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High construction cost, investors’ apathy dampen interest in build-to-rent scheme

By Victor Gbonegun
20 March 2023   |   4:28 am
Homes built exclusively for renters are becoming hard to come by, as economic uncertainties persist and impact real estate industry.There has also been an overall slowdown in construction activity...

Aerial view of Lagos

Homes built exclusively for renters are becoming hard to come by, as economic uncertainties persist and impact real estate industry. There has also been an overall slowdown in construction activity, with rents either stagnating or increasing in most segments depending on locations.

The weakness in the domestic economic environment, unstable exchange rate, fuel scarcity and high cost of building materials, is in turn fueling challenging business conditions.
Residential market appears to have been the most significantly impacted by these economic conditions, as developers struggle to remain operational in a market already challenged by a demand-supply imbalance.
With the rental market being the most active segment of real estate, the build-to-rent scheme, which enjoyed significant patronage in the past, has suffered a setback.
Initially, the scheme has been a money-spinner for investors, as many Nigerians need homes, while housing shortage is estimated at 22 million. In fact, investors are shying away from the model owing to an unfriendly environment as only few real estate developers could raise capital to build houses for profits.
For instance, a property investor, who invested a total of N500 million on a project, may have to wait till about 45 years to get return on investment through the ‘build-to-rent’ homes.
Experts explained that building house for rent is a long-term investment, but never an instant busines, as returns are usually slow. The current interest rate charged by banks has made it risky to take a loan and use it in building for rent purposes.
A professor of estate management and valuation at Federal University of Technology, Minna, Adebowale Kemiki, said the rate at which people build-to-rent accommodations now compared to the last four to 10 years has dropped.  He said this is not unconnected with the economic downturn witnessed, as many Nigerians still struggle to eat and meet other basic needs of life. He noted those who are building; mostly do so for self-occupation.
“Currently, there is a shift in the approach of built-to-rent. Before now, we have individuals, who build one single accommodation, maybe one or two flats or four flats at maximum.
“But now, we have an influx of private developers, who build estates for rent and in most cases these estates are built for rent as serviced estates. They collect rents, manage the estates and also administer services, “ he said. Kemiki, who was also a former Chairman, Nigerian Institution of Estate Surveyors and Valuers (NIESV), Niger State branch, said the challenges facing the scheme include, building in a wrong location, high cost of building in relation to the value and cost of mortgage.
“Some of the investors may feel because the land is a little bit cheaper and take advantage, but when they build in a location that is wrong, the expectation is cut short in the sense that they cannot attract renters.
“For example, if you build beautiful blocks of flats for the middle-low income earners in a shanty, noisy and crowded area, where drainages are not working, it will be difficult for people to rent such a development. Even if they want to rent, they will lower the rent.
“People now spend more to build and earn little from rents and have to wait for many years to recoup their money. Most especially, if they go on mortgage, they may not be able to meet up because the mortgagor will be on them to pay the mortgage, but the rent may not be able to meet the high cost of mortgage, because it is not translating to high value, “ he explained.
He added that owing to the low purchasing power of Nigerians, there are vacancies in the property market with many who are supposed to change their accommodation are not able to as a result of lack of funds.
On profitability of the model, Kemiki said if projects are located in areas that meet the needs of the target markets, it could be profitable, adding that the investors will also have to wait for years like a period of 20 years before recouping investment.
“Many investors prefer to build to sell because they don’t know what may happen tomorrow. You can build an accommodation of N120 million and get rent of N6 million yearly and so may have to wait for 15 to 20 years to recoup their investment unlike other businesses that deal with buying and selling of goods. As the person is waiting and the Naira is devalued, it is another problem. It will further eat into the profit.”
Immediate past chairman, NIESV Lagos branch, Adedotun Bamigbola, said though, there are no statistics concerning the success rate of the housing model, it is not a bad idea and can be innovative depending on whoever is carrying out the development, especially, in Nigeria where rents are paid yearly.
He also affirmed that a critical challenge is the ‘cash and carry’ type of economy that operates in Nigeria, where investors have to buy everything to develop a building.
Bamigbola said the challenging economic situation may make build to rent development not profitable as past governments in places like Lagos that deployed the model were not able to sustain it.
“In fact, if you don’t buy in bulk, you may be running at a loss as prices keep escalating over time. No bill of quantity is sustained beyond three weeks these days. A lot of materials are imported and so the challenge of rising cost is there even for the local materials, if they are available.” He said the government may be able to sustain such development but a private individual venturing into the scheme will develop a lot of guts, sacrifice and probably decide that the business is not for profit.
“It should be a social asset or intervention and not a business investment. Even for the government investing in it, the possibility of being hijacked by people with ulterior motives is high,” he said.
The Managing Director, Echostone Development Nigeria, a property development company, Mr. Sammy Adigun, explained that the challenge has been the absence of a credit system, adding that if there is no credit, you cannot develop houses for build-to-rent. He said: “Culturally, we have not been doing it. There is no long-term finance in the economy; the interest rate is high to even allow profitability. It has to be driven by the government because nobody has the capital to waste. Many people just want to build and sell.”