Overall strong economic growth in Nigeria has driven expansion of the real estate sector, which is expected to continue on its upward trend in coming years in line with the country’s rising GDP. The residential and retail segments in particular are set to grow due to rising consumer demand from Nigeria’s increasing population. However, whilst its growth prospects are positive, the sector faces a number of serious challenges, including limited funding to address a shortage in affordable housing and the task of providing formal homes for some 80% of the population who currently live in informal housing structures. There are a number of government schemes currently under way to tackle these issues, which aim to increase accessibility to low-interest mortgages and boost the supply of housing.
BY THE NUMBERS: Between 2006 and 2010 the real estate market grew 11% year-on-year (y-o-y) on average. The IMF projects continued GDP growth of 7% in 2012 and estimates the sector will contribute 40% of this total. Prior to the 2008 global economic crisis, real estate prices in Nigeria rose rapidly before undergoing a jarring correction. From the mid-2000s, the price of residential properties sometimes experienced increases of around 300% y-o-y.
Perhaps the most important issue that must be addressed is the increasing pressure on housing supply caused by rising demand from the growing population, particularly from low- and middle-income earners. According to UN Habitat, the market is suffering a shortfall of 12m-16m units, which continues to grow at a pace of 500,000 units a year.
FINANCING: Private equity companies, such as African Capital Alliance and Actis, have been playing an increasingly substantial role in developing and financing commercial real estate in the country (see analysis). The reluctance of banks to issue loans following the 2008 financial crisis, as well as the recent structural banking reforms enacted by the government that were designed to curb risky lending, have cooled the banks’ enthusiasm for involvement in the sector. As such, large-scale real estate ventures have become the province of companies with a greater risk appetite than commercial banks.
The Federal Mortgage Bank of Nigeria (FMBN), which recorded its first quarterly profit in 20 years in the first quarter of 2012, is the dominant player in the market, and accounts for 80% of all mortgages issued in the country. As a federal entity, the FMBN can draw long-term financing with lower interest rates. It was reconfigured through a series of reforms between 2002 and 2006 that placed greater emphasis on the secondary mortgage market and its capital market functions.
NATIONAL HOUSING FUND: The high demand for affordable housing is among the primary drivers of the real estate market. The UN estimates that Nigeria currently has the financial capacity to produce just 2m homes. To address the funding challenges, the FMBN has been facilitating longer-term credit options and allocating contributions to a National Housing Fund (NHF) Scheme, to which all Nigerians earning a monthly income of N3000 ($19.2) or more are required to contribute 2.5% of their salary. Though officials admit that there are challenges when it comes to enforcing compliance among employees in both the public and private sectors – to the extent that an estimated N100bn ($640m) is owed to the fund – the NHF has been successful at aggregating funds overall. It has recorded collections of over N77trn ($492.8bn), with roughly N1bn ($6.4m) coming into the fund per month. During the course of 2011 the bank realised collections of approximately N12.6bn ($80.64m), which enabled it to overcome some of the funding limitations that have affected the real estate market in the past. The NHF has approved loans for the construction of more than 32,000 units, which, when combined with advanced mortgage loans to some 18,500 beneficiaries, has seen more than 60,000 units financed by the FMBN.
To remedy the problem of collecting contributions from businesses and employees registered under the NHS, the FMBN is currently developing an electronic collection process. The platform will record contributions that have been made by using commercial banks’ information technology infrastructure to streamline remittances to the FMBN.
INCREASING ACCESSIBILITY: Despite these developments, the vast majority of Nigerians still do not have access to credit, particularly home loans. This is because an estimated 85% of Nigeria’s working population is employed in the informal sector, making employment and income difficult to verify as part of the loan application process.
In July 2012, the minister of housing, Ama Pepple, said it was her department’s goal to increase access to affordable housing by 37% by the end of 2013. She said the Ministry of Housing is looking for additional funding from the national budget, which it will use in part to train unskilled labourers in order to facilitate the attainment of more secure employment. The private sector will also be critical for the ministry to achieve its objectives.
As part of the efforts to make housing more accessible, the FMBN unveiled its Informal Sector Cooperative Housing Scheme in December 2011. The objective of the initiative is to incorporate informal sector workers, such as farmers, artisans and street vendors, into the NHF’s housing programme via cooperatives through which the FMBN issues lower-interest loans for affordable housing. Previously, the NHF’s lending services were only accessible to workers in the formal sector, given the relative ease of verifying their employment and income status.
As part of the scheme, the FMBN offers Cooperative NHF Loans (CNLs) to those who work in the informal sector. The loan aims to provide potential homeowners access to a steady flow of credit with no onerous conditions through the cooperatives to which they belong. Through a CNL, cooperatives in existence for at least one year may acquire land to develop housing for its members at an interest rate of 10% for a maximum tenor of two years with a moratorium period of 12 months. The cooperative collaborates with a primary mortgage institution to process members’ loans. Housing units for proposed projects are not permitted to exceed N5m ($32,000). Individual cooperatives will also be eligible to receive a CNL through the scheme, although at an interest rate of 6% per annum repayable over 25 years Other projects by the FMBN to increase housing supply are also under way. These include the Police Social Housing Scheme, an initiative that will see some 5550 housing units constructed for police officers across the country. Under the scheme, the FMBN will help by providing NHF loans at affordable interest rates to police officers to enable them to purchase a home. Police officers will be required to pay 30% in personal contributions to the scheme, which is also expected to employ around 20,000 Nigerians over the course of its development.
Meanwhile, Delta State is looking to overcome its housing deficit of 400,000 units through the Delta State Integrated Development Project (DIDP), a public-private partnership that will see the construction of homes in Asaba, a site called the DIDP Downtown, and another named New Oil City in Warri. The initiative also includes plans for the establishment of a material testing laboratory, a housing fund, new housing policies, and provisions to study and improve working conditions and tools for projects.
CAUSE FOR CONCERN: Concerns have arisen that these projects are bringing down property costs, which have fallen some 35% in recent years. A 200-250 sq metre rental in Ikoyi or on Victoria Island, for example, has fallen from $100,000 in 2010 to $60,000 in 2012, according to Gboyega Fatimilehin, a partner of real estate firm Diya, Fatimilehin & Co. However, slowing investment in the hydrocarbons sector, which is the key demand driver for Lagos-based real estate, has been the main contributor to this decline some believe. Moreover, the sector is somewhat opaque, with records poorly or often not kept, and a land registry that fails to account for correct ownership. These challenges can make it difficult to accurately assess market conditions. For example, it is estimated that 80% of the land in Lagos is government-owned, but it is unclear who owns the rest.
However, despite falling foreign demand caused by the decline in oil investment, increasing demand from locals is driving the market. Middle-income Nigerians are increasingly willing and able to pay for higher-end units near city centres, which is bolstering rental prices, despite the softening that has been caused by the decline in oil investment, Fatimilehin said. An abundance of luxury flats were built in anticipation of demand from expatriates, and with prices becoming lower, middle-class Nigerians are increasingly opting to rent flats in the city. In line with this, landlords have stopped expecting rent be paid up to five years in advance, which was common practice in the past, and now seek advances of just two or three years. According to Erejuwa Gbadebo, the CEO of property consultancy Broll Property Services Nigeria, “Residential prices are now reaching a sort of plateau phase.”
Some owners, however, are still reluctant to lower prices in accordance with the post-2008 market conditions. Often, property owners will wait for foreign companies to employ expatriates so that they can overcharge them. In early 2012, Abuja saw an increasing number of vacant housing units, with many Nigerians, unable to afford the prices in the capital, deciding to live on the outskirts; however, owners still refused to decrease prices.
At present, an estimated 80% of the population live in informal housing structures without assignee rights to the land on which they were built, although it is expected that falling prices and improving socioeconomic conditions will result in more and more Nigerians living in more permanent formal housing.
RETAIL: Although it represents a small portion of the overall economy, the retail sector has shown signs of taking off, thanks to continued growth and the easing of protectionist import policies. “The retail sector currently offers the highest potential for demand for property services. The elimination of the ban on textiles, as well as the investments of international retailers, is driving the sector forward at steady pace,” Gbadebo told OBG. In just a few years, the country has seen an uptick in demand for retail property, as more Nigerians are looking to purchase quality, internationally known retail products. For example, previously unavailable fashion products have become a boon for high-end shopping centres, such as Ikeja City Mall, owned by conglomerate Gruppo, which is comprised of Actis, RMB Westport and Paragon. Global fashion brands make up some 70% of such malls’ offerings, according to Gbadebo.
The $100m Ikeja City Mall in Lagos opened its doors to shoppers in 2011, and has 23,000 sq metres of leasable space that can accommodate around 100 shops. The mall in Ikeja, which saw roughly 30,000 shoppers in its first three days of opening, comes five years after the opening of The Palms Shopping Mall Complex in Lekki, which features some 70 shops in 21,000 sq metres of leasable retail space. At present, there are ambitious plans by the owner of The Palms, Persianas Properties, to expand retail, office and residential space in and near the mall, totalling some 180,000 sq metres.
OFFICES: Similar to residential properties, commercial real estate prices continued to rise in the 2000s, plateauing slightly from the start of the Nigerian banking crisis in early 2008. Since then, demand for high-quality office space is on the recovery, especially in urban areas. Although this rising demand can be attributed to a lack of existing office space, as well as a lack of new major office construction projects, renovating existing office space could go a long way towards meeting current demand.
One solution is being provided by the African Capital Alliance, a N5bn ($32m) joint venture with Guarantee Trust Assurance, which is constructing an office complex on Victoria Island in Lagos. Set for completion in July 2012, the complex will have over 7000 sq metres of lettable office space and 109 parking bays. The firm’s hotel complex in Benin City is also nearing completion. The 100-room Protea Hotel Select Emotan occupies a total area of 1.7 ha. Meanwhile, a new secretariat annex is also being built in Alausa, Ikeja in the south-west of the country. The building will house offices for various state agencies and will have parking space for up to 600 cars.
