It is important to examine the impact of the economic downturn on the real estate market in Nigeria – a topical issue that presents significant challenges to almost all economies (underdeveloped, developing and developed). In recent times, the drop in oil prices has left nations with undiversified oil based economy like Nigeria in economic crisis. This challenge, brought about by exchange rate fluctuations, is eventually leading to the devaluation of the Naira, affecting the demand and supply sides of the economy.
In Nigeria today, both local and international businesses find Lagos and Abuja to be the prime locations for their businesses. Due to the influx of international firms seeking decent office buildings, it became imperative that investors explore this opportunity, with Grade A and Grade B buildings starting to come up in Lagos and Abuja. In Lagos, properties in the upper-end market (Lagos Island such as Ikoyi, Victoria Island and Lekki Corridors) are severely affected by the economic downturn, while properties on the lower end (Lagos mainland) have instead seen an increase in demand, leading to an increase in rental rates for the commercial properties in the axis.
This economic downturn has hit the Nigerian real estate market in a unique way. Since the devaluation of the Naira by the Central Bank of Nigeria (CBN), the exchange rate of the local currency against the US Dollar has been unstable and discouraging. The implication of this to a tenant who rented an apartment at a certain rate two years ago is that, at the point of lease renewal, the rent would have doubled. It is against this backdrop that housing industry experts were in support of the CBN’s ban on the use of foreign currency to transact business in Nigeria, insisting that the legal currency for doing business in Nigeria remained the Naira. As a result, going forward it is illegal for anyone to transact business in US Dollars in the country. Godwin Emefiele, the Governor of the Apex Bank, announced this ban after a two-day monetary policy committee (MPC) meeting in Abuja, declaring people and organisations demanding foreign currency payment for services, rent or other transactions would be penalised.
The rate at which the Naira is falling has caused a crisis in the housing industry, pitching tenants against landlords, businesses against investors. A lot of property owners bring in foreign investors to invest in real estate with the assurance that their investment will be Dollar-denominated. But with the current policy guarding against this, investors who had been assured that their investments would be Dollar-denominated cannot stand the thought of losing so much because of the instability in the exchange rate, therefore, they figured the best way to not lose so much would be to transact in Naira but keeping it pegged at the prevailing Dollar rate. This would help minimise their losses.
Before now, a home seeker’s frustration was not only in the outrageous price tags on houses for sale or rent, but also in the demand for US Dollars instead of Naira in exchange for the houses on the market. A very significant number of developers and landlords in more exclusive locations, especially those in Banana Island in Lagos, were guilty of this and, typical of the Nigerian elite, it was gradually becoming a fad or status symbol to live in US Dollar-denominated rent apartments. The excitement on the part of house owners, therefore created a myth and an uncommon exclusivity around Banana Island, making it the most expensive real estate destination in Nigeria, where a three-bedroom apartment rents for between N15 million and N20 million per annum and sells for N200 million.
The Nigerian real estate market has been hampered by the general economic downturn, with most real estate investors now struggling to remain in business. Recently, a report by the Financial Derivatives Company Limited (FDC) stated that the number of vacant properties in the upper-class real estate neighbourhoods of Lekki, Victoria Island and Ikoyi has risen by 72% over the last 18 months. The report further stated that Lekki, with the largest number of residential developments, recorded the highest vacancy rates.
Before now, the Nigerian property market in the major cities of Lagos, Abuja, and Port-Harcourt achieved an all-time high boom between 2007 and the second quarter of 2008. In Lagos, property values were known to have been increased by as much as 100% in the first half of 2008 from their 2007 values. Strange as it was to discerning investors and professionals, the phenomenon was easily explained by the “militant activities” in the Niger Delta that forced oil corporations to relocate from Port-Harcourt and Warri to Lagos, exerting demand pressure on the limited housing stock. The erstwhile virile stock market trading fuelled the housing bubble and it was only a matter of time before the bubble burst.
Moderate economic growth with low interest rates, punctuated with bouts of pessimism and volatility—the factors that have characterised the world economy for the past few years—are likely to continue, supporting moderate growth in commercial rents and investment sales volume globally. But the real estate market in Nigeria is filled with lots of opportunities for profitability and the fact that real estate appreciates in value over time suggests that real estate is still a better alternative to stocks in the near future.