Real estate has historically provided a strong inflation hedge, but rising interest rates and the looming housing crisis are raising concerns among property developers, mortgage operators and professionals. The operatives are seeking government’s intervention in the housing and mortgage sectors of the economy to maintain affordable rates for citizens, writes CHINEDUM UWAEGBULAM.
Persistently higher interest rates have continued to create headwinds for the real estate market, especially impacting commercial properties by increasing borrowing costs, reducing demand from developers and investors.
The increase has unquestionably aggravated the nations’ housing crisis. This has further made investors adopt a more cautious approach, given the ongoing rise in building materials prices due to inflation in the country.
Interest rate averaged 11.89 per cent from 2007 until 2024, reaching an all-time high of 22.75 per cent in February of 2024 and a record low of 6.00 per cent in July of 2009. The Central Bank of Nigeria (CBN) raised its key benchmark interest rate by 400bps to 22.75 per cent on February 27, 2024, a new record high since at least 2007, and above forecasts of 21per cent.
The current lending rate is between 27.07- 30 per cent, while the inflation rate is 31.7 per cent as at February 2024, according to the Nigeria Bureau of Statistics. Before the hike in Monetary Policy Rate (MPR) to 22.75 per cent, banks’ lending rate had already reached 27 per cent per year.
Following the increase recently, the commercial real estate transaction market has been significantly hindered, while the construction and development of new properties have declined due to developers’ reluctance to take on additional financial burdens and project risks.
With demand for commercial properties decreasing and property values potentially increasing, investors are adapting to market shifts and identifying opportunities amid the challenges. There has also been a shift from a seller’s market to a buyer’s market, as a result of rising interest rates, which significantly impacted the supply and demand dynamics in the commercial property market.
Experts say higher interest rates may cause a decrease in demand as businesses may be less inclined or able to invest in real estate, and developers may also become reluctant to finance new construction projects due to the increased cost of borrowing.
Specifically, the rising interest rates have impacted residential rent rates more than commercial rent rates. An increase in interest rates discourages demand for buying homes, leading to more people choosing or being forced to rent. The increase in demand for rental properties results in higher residential rent rates.
Also, it has reduced occupancy rates in commercial properties leading to higher vacancy rates and affected property values. According to the Director, School of Environmental Studies, Moshood Abiola Polytechnics, Dr Samson Agbato, “the rising interest rates have led to an increase in the value of the active property market.”
Agbato, an estate surveyor and valuer, explained that higher interest rates can make borrowing money more expensive for real estate developers and consumers, while potentially making it harder to get approval for new applications for loans.
He said: “Higher interest rates can increase the cost of financing for real estate developers and construction projects. This could lead to a slowdown in new construction and real estate development activities. When interest rates rise, the cost of borrowing is higher. Therefore, one may pay higher interest rates on new loans and potentially be unable to borrow more. The impact on existing loans may also vary depending on whether it is a fixed-or variable-rate loan.
“Higher borrowing costs deter some potential buyers from entering the real estate market or prompt others to delay their purchase decisions. Consequently, a decrease in demand can put downward pressure on property prices or result in stagnation of market activity.”
He said real estate development can be highly lucrative, but profits can quickly erode due to cost overrun, from fluctuating labour and material costs to unexpected rise in interest rates. “The challenges faced by property developers, owner-occupier, and commercial landlords, as well as lenders at a time like this are enormous.
“There is obviously drastic lower demand for loan, office and retail buildings and pushed vacancy rates higher. It is also important to mention that high interest rates erode the purchasing power of money, which can lead to an increase in property prices as sellers seek to compensate for their investment.”
Agbato urged property developers to regularly review investment portfolios, such as assessing risk tolerance, investment goals, and adapting to current market conditions, adding that diversifying portfolios across different geographic locations and property types can also help mitigate risks.
He also advised that they should build a financial safety net, create a financial buffer, such as setting aside a portion of rental income, which can provide security against unforeseen circumstances, like interest rate hikes or periods of vacancy.
Other remedies available to real estate developers include but are not limited to diversification and asset allocation, adjusting to new borrowing strategies, tax-efficient investing, short-term and high-yield savings accounts, and hedging against interest rate risks.
The Managing Director/Chief Executive Officer, Propertygate Development and Investment Limited, Adetokunbo Ajayi, who anticipates further rise in interest rate, revealed that high interest rates are devastating to businesses, and real estate.
He said that high interest rates translate to a rise in operations’ cost of a property developer. “This ultimately ends in high delivery costs of products. Demand naturally diminishes in the face of rising prices, threatening the business of a property developer.
“Lenders are also not thrilled by rising interest rates, as demand for their credit products reduce, and incidents of bad loans tend to rise, while commercial landlords with debt servicing will have tough situations on their hands as high finance costs can be destabilising.”
Ajayi revealed that developers and real estate owners are already adjusting their prices to reflect the current financial and economic realities, adding that the result in the marketplace is a rise in property prices.
“There are also renegotiations of loans’ terms with lenders, sourcing equity funding to take out debt finance, and limiting exposure are some options open to developers dealing with debt situations,” he said.
He said developers should avoid speculative development at this time and to weather the storm, they need to pursue revenue diversification. “This will be helpful not only for stability in the short-term but also for long-term sustainability,” Ajayi added.
Another property developer and Managing Director/Chief Executive Officer, NISH Affordable Housing Ltd, Dr Yemi Adelakun, said the rising interest rate has compounded the existing precarious situation created by the high cost of building materials.
He stressed the situation has negatively affected real estate development especially in the low-cost housing space. “Definitely, property prices will increase and these may further discourage effective demand for such properties. This may result in locked up capital,” he said.
Adelakun said institutional developers with strong financial base or those mobilised to build on contract may not feel the heat as much as those who rely solely on credit finance, adding that the major challenge is the ever-rising prices of building materials both locally produced and imported items.
Another challenge, he said, is the uncertain demand and dwindling purchasing power of end users, who are already overburdened by high inflation without commensurate increase in income. He foresees developers passing the extra building costs to off-takers, while many tenants may not renew their tenancy or afford rent increases.
Adelakun said government incentives for developers will be desirable, which include price interventions with manufacturers of building materials, special lending rates for the affordable housing sector and easy access to affordable mortgages. “The government, in turn, will reap the benefits of multiplier effects of housing on the economy,” he added.
The Executive Secretary/CEO, Mortgage Banking Association of Nigeria (MBAN) Dr Adedeji Ajadi, said with the recent hike in rates by the CBN, all rates are expected to go up, adding that the MPR rate is the benchmark rate that drives other interest rates in the economy.
He urged the government to intervene in the housing and mortgage sectors of the economy to maintain affordable rates for citizens, given the strategic positioning of the sub- sector in supporting the provision of shelter, financial security and overall economic development of the nation.
According to him, government intervention is inevitable in the housing and mortgage sectors to avert the housing crisis in the country.
