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Real Estate

JVs, crowd-funding advocated as viable real estate financing options

Joint venture arrangements, crowding funding and off-plan sales are some of the viable alternatives to funding real estate projects in Nigeria where cost of funds has made bank credit both inaccessible, unaffordable and unattractive, experts and industry stakeholders have said.

The experts explained that one of the biggest challenges facing players in Nigeria’s real estate sector is the accessibility and affordability of capital to finance development projects. Commercial banks are not an ideal or suitable medium for financing real estate projects because whereas commercial bank deposits are short-term in nature, real estate is for the long term which is usually vulnerable to the vagaries in the economy such as changes interest rates, exchange rates, and the rate of inflation.

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“Nigeria is still a viable market. Capital is a challenge but deals are happening. It means funds are available. Players in the industry are making use of other financing options to fund real estate development projects,” said Andrei Ugarov, partner at PricewaterhouseCoopers (PwC) at the Refined Investor Series 2018 organised by Fine and Country West Africa in Lagos Tuesday.

Some of the financing options available include equity partnerships, pre-sales, debt financing, public-private partnerships and mezzanine structure. Companies such as Mixta Nigeria, UPDC and Landmark are local developers who have leveraged on partnerships with foreign firms to finance projects.

The Maryland Mall is an example of a successful partnership. The Wings Towers is another high profile and very visible office space that is also a product of partnership between Oando and RMB Westport.

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To deal with challenges associated with funding, stakeholders in the industry are encouraged to focus more on resourcefulness and to see real estate as a collaborative venture it really is.

“One of the trends we see in the real estate is pre-financing or pre-sales financing. This is a situation where end-users pay their rent upfront to enable the company get capital to fund a project. This model of financing is very innovative,” Ugarov said. “End-users, in this case, carry more risk burden,” he noted.

Udo Okonjo, Fine & Country’s CEO/Vice Chair, highlighting the theme of the series, ‘Collaborating for New Heights and National Growth’, stressed the need for collaboration in environment where credit is dry and risk is high, hoping that gathering would act as a catalyst to create winning collaborations among stakeholders so that Nigeria could grow its economy.

“The case for collaborating in real estate cannot be stronger than now with a sluggishly recovering economy, where there’s not only massive infrastructure and protracted housing deficit, but also huge amount of underutilised and idle asset,” Okonjo said.

But Fabian Ajogwu, managing partner, Keena Partners, warned of possible pitfalls of even the best joint ventures, advising that before entering into any joint venture agreement care must be taken to find out, among other things,  the strength of the project, legality and structure of the development or business, the developer’s credit history, etc.
On the developer’s side, Ajogwu advised further that care must be taken to avoid project cost over-run, point out that the implications could be grave as it has the capacity to change the story of that project completely.  “Challenges will come from the financiers, off-takers, contractors and a lot more stakeholders”, he said, adding, “cost over-run can make investors see the project executor unreliable and untrustworthy, and this can affect future projects,” Ajogwu said.

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According to him, industry players can mitigate this risk he recommended insurance.“Developers can take up insurance to deal with cost over-run. They will have to pay premium which is  cost to cover the risk. Risks involved in project developments are insurable,” he said.

Earlier in his opening remarks, Frank Aigbogun, CEO, BusinessDay, had given insights into where Nigerian economy would be headed going into 2019, pointing out some macro-economic factors that real estate and property investors might face in 2019.

“The first thing I see going into 2019 will be exchange rate management and dollar liquidity issues. We recovered from an economic recession not too long ago and it seems as if there is another one by the corner. Currently, oil prices are not looking too good. With the dollar scarcity back what direction will Nigeria foreign reserves go? The Central Bank of Nigeria desires to protect the naira and foreign reserves is critical,” Aigbogun noted.

He added that in the coming year, Nigeria would be dealing with infrastructure problem. “Nigeria is dismal when it comes to this; its capital formation, according to World Bank, is 13 percent to GDP, China is around 40 percent and India has an excess of 30 percent. China has rolled out infrastructural plans to expand economic activities”, he said.
He was of the view that, though there is GDP growth, the economy is expected to end flat at 2 percent in 2018.”Currently, consumer spending is very weak and, unfortunately, the reforms to change this are not happening”, he noted, hoping however that no matter how things are happenings, major deals will happen next year.

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