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Improving projects financing will make housing affordable, says Ojo

By Victor Gbonegun
04 April 2022   |   4:04 am
In rapid inflation period, there is bound to be situations where some of the contractual covenants are difficult to achieve. Contractors have to device cost management strategies to improve the success of such agreements.


Mr. Odunayo Ojo is the Chief Executive Officer, UPDC Plc, a property development company. He spoke to VICTOR GBONEGUN on how rising inflation is impacting projects, workability of monthly rent and ways to ensure affordable housing, infrastructure funding.

With rising inflation, contractors may likely file for variations in projects. What suggestions are you offering to mitigate the problem and ensure affordable housing?
In rapid inflation period, there are bound to be situations where some of the contractual covenants are difficult to achieve. Contractors have to devise cost management strategies to improve the success of such agreements. 

The first is to ensure cash flow projection of projects are improved and this means simulating what is likely to happen with trend analysis as well as ensuring effective cost control during the life of a project.

We need to start looking at a situation, whereby the developer can assist the contractor by looking at items that may likely increase in price and give the contractor a significant payment to acquire those items from day one. This may include items that would be imported to manage the risk. This can be backed by advance payment and performance bond. 

Also, people need to engage experienced contractors. They may come at a premium but at the end of the day, they would have factored in all risk management strategies to prevent variations. The projects also should have a reasonable contingency plan that provides for enough allowance in case there are increases or unforeseen circumstances so that projects do not fail.

The subject of affordable housing is a complex one and the mechanism for affordability lies on many independent factors. These include cost of construction, improving financing structure for project delivery both on the contractor’s side and developer’s side as well as the customer side. Improving financing structure for projects will make housing affordable. If you don’t have long-term mortgages, housing may not be affordable.

If the interest rate is low, it could make property more affordable, things like infrastructure must be put in place and new technology explored. 

What is your assessment of the real estate sector in the last two years, especially on project costs and housing supply; do you think the sector has overcome COVID-19 pandemic?
The real estate sector has suffered some setbacks generally in the last six to seven years. The first few years of the recession were very tough. Then, as we began to get over it, there was COVID-19 pandemic, which also meant that there were economic impacts globally on supply chain and ability to produce assets.

People have to work from home and suspend projects. However, since the middle of 2021, especially the last three quarters, we began to see a resurgence of growth in the industry driven by three factors.

There was a lot of pent up demand that couldn’t be fulfilled during the pandemic, a lot of people who wanted to acquire real estate or do projects couldn’t. So, there was a lot of capital that were released into the system as a result of the demand. New industries like logistics and e-commerce emerged as well as other new sub-sectors.

The residential segment has continued to do well because your house is no longer just your home, but your office and children’s school. The live, work and play concept also emerged. The demand for large accommodation became high; people who wanted two-bedrooms now wanted three-bedroom to serve as extension of office and where kids could do their online school, while their parents are doing their work. 

Factors like costs are seeing a significant rise. Part of the cause is occasioned by the impact of the pandemic, which disrupted supply chain. There was backlog of supply, which affected timely delivery and increased cost. 

Currently, the sector is being cautiously optimistic, the fundamentals and prospects are good, but the recovery is fragile at this point in time.

Given a combination of factors, we are beginning to see significant instability in the global geo-political scene, high cost of energy, capital flight and political season in the country. These factors inter-play in the way real estate function and give rise to certain levels of uncertainty.

Real estate is a multi-dimensional sector, however, this is when experience matters and why a company like UPDC is poised for a brighter outlook. In times of uncertainty, people naturally gravitate to brands and companies that have experience. This is not a time to experiment with hard earned money. Generally the industry should be cautiously optimistic. 

The Federal Government is to spend N481.964 billion on works and housing in 2022. Do you consider the amount sufficient for infrastructural needs; if not, what option should government deplore to fund the shortfall?
I don’t think there is any amount that we can put into infrastructure that would be enough or too much. Depending on who you quote, they will tell you that we have 20 million housing deficit or more and goes into trillions and several billions of naira every year the cost for infrastructure and housing.

Government is trying its best and our resources are limited as a country.

With what the government can afford, if the funds are judiciously utilised, we are going to reduce the pressure on infrastructure but that is not a lasting solution. The solution is to have a public private partnership structure, where the public and private sector can come together and deliver infrastructure in an efficient manner. Resources are better utilised in the hand of private sector but you also need the public sector to give you access, regulations, approvals and permit. 

You can see this in action in Lagos State with the deep-sea port that has been inspected by the President, infrastructure like the airport and roads. If we harness the capital of the private sector and the might of the public sector, they will resolve some of the difficult infrastructure challenges. What the private sector needs is government support. 

With the recent collapse of the 21-storey lkoyi building, the nation’s construction industry had its worst moment. What would be the impact on investment in that segment of the property market and how do we forestall a reoccurrence?
There has been an impact, especially unintended consequences of that event. It has made customers become more enlightened by asking more questions now about development and people, who play in that sector.

