Nigeria’s Real Estate Sector: Positive Signs But Not Yet Out

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According to the NBS, Nigeria’s real estate sector printed a 2.2%y/y growth in Q4-2020, the first time since Q4-2015. However, the sector tumbled -9.2% in FY-2020, the steepest decline since 2016.

Notably, the sector has been in recession for five straight years. Prior to 2016, the real estate sector was growing at a fast pace, driven by the oil market boom and a +6.0% aggregate income growth in Nigeria.

The Nigerian real estate sector has not quite recovered since the 2016 recession
Real Estate GDP vs Real GDP

Nigeria’s Real Estate Sector Brandspurng Positive Signs But Not Yet Out
Sources: NBS, United Capital Research

However, during the 2016 recession, the sector saw a contraction of -6.9% and has not quite recovered since. The sector suffered the most, economically, during the 2020 lockdown, tumbling -21.9% in Q2-2020, however, the Q4-2020 number showed a surprising rebound in Q4-2020.

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Nigeria’s real estate sector is trapped in a vicious cycle of lower crude oil income, decreasing income-per-head and poor FDI inflows. This is worsened by FX shortages and a poor policy framework.

So, even before Covid-19, Nigeria’s sub-2.0% GDP growth, alongside its one-commodity economy and shrinking middle class, made an investment in the real estate sector unattractive.

In countries where real estate has blossomed in recent times, e.g., Indonesia and Columbia, GDP has grown by c.5%, bolstered by a growing middle class. Also, the government plays a vital role in driving real-estate sector growth, creating mortgage funds through subsidies that encourage homeownership.

Although, the Nigerian government, through the Federal Mortgage Bank (FMB), has initiatives such as the National Housing Fund (NHF) aimed at boosting home ownership in Nigeria, mortgage loans to GDP in Nigeria is a paltry 0.5%, vs. 72.0% and 78.0% in the US and UK.

Notably, the N15.0m funding gap by the FMB seems inadequate in a high-cost market and a reported average loan processing time of 2-3 years, makes the NHF scheme too bureaucratic.

For private investors looking for alternative investments, the low rental income yield, even in highbrow areas such as Victoria Island and Ikoyi, compared with returns on risk-free government notes, makes real estate investing unattractive.

As such, the resurgence in the sector seems unlikely in the interim amid Nigeria’s shrinking middle class, the large population outside the housing market and unaffordable mortgage facilities.