…loan to sector slips 21%
Nigerian commercial banks intensified their risk-averse attitude and cautious stance in the property industry as credit to the sector dropped to a four-year low in the second quarter of 2019.
Sectoral credit allocation to real estate shed N13.43 billion quarter-on-quarter and N161.6 billion year-on-year, the half-year data by the National Bureau of Statistics (NBS) has shown.
“Banks’ unwillingness to provide credit to the real estate sector reflects low confidence in the sector, and people’s disposable incomes remains stifled,” Rotimi Olu-Steven, a broker at International Real Estate Partners, said.
Of the N15.48 trillion combined credit given out to 17 sectors by the Nigerian deposit money banks, real estate got N582.96 in the second quarter to June 2019, 2.25 percent lower than N596.39 received in the preceding quarter.
According to industry sources, commercial banks are not ideal or suitable medium for financing real estate projects because whereas commercial bank deposits are short-term in nature, real estate is for long term which is usually vulnerable to the vagaries in the economy such as changes interest rates, exchange rates, and the rate of inflation.
“Nigeria is still a viable market. Capital is a challenge,” Andrei Ugarov, partner at PwC said, adding that “deals are however happening. Players in the industry are making use of other financing options to fund real estate development projects.”
More than 90 percent of new homes that are built in the country utilise funds from personal savings, a statement by the Association of Housing Corporation of Nigeria (AHCN), an umbrella organization for all federal and state housing agencies read.
An analysis of the H1 2019 data by the state-funded Bureau revealed that bank lending to Nigeria’s property industry in the review period is the lowest since the N548.21 billion credited to the industry in the second quarter of 2015.
With a deficit of more than 17 million units, Nigerian property industry contributed 6.44 percent to real GDP in Q2 2019, higher than the 5.57 percent it recorded in the preceding quarter but lower than the quarter before.
After exiting recession in Q1 2019, the first growth from its negative mode, the real estate sector in the second quarter of this year turned back to contraction to post -3.84 percent growth in Q2’19.
“There is no liquidity in the market; no one is releasing the money,” Tosin Ajose, Lead Advisor at DealHQ Partners said. She added that “it will take two to three years for the sector to fully recover.”
A key culprit of the housing industry is the low level of mortgage penetration in Nigeria, industry sources have said.
“Banks run away from mortgage industry now but players in the space understand that it is a sleeping giant; by the time the right antidote is given to the sleeping giant, you will see the potential unleashed,” Banjo Obaleye, CEO, Infinity Trust Mortgage Bank, said.
With single-digit interest rates in some other countries, mortgage industry contributes significantly to economic growth and development. This is, however, not the case in Nigeria as the roaring inflation rate and the attendant high mortgage rate have not only dampened housing demand but has blunted developers’ investment appetite.
Nigeria has one of the world’s lowest mortgage-to-Gross Domestic Product (GDP) rate at 0.6 percent. This lags Ghana’s 2 percent, South Africa’s 30 percent and crawls after the U.S and UK rates of 60 percent and 70 percent respectively.
“The biggest problem in the sector is the high cost of the very limited mortgage that is available. If they can develop a policy to ease housing finance, it will be impactful,” Wole Olabanji, the CEO of CoBuildIT, a Lagos-based real estate firm said.
The typical mortgage interest rate in Nigeria ranges from 7 to 10 percent for Federal Mortgage Bank of Nigeria (FMBN) and between 15 and 25 percent for commercial mortgage institutions, making it one of the highest in the world.
On September 6, 2019, the Central Bank of Nigeria said in a circular signed by Kevin Amugo, Director, financial policy and regulation department that the “maximum MPR + 5%” is no longer applicable to all financial institutions in Nigeria.
According to Obaleye, the move by the apex bank is in line with the plans to drive down the mortgage rate to a single digit.