The real estate industry in Nigeria seems to depend heavily on commercial banks’ funding, as the decline in lending rate to this industry has contributed in pulling it in downward trajectory.
Total bank lending to construction and real estate sector declined by 11 percent from N4.81 trillion in 2015 to N4.2 trillion in 2017.
On the reasons for the decline in lending to the sector within the period under review, analysts attributed it to the nation’s five quarter recession which was experienced between first quarter of 2016 into the first quarter of the following year.
“The economy was in recession, and even the sector is still in contraction. So, lending to most sectors declined.
Banks saw other sectors viable enough to give credit to because they were more certain to get their return from those sectors in order to prevent bad debt which is not good for their books,” an analyst commented on the condition of anonymity told Business Day by phone.
Like other commodity dependent countries, Nigeria has had to weather the storm of declining petrodollars, following a lengthy collapse in oil prices which started mid-2014 and production disruptions caused by disgruntled militants who damaged oil pipelines in their clamour for better compensation for the oil extracted from their region.
This resulted to the country’s longest contraction in more than 25 years, although it emerged from the negative growth when oil prices increased, and as such has expanded for four consecutive quarters into 2018.
Bank lending to construction and real estate sectors in Nigeria has remained dismal when compared to the likes of South Africa, the continent’s most-industrialized economy.
With a population of about 55 million, mortgages in South Africa account for almost 30 percent of total credit, the largest component of banks’ assets, which amounted to about ZAR5.14 trillion ($382 billion) at the end of January, according to central bank data.
Negative and weak growth in construction and real estate sector of Africa’s largest economy continues to drag growth in the country’s GDP even as it slowed down in the first quarter of 2018 to 1.95 from 2.11 in the previous quarter owing mainly to weak bank lending to the sector.
Meanwhile, Africa’s most populous nation has a housing deficit of about 17 million units and its mortgage rates ranging between 7-10 percent for the National Housing Fund (NHF) and between 15-25 percent for commercial mortgage institutions which is considered by industry experts as one of the highest in the world.
Another analyst however pointed out the importance of bank lending to the real estate sector, saying, “this sector of the economy is the kind that is in steady need of liquidity and long term capital; when not available , it will continue to be in the position it is now,” the analyst who asked not be quoted said.
The economy, he added, needed to grow more in order for the property sector to feel the impact. “However, the economy has to expand more as this will rub off on the purchasing power of the citizens and, as such, there will be the demand for the products produced by the sector; so making funds available to the sector is not just enough, because if there are no demands to meet their supply, the sector will still be doing as badly as when it lacked funds,” the analyst added.
According to the National Bureau of Statistics, real growth rate of the real estate sector, real GDP growth recorded in the sector in Q1 2018 stood at -9.40 percent, lower than growth recorded in Q1 2017 by 6.30 percentage points and lower by 3.48 percentage points relative to Q4 2017. Quarter-on-quarter, the sector grew by -30.57 percent in the Q1 2018.
It contributed 5.63 percent to real GDP in Q1 2018, lower than the 6.34 percent it recorded in the corresponding quarter of 2017 and lower than the 7.03 percent in the preceding quarter.
This has been ascribed to the constraints placed on foreign exchange access that affected the construction and real estate industry, which is profoundly import-based, and the unbalanced economic climate, which has affected the general inclination to invest in the country’s real estate sector.
“The government has a larger role to play in the aspect of policy. If the government is able to develop and implement policies that are favorable to these sectors, definitely, they will see a boom. The prevalence of a lot of taxes and additional charges that are being put on construction companies and real estate developers is not helping and it frustrates the entire process of being able to initiate and complete a project,” Hakeem Sadiq, Founder of Zama,a real estate advisory firm, said