Nigeria’s apex bank CBN recently announced its new monetary policy that includes a benchmark interest rate of 50 basis points to 18%. This has sparked anxiety amongst experts in the real estate and property development industry who believe the new interest rate introduced by the CBN would have a negative impact on property prices and the entire construction value chain.
Mr. Godwin Emefiele, CBN’s Governor had disclosed that the slight increase in the interest rate was to curb the effect of inflation and provide an economic solution to Nigeria’s rising economic crisis.
Nigeria’s inflation which has now risen to 21.91% in February from 21.82% from the previous month according to the figures released by NBC, while the monetary policy rate has been on the rise since April 2022 which was at 11.50% has impacted the lending and inflation rate in Nigeria, thereby increasing the cost of goods and services.
According to experts, which have also expressed worry about the automatic increase in the bank-lending rate which they consider to be very high, have also forecasted that the interest rate from commercial banks might exceed 30% in the months to come.
The real estate sector which is largely underfunded and keeps experiencing challenges when trying to access funds which are usually hindered by bottlenecks in the financial system. Real estate experts believe it would be unwise to expect huge returns from a largely underfunded sector.
This has caused developers in the past to resort to options such as rigorous off-plan sales, but this has never ensured enough cash at hand for business, instead of going through the risk of high borrowing with a high-interest rate, which has resulