the outskirts of towns where you can realistically deliver social housing at affordable rates is also a challenge to developers and even for occupiers. Of course unnecessary bureaucracy in building approvals is a major problem as well that ends up frustrating would be buyers.Practical solutions to low-cost housing design and construction through the use of locally sourced building materials and culturally sensitive designs should also be looked into for social housing program work in Nigeria.

This will address the development of building construction methods and technologies which are both appropriate to the resources and skills locally available, and which offer flexibility while reducing cost.Furthermore, as long-standing economic challenges coupled with the recent global economic meltdown have made the purchase of a home in the formal sector unrealistic for households with falling real incomes, a realistic social housing strategy by a way of renting to own should be harnessed. This would cater for those at the lower level of the ladder by a shift from rental housing to the desired and ideal state of homeownership.