Harsh Economic Realities Take Toll on Real Estate Sector

As operators in the Nigerian real estate sector lament the rising cost of business which is compelling contractors to either renegotiate existing contracts or settle for their suspension, the planned provision of affordable housing units by both the federal and state governments, especially for those in the lower rung of the ladder, will not only remain a mirage, but the attendant frustration will further drive the citizen to slum and crime, reports Festus Akanbi

As much as the current administration pushes the narrative of an economy responding to a series of reforms put in place since May 29, observers said the reality these days is the pain and dislocation brought about by the impact of some of these policies on many sectors of the economy.

For the real estate sector, where operators are still complaining about the effect of the removal of fuel subsidy and the currency devaluation that followed the naira’s floating, operators said this is a period to count losses and re-strategise with the hope of a better operating environment next year.

This was the focus of discussion at the recent 15th annual lecture series of the Lagos State Branch of the Nigerian Institute of Quantity Surveyors, where operators painted the picture of a distressed industry where many firms had been forced to abandon projects, while others had to adopt survival mechanisms to survive the harsh economic consequences of petrol subsidy removal and naira devaluation. 

Like other sectors of the economy, real estate operators are complaining over increased running costs spanning logistics, labour, and building materials, among others.

With the development, housing developers and contractors said they are finding it difficult to deliver affordable housing for over 75 per cent of Nigerians, who lack access to desired accommodation. There has also been a spiral effect on the prices of houses, especially newly constructed buildings, as well as delayed delivery of projects.

Rising Costs of Building Materials

The industry is experiencing increases in the costs of cement and other components, such as blocks and rings, which utilise cement as a major ingredient for production. Prices of paints, reinforcement and sanitary fittings, sand, roofing sheets, tiles, and granite were said to have risen by over 70 per cent.

This perhaps explained why the news of the recent announcement of price reduction by BUA cement spread like wildfire among Nigerians who had heaved a sigh of relief. However, a market survey last week showed that the price cut remains an illusion as a bag of cement is still being sold at between N5,300-N5,500 in Lagos, Ogun, and Oyo states although BUA’s product could not be found in most of the markets visited.

The rising cost of raw materials such as limestone, clay, and gypsum, is attributed to price increases from haulage and fluctuations in exchange rate, according to producers, although analysts dismissed the excuse given the fact that most of the raw materials are produced in Nigeria.

Also, the price of granite moved from N180,000 per trip to N350,000 per trip, giving an increase of N170,000 in 24 months; sharp sand now sells for N120,000 per trip, up from N80,000 per trip, giving an increase of N40,000 per trip in two years. For cement-based blocks, a nine-inch block previously sold at N380/N400 is now N450, while the six-inches block is now N370 from N340/N350. The average price per tonne of iron rods (12mm) in the building material market is N550,000. Similarly, the price of paint, sanitary fittings, and other items have also hit the rooftop.

Other key building materials like steel rods, concrete, laterites, roofing sheets, windows, doors, tiles, nails, plywood, and aluminium roofing sheets, among others, have been on the rise in recent times. For developers that have been able to keep pace with the rising cost of building materials, the cost of delivering real estate projects is high thereby making the houses available but not affordable to investors and real estate consumers who need the buildings.

Urgent Intervention Needed

A property market analyst, Mr. Patrick Ogunjobi, explained that to address these aforementioned challenges, the economic climate in Nigeria must be brought to normal by the government at all levels through its agencies. The current cash crunch, both in foreign and local currencies, according to him, must be addressed by the Central Bank of Nigeria (CBN) through the money deposit banks. The financial intermediation function of Money Deposit Banks (MDBs), otherwise known as commercial banks should be fully carried out in addressing the challenges of cash crunch.

He added that measures to regulate the exchange rate should be put in place by the CBN through its monetary policies. “Forex should be made available to importers of building materials”, he said, adding that tax holidays and waivers should also be granted for the importation of key building materials.

He challenged mortgage institutions like the Federal Mortgage Bank to quickly come up with a product aimed at addressing the many challenges that are facing real estate developers in Nigeria.

In the explanation given by Chief Executive Officer of Rainoil Limited, Gabriel Ogbechie, the number one impact of the fuel subsidy removal on the construction industry is the rise in construction costs and housing projects.

For construction firms, price hikes of this nature present a challenge of delivering on pre-agreed prices sold to subscribers who paid for projects off-planned before the removal of fuel subsidy. 

Construction industry experts further explained that the rising cost of business stemmed from the nature of the industry which relies on importation to a very large extent. “It is natural for prices of these imported items to skyrocket given the recent slide in the value of the naira and the shortage of fx from the official channel,” a construction worker stated.

Reassessing Construction Projects

Operators said the difficulties being encountered may lead to an upsurge in the number of abandoned projects because of the contesting demands, which might in turn force firms to slow down on major projects, and this might also lead to the use of substandard materials. 

A report quoted the Managing Director of Interstate Architects Limited, Olusegun Ladega as saying that subscribers to some housing projects may have to re-assess their budgets and how much more they can afford to add to the initial budgets vis-a-vis the additional project cost necessitated by the new economic reforms. “These critical financial decisions will then determine the eventual value engineering decisions the client will approve to be implemented by contractors,” he said.

He further stated that developers who had already sold off-planned projects to clients now face the dilemma of reviewing prices to make up for the substantial hike in delivery costs. 

More Pressure on Low-income Earners

While construction materials often gulp the highest spending in building production, developers across major cities are not enjoying the best of times as they find it hard to maximise profit. This has affected the construction of new houses and the decline in rental accommodation in major cities such as Lagos, Port Harcourt, Abuja, Kano, Ibadan, and Enugu.

In remote areas like Abraham Adesanya in Lagos State, and Olambe in the Ifo Local government area of Ogun State, a two-room self-contained apartment now goes for N600,000 including agent fee, per year while a two-bedroom flat goes for N700,000 in the areas.

For average renters, getting a two-bedroom flat at N500,000 has become a mirage as such an apartment, especially for newly-constructed buildings could be as high as N850,000 and N1 million.

The development has put pressure on many Nigerians, who fall within the low-income earners, some can hardly afford such accommodation rather they settle for remote and distant locations that offer affordable rent.

The expectation is that the government at all levels will invest heavily in housing programmes to ease the pressure, especially on the low-income earners who form the bulk of the population. Doing so will not only encourage them to contribute more positively to the economy, provision of shelter will also reduce the current level of economic frustration which is pushing many to crimes.