Developers have also woken up to their responsibilities because they have seen the negative impact of the incident on brand, business and life. We have seen improved interest in UPDC because people believe the brand is trusted. Customers will continue to drill developers to ensure that they do the expected in project delivery. 

The nation needs to heighten its building and development control and supervision. It is not just the government; we need interest groups, professional bodies, who need to be more concerned about the industry. 

Technology is playing significant role in the global housing market. What is the future of such technology in the real estate sector?
Technology is disrupting every industry across the world. Even though the real estate sector is a late adopter, it is beginning to play a dominant role in the different aspects of the value chain.

One of the areas is the use technology to reduce the cost of construction through modular housing, where you build more efficiently, reduce wastes and deliver projects faster. We are seeing 3-D printing of housing in the world today.

Design can now be more efficiently done through technology. In marketing property, technology has taken over with digital inspections/virtual tours, drones, conveyance, relationship between buyers and sellers. In today’s world, we cannot deliver affordable and low-cost housing without technology.

Mass housing is an area where technology resolves a lot of issues; roll out thousands of housing units with a fraction of cost. It has the potential of economics of scale and technology is something we should embrace. 
The Federal and Lagos State government are pushing for a policy that would introduce monthly rent payment. What are your views on this and is it workable amid concerns by some property owners?
I personally think that rent control edict don’t work in a free market environment. Rent like every other price, is an output of the interplay of demand and supply.

The moment you try to control prices, other complications might arise. I am concerned about the rapid increase in rent and its effect on the livelihood of an average Nigerian, who struggles to cope with inflation. I believe there are other strategies that can be implemented rather than rent control to improve home ownership.

If there are many housing units supplied, prices will go down. We have growing population everyday, rural to urban migration and so, how do we control rent when the fundamentals affecting it are not controlled.

There will be challenge to implement such policy. Attempt in the past has not succeeded and l think this might complicate the struggle.

UPDC brand went through recession in recent years. What was responsible for this development and what is being done to revive the firm?
The UPDC brand has always been a strong brand in the industry and responsible for a lot of first grade projects. Over the years, UPDC led the development revolution in several parts of the country, especially Lagos, Abuja and Port Harcourt.

However, the economic recession of 2015 really affected the company because so many of our customers are traditional customers, who had economic challenges that impacted their businesses and ability to invest in real estate, which affected the company too. If you remember, Nigeria went into very deep recession and many businesses were affected as a result.

The real estate industry was one of the most affected and you can see from statistics of the industry, it was a great recession, which continued for a long period and this was evident in the performance of UPDC around that time.

Also, the peculiar situation of UPDC was compounded by its level of debt portfolio, which was relatively high and because of the impact of the recession, it affected the profitability of the company. 

In the last three to four years, we have consistently gone through some corporate restructuring, primarily to restructure the financial base as well as corporate structure. The first thing we did was to reduce our debt from around N21 billion to N5 billion and boost the company’s ability to continue to carry on business.

In May 2020, UPDC got a new investor, the Custodian Investment Plc. If you are familiar with them, they are very strong financial institution with the kind of capital base to support capital intensive businesses like UPDC. Custodian has begun to implement its strategies to ensure that in near future, UPDC becomes profitable and gets back on the path of growth. 

We now have a new board and management, chief executive and new strategies are been implemented, which we are beginning to see results in the short term. But this is a long distance race and we expect that these actions in the long-term will progressively improve the fortunes of the company. 

There have been reports of recent corporate action, especially in Real Estate lnvestment Trust (REIT). What impact should investors expect from this initiative?
UPDC sponsored the UPDC REIT, which is another listed real estate vehicle at the capital market. In 2020, the company decided to unbundle its holding in UPDC and distribute the units to the shareholders at that time and this was a way of compensating shareholders, because they immediately became shareholders of UPDC REIT.

UPDC REIT has always declared dividends and so immediately one became a beneficiary of the entity, there will be dividend every year. This is one way we have delighted the shareholders by giving them to the entity that is very profitable. 

Will the unbundling not affect the performance of the REIT?
The trading on UPDC REIT is higher and so subscribers, who could hold or sell become more liquid. That meant that it was additional benefit to our shareholders. Primarily for UPDC, the unbundling of the REIT means there has been increased activity on the trading of REIT units and improved returns to our shareholders. 
The REIT market will not be dampened because if the unit holders are able to trade in the REIT more actively, it means that there will be the forces of demand and supply that will affect the trading of the REIT. What is most important is the performance of the underlying assets because it is an asset based structure.

The REIT has underlying assets where the income comes from and once the assets continue to do well, the REIT will continue to do well. There have been some corporate actions whereby the REIT active assets are managed by people that have experiences and capabilities.

Naturally with the strategies, the units’ holders will see higher returns and it will improve the performance of the REIT. So, all these actions when they come together will ensure that the unbundling does not affect the performance of the REIT. 

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