How Real Estate Players Lost Millions In 10Mths

+The Story Of Their Bitter Experience

Do you know that many real estate players lost millions over the last 9 months, due to Inflation and Dollar/Naira instability?

We can tell you that authoritatively. We can also tell you that many of them didn’t see it coming. Many couldn’t have imagined that the economy will nose dive the way it did.

Since last year, there have been tales of woe as a result of the devastation their businesses suffered and how it affected their real estate projects. Many of them have lost huge sums on many projects they embarked on early last year, the cost of which has now far exceeded their initial projection.

What happened was that many of them had embarked on projects and they had gotten interested buyers to pay upfront, only for inflation to make nonsense of the prices they gave their clients. Many of them had started the year 2023 on a good footing, with all their projections in place. But things changed.

Many had reckoned that with the 2023 general elections over and done with, the economy will stabilise once a new President emerges and real estate business will return to its former stable days.

But that didn’t happen. The elections became rancorous with so many court cases. Even when Asiwaju Bola Tinubu won, he was dragged to court by the losers and for a few months, things were unstable.

Then came the inauguration of Tinubu as President and he announced the removal of fuel subsidy which led to a lot of trouble in the economy.

It led to mega Inflation and the naira/dollar foreign exchange issue escalated prices. Prices of essential commodities went hey wire and it affected all the projections that many real estate had banked on.

So bad did the situation become that building materials, Labour, increased construction costs by 200%.

Since the beginning of last year, the Built & Construction industry had been through its worst moments, as exchange rate, building materials and Labour prices triggered an increase in Construction costs by 200 percent in the last 2 years.

Last February, The Guardian newspaper published a report which showed that Nigeria’s inflation rate as of December, 2023 climbed to 28.9 percent. “The recent upsurge in Inflation is primarily linked to the effects of petrol subsidy removal and the devaluation of the official exchange rate, both exerting substantial impacts on consumer prices”.

According to the detailed report, the exchange rate crisis worsened the woes of the Building sector. “The direct effect of exchange rate is being felt more on imported materials like windows, doors, ceramics, tiles, plumbing appliances and sanitary wares, which represents 23% of materials in the Building market”. “The depreciation in the value of the naira directly affects the prices of building materials in the Construction industry”, the report said. “With the present economic situation, the downward trend of the value of the naira, cost of materials continues to escalate at a higher rate. Prices of essential building materials such as Cement, Blocks, Doors, Reinforcement Rods, Sand, Timber, Paints, Roofing Sheets, Glass and Tiles had risen by over 75% in the last 12 months. And this has become a source of concern to the Built environment professionals because of the direct impact on Supply, affordability and accessibility to housing, especially for Low and Middle-income earners”.

According to Architects, materials and Labour prices have risen between 100-200 percent in the last 2 years.

But some industry practitioners had seen all these coming. At the Wemabod Real Estate Outlook For 2024 held at the Muson Centre in Lagos on 21st February, 2024 experts spoke about the volatility in the Real Estate Markets.

The Theme was: How To Navigate The Volatile Nature Of The Market In 2024.

Discussants looked at the opportunities and Threats.

Dr. Doyin Salami revealed,

Keypoints about Nigeria’s Economy in 2024. According to this brilliant Economist, the Nigerian economy in 2024 faces a mix of Challenges and Opportunities, with a fragile global economic environment impacting domestic stability. He said Nigeria needs investment capital to boost its economy, but it currently faces a capital deficiency, highlighting the importance of mobilising both domestic and foreign capital”.

“In 2024, the domestic economy is expected to see improvements, albeit with some instability, as the country grapples with the costs of long-delayed reforms and the impact of inflation on real returns…The Housing sector, particularly Construction and real estate, plays a crucial role in Nigeria’s economic landscape, with increasing demand driven by population growth, urbanization and the growth of the middle class…The global economic risks, such as Inflation and geopolitical tensions, impact Nigeria’s economic outlook for 2024, underscoring the need for strategic planning and risk management in the real estate sector”.

