By Olubisi Olawale Shaola
Nigeria is Considered the giant of Africa and boasting the largest economy in West Africa, Nigeria may well be merely living off its past reputation for economic prosperity—and the real estate sector like other sectors suffers the outcome.
Prior to 1957 when Nigeria began to trade in crude oil, the country operated as one of the largest exporters of agricultural produce in the world, churning out over 167,000 metric tonnes of palm oil (27% of the global export volume) beyond its borders yearly. Circa this period, agriculture contributed 64.1% of the nation’s GDP, with cash crops such as cassava, groundnut, and cocoa bringing in the highest revenue. However, the discovery of crude oil in the Niger Delta would turn out to pose more challenges to the economy than it has boosted it, in what economists call the “Dutch disease.” Today, over 80% of Nigeria’s forex earnings are tied to the oil and gas sector.
For starters, agrarian products will always be economically viable, but neglecting the agricultural sector (as well as other primary and secondary sectors) and focusing on crude oil exports has left the country in the clutches of the global oil price volatility and decline. As opposed to its daily export volume of about 2200 BBL/D/1k (2.2 million barrels per day) in the 70s, Nigeria currently does 938 BBL/D/1k. Aside this struggle to sustain its export capacity, the price of each barrel has continued to plummet together with other short “windfall” breaks not until recently. This means that the country (that is largely import dependent) does not sell enough economically viable products aside oil to earn sufficient foreign currency (the most significant of which is the dollar) to earn foreign reserves and sustain the economy.
Ordinarily, this situation should not pose damning threats to any “giant” country living up to its name; any oil-producing country with a diversified economy and thriving manufacturing sectors should survive the decline. This, however, is not the case with Nigeria which depends heavily on imports to sustain all its sectors and growing population. Its industrial sector yields an abysmally low output, making the country what economic experts would describe as a dumping ground for basic consumer products. Problems therefore arise when importers approach banks to exchange their naira for the greenback to pay their foreign vendors. As the Central Bank does not have sufficient dollars in its forex reserve owing to trade deficits, importers are forced to obtain the dollar from the black market at exorbitant rates. As at the time of this piece, the dollar exchanges at N855 on the black market, nearly 100% higher than the official exchange rate of N439.67.
How devaluation affects the real estate sector
The first point to note is that, where naira devaluation is concerned, the major challenge bedevilling the real estate sector is the overreliance on foreign materials at finishes stages. Real estate developers depend on import for a great deal of building materials, including but not limited to doors, tiles, marine boards, sanitary and plumbing appliances, ceramics, and aluminium. But the scarcity of forex means that importers of construction materials have to exchange significantly more in naira for the greenback at the black market, thereby influencing the market price of the products. Ultimately, the skyrocketed cost of construction materials affects the prices attached to the sale or lease of the finished real estate properties.
As forex is an integral part of any nation’s economy and currency devaluation significantly affects consumers’ purchasing power, business for real estate investors becomes slow and sometimes unprofitable, often even frustrating many out of the sector. Olayinka James, a former real estate investor who has now diversified into cybersecurity and resides outside Nigeria, says:
“Although there is profit from real estate investments in Nigeria due to the massive population growth, the instability of exchange rate makes it less desirable as an investment vehicle for wealth accumulation.”
The diasporan goes on to explain:
“…if you had invested $1M in real estate about six years ago when the dollar was exchanging for N280, that same investment, including possible appreciation, would be worth around 70% using today’s exchange rate.”
The Domino Effect
1.Disrupted project timelines and funding problems:
Many real estate investors run into problems because of the instability of the naira. The investor who plans to complete a project by a certain period is unable to do so because he must first seek more funds to meet the scarily rising cost—a harsh reality he hardly anticipated in his financial planning and modelling at the start of the project. These funds may not be readily available, thus stalling the project, frustrating investment in real estate, and impeding the growth of the sector.
2.Poor sales of real estate assets
Former CBN’s deputy governor and economist, Kingsley Moghalu, once opined that while a stronger currency does not necessarily produce a stronger economy, a stronger economy will eventually produce a stronger currency. Although a stronger currency, like Moghalu argues, cannot bolster a failing economy, a devalued currency surely weakens it further. American business magnate and politician Ross Perot also affirms this. In his words, “A weak currency is the sign of a weak economy, and a weak economy leads to a weak nation.”
In the real estate sector, just as devaluation reduces buyers’ purchasing power, it simultaneously forces investors to hike the price of their properties because of the increased construction costs. This price surge affects the number of interested customers, as prices of houses hit skyhigh in an economy with low per capita income.
Therefore, investors find it challenging to break even because they either have to sell off with a very low profit margin or risk having no buyers for protracted periods. This amounts to stagnancy and poor sales in business.
3.Reduced value of repatriated capital
Foreign investors are often drawn to countries with currencies significantly weak against the dollar; bearing in mind that it is the world reserve currency. Investors with plans to reconvert their proceeds to dollars for use in other countries will have profitable margins only if the local currency of their operational base remains stable and fluid. When devaluation (whether by design or happenstance) occurs, the sagged value of the naira upsets projections leading to a less desired outcome.
Ayoola Julius, another Nigerian investor in the diaspora, expresses his concern about this instability of the currency thus:
“Exchange rate fluctuations are also a major challenge for transactions across borders. The dwindling value of the naira makes me think about what effect the fluctuation will have on my returns on investments and the true value of my capital repatriation.”
4.Prevalence of uncompleted projects
Because of the increased cost of building materials (particularly the import-based commodities) occasioned by the depreciation in naira value, Real estate developers struggle to keep up with the terms of agreement with their customers, off-takers and their lenders regarding quality , project timelines and payment schedules. Therefore, it has become increasingly common to see construction projects stagnated due to lack of funds courtesy of disagreement between real estate developers and their lenders (and sometimes buyers) who more often than not frown at any iota of variation needed to complete the projects.
The way forward for the Real Estate Sector
Some of the most visible signs of a healthy and prosperous economy are its GDP and the volume of its year-on-year exports. A major indicator for growth in any clime is the sum up of the goods and services it produces. There is an urgent need for the Nigerian government to create the enabling environment and needed infrastructure to usher in a new era of industrialization. This feat can be achieved by providing stable electricity, curbing insecurity, eliminating nepotism, investing heavily in education and agriculture; raw materials to name but a few. A good environment easily attracts Foreign Direct Investment (which could aid creation of goods and services), so it is no surprise that based on the data released by the National Bureau of Statistics, Nigeria’s Foreign Direct Investment presently as at today is at an historical low.
Countries (like China and South Korea that were hitherto less industrialized) that changed their course and towed this path decades ago are bountifully reaping the benefits of such investments. If and when the government aligns its priorities along this thinking and make manufacturing a key agenda, then the real estate sector primarily (and the country generally) is consciously set on a part of prosperity as the bulk of the building materials needed such as quality doors, tiles, furniture boards, sanitary and plumbing appliances, ceramics, and aluminum can be locally produced thereby creating more job opportunities, promoting affordability, reducing reliance on import viz-a-viz dollar demand, and ultimately increasing the standard of living of Nigerians.
• Olubisi Olawale Shaola is a Lagos-based Legal Practitioner, Property Law expert and Consultant writes from [email protected]