The real estate sector in Nigeria is grappling with significant challenges due to volatile exchange rates and soaring inflation, which have severely impacted growth and investment prospects. This economic instability has caused potential investors to reevaluate their decisions, leading to a slowdown in the once-booming property market.
In recent months, property prices across Nigeria have surged, yet real earnings have not kept pace. This discrepancy has deterred investment and stifled sector growth. According to the National Bureau of Statistics (NBS), the contribution of construction to Nigeria’s real gross domestic product (GDP) was 3.17 percent in the second quarter (Q2) of 2024. This represents a decline from 3.23 percent in the same quarter of 2023 and a further drop from 4.01 percent in the first quarter (Q1) of 2024. Additionally, real GDP growth in Q2 2024 stood at 0.75 percent, reflecting a decrease from both the previous year’s Q2 growth and the first quarter of 2024.
Financial markets analyst Ike Ibeabuchi, based in Abuja, highlighted the severe impact of inflation on the cost of maintaining existing properties. “The cost of maintaining properties has risen significantly due to inflation,” Ibeabuchi noted. “Moreover, the cost of funds has increased, making it more expensive to invest in real estate. Many available funds are costly, and without accessible and affordable financing, investments in real estate are constrained.”
A local developer shared his experience of the current market conditions. Four years ago, he sold 24 units of semi-detached houses before even roofing them. Now, he is constructing 10 townhouses priced at N65 million each but has only sold two units and is nearing the end of the development process. “When people are holding onto cash, it indicates tough times. A person with N60 million may be reluctant to buy a house costing N45 million because they prefer to retain a larger cash reserve. Such individuals are cautious, waiting to see how the situation evolves,” the developer explained.
Previously driven by factors like ‘unearned wealth’, foreign investments, and remittances from Nigerians abroad, the real estate market is now facing an investment drought due to hyperinflation and fluctuating exchange rates. The rental market, in particular, has been severely affected. A landlord in a prestigious area revealed that his property, originally priced at $85,000 per annum, has been reduced by 40 percent to $45,000, yet remains vacant.
Despite these challenges, Gbenga Olaniyan, Chairman of Estate Links Limited, believes that now could be a strategic time to invest in real estate. “Those who don’t invest now may find themselves paying more later. If the market improves, those currently selling will hold onto their units and their funds,” Olaniyan advised.
On a more positive note, the real estate market is undergoing a period of price correction and stabilization. Analysts suggest that this correction, estimated at around 20 percent for both residential and commercial properties, is a sign of maturing market dynamics. Olaniyan pointed out that, at one time, Nigeria’s rental rates for Grade A office spaces exceeded those in cities like Hong Kong, New York, and parts of the UK. “For example, Grade A office rent was as high as $1,100 per square meter. Currently, it’s closer to $800 per square meter,” Olaniyan said. Similarly, prime land prices in upscale areas such as Ikoyi have fallen from $330,000 to $350,000 per square meter, reflecting reduced demand and lower rental yields.
Olaniyan elaborated that high rents in Nigeria previously stemmed from a shortage of quality Grade A office spaces. “At the height of the market, rents in Nigeria were three times higher than those in South Africa, where office buildings are of superior quality,” he noted.
Overall, while the Nigerian real estate sector faces significant headwinds, including economic instability and reduced investment, the ongoing price corrections may present new opportunities for informed investors.
Businessday Report.