SCHOOLS: One market attracting new attention from real estate developers is educational institutions. The central bank awarded Tecnis EPC International a N9.5bn ($60.8m) contract in April 2012 to develop a new conference centre at the University of Jos in Plateau State. Additionally, the government awarded a N5bn ($32m) contract for the construction of schools nationwide for the Almajiri population. It is estimated that some 9.5m Almajiris – the name given to street children – are not participating in the education system. This project aims to give these children a blend of Islamic and Western education. With the support of the Islamic Development Bank, some $98m has been allocated to the programme and a significant portion of these funds will be directed to building the facilities.
EXPANDING CITY: Rapid population growth in Lagos and the resulting increase in congestion has presented a challenge in terms of finding quality real estate at prices that accurately reflect market conditions. Nevertheless, several new projects are currently under way. Among them is the ambitious Eko Atlantic Project — a planned city currently under construction that will be one-and-a-half times the size of Victoria Island once completed. Eko Atlantic will be located adjacent to Victoria Island, and is expected to have the capacity to accommodate some 250,000 residents and 150,000 commuters. Scheduled for completion by 2016, Eko Atlantic is being built on 140m tonnes of sand dredged from the floor of the Atlantic Ocean. As of 2011, some 1.3m sq metres of land had been reclaimed from the sea. In addition, the island will feature an 8-km seawall designed to prevent erosion and protect against tidal surges. As of the first quarter of 2012, the seawall was around half way to completion.
Perhaps the most interesting aspect of the project is its concessionary structure and the development of its ancillary facilities – a significant concern in a country prone to power cuts and undermaintained infrastructure. Eko Atlantic is being constructed to be a self-sufficient city with its own sanitation system, clean water supply and fully independent power plant. The project is entirely privately funded by the Lagos-based Chagoury Group, whose subsidiary, South Energy Nigeria Limited (SENL), was awarded a 78-year concession by Lagos State in July 2006 to develop the city. The project has received ample interest and funding. “Our financing model for the project is very much on track. There has been a lot of interest from London. The most important thing is not just to sell the land, but to get developers to come in as soon as possible,” SENL’s managing director, David Frame, told OBG.
LINKING UP: In conjunction with the construction of Eko Atlantic, several transport projects aimed at increasing access to the new island and relieving congestion in the surrounding areas are being discussed. Among these is an expansion of the Ahmadu Bello Way on Victoria Island into an eight-lane motorway stretching to Nigeria’s border with Benin. Another is the construction of a bridge or tunnel that will link Victoria Island directly to the port of Apapa. The most advanced project, however, is the Lagos Light Rail System, which is being developed by the Lagos Metropolitan Area Transport Authority. The multi-line network will include stops that stretch from Okokomaiko to Marina, and from Marina and Agbado. It will also include stops on Victoria Island.
REGULATION: One of the major challenges for Nigeria’s real estate stakeholders is the property registration system. In its 2011 “Doing Business” report, the World Bank ranked Nigeria 180 out of 183 countries in terms of ease of registering property. Currently, there are 13 steps in the registration process, which can take up to 82 days. Four of the steps carry their own associated costs, which on average total 20.8% of a property’s value.
The Land Use Act of 1978, which was successfully enacted to formalise the previously informal real estate market, represents another regulatory burden on the industry. In effect, it declared all land government property to be managed by state governors. Thus, all real estate transactions, including sales, leasing and subletting, require direct permission from the governors. Although technically land cannot be sold since it property of the state, it is “reassigned”. Efforts to reform the act have repeatedly stalled at the National Assembly.
While Nigeria has no property tax, it does tax rental income at a rate of 10%. In addition, assignees must pay a consent fee to the state governor that can cost 8-20% of a property’s total value. A capital gains tax of 10% is levied on all property sales, or more accurately, property reassignments. These and other costs associated with property transactions contribute to the difficulty working Nigerians have in accessing a low-interest mortgage.
OUTLOOK: The burgeoning middle class will be a key driver in the continued development of a robust real estate sector. As more and more Nigerians benefit from the country’s impressive economic growth, demand for housing will continue to outpace supply. However, the government, through a number of initiatives, is attempting to increase access to affordable housing by making low-interest loans available to informal sector and low-paid workers. This in turn should help address the affordable housing shortage by encouraging developers to build new units. This will be a big challenge for the government, but if successful, it should help boost housing supply. Private equity firms are expected to play an important role in the development of the sector as a whole as commercial banks have been more cautious since the 2008 global financial crisis.
With regards to the retail segment, demand for retail space is likely to continue to increase. The success of the Ikeja City and Palms shopping malls has demonstrated a sustained appetite for retail goods and luxury products in the country’s urban areas.
Read More from OBG