In his Welcome address, the MD/CEO of Wemabod Limited, Oluyemi Emmanuel Ejidiran, said there are a myriad of pressing issues that have plagued the Nigerian real estate market, creating a landscape of volatility and uncertainty. “The challenges we face are indeed formidable, as we grapple with a severe lack of adequate investment capital, complex and interwoven macroeconomic fundamentals sky-high interest rates, staggering inflation rates and the foreign exchange quagmire that has only added to our problem… The Nigerian real estate market has long been hindered by a chronic shortage of investment capital, which has stymied growth and development in the sector. This lack of capital has restricted the ability of developers and investors to undertake large-scale projects, leading to a stagnant market and a limited supply of quality housing. The macroeconomic fundamentals that have plaqued the real estate market must be addressed with urgency and precision. High-interest rates, and rampant inflation have eroded the purchasing power of consumers, making it increasingly difficult for individuals and business to access credit and invest in real estate…Critical amongst the risks we face are Currency volatility, economic instability, regulatory changes, funding constraints and infrastructural deficits.

(Power, water, roads, technology).

The Chairman of Wemabod, Emmanuel Efuntayo also raised these issues in his welcome address. He called for an exchange of insights and experiences by dissecting and understanding the intricacies that lie with the flunctuations and changes within the real estate market.

Dr. Biodun Adedipe, one of the speakers said, “in the ever changing landscape of the real estate market, it is imperative for us, as investors, developers, and industry stakeholders to navigate through the challenges and seize the opportunities that come with volatility… Our relevance in the real estate market, traditionally seen as a stable and lucrative investment, is increasingly susceptible to volatility. Factors such as economic recessions, interest rate fluctuations, geopolitical tensions, and public health crises can significantly impact property values, demand, and overall market dynamics.

Babatomiwa Jafojo, on behalf of Arrowhead Development Advisory wrote: The Nigerian economic environment is currently facing unprecedented challenges and the topics everyone is discussing are rising inflation, cost of living crisis, rising cost of foreign exchange and an apparent mismatch between monetary and fiscal policies. Real estate as a sector is not immuned to any of these external forces, mostly because one of the primary ingredients in delivering a real estate product (building materials) are mostly imported items and as the cost of these items go up in line with foreign exchange, the cost of the expected selling prices/lease rates from finished developments are also expected to go up”.

“For locally produced items, we are seeing a rising cost for goods and services and as the currency weakens, more naira is required for transactions to close. We have experienced land prices in certain parts of the country move upwards in a similar manner to the devaluation but there is however a tipping point where Buyers will not be willing to pay beyond a certain amount for land. The same applies for professionals providing services in the real estate market. Perhaps there may be some “price discovery” as to the fair value for land in certain parts of the country.

As regards threats to the real estate market, whilst Shelter (residential) is a basic need for all human beings and home ownership is largely aspired to by all, the other asset classes may face some form of threat of substitute as cost of operations and prices continue to impact spending power. There is a possibility that asset classes such as commercial office space, co working and hospitality included may contract in favor of cost saving alternatives such as the work from home trend.

“In the Construction space, we have seen developers and contractors react very differently to the concept of “fixed price contracts”. Developers seek this as an option to hedge against Inflation and contractors shy away from this position as they do not want to be saddled with currency risk. We are now in a situation where the currency may devalue as much as NGN3S/US$ in a 24-hour window. Pricing is subject to change between the time of contracting/transacting, settlement and sourcing of the foreign exchange required to ensure project completions. Whilst borrowing rates are anticipated to rise, developers who are institutional in nature can begin to access the capital markets for better rates to finance their developments”.

“Whilst we remain cautiously optimistic for the course of the economy to recover, this period of limited activity is also a good time for developers to begin their pre-development activities (design, approvals, fundraising) with a view to be ready to commence construction when the recovery/stability returns to the market. We also believe that there is an opportunity for gentrification by carefully redeveloping existing buildings as there may be some cost savings in this approach and it offers a shorter distance to the market”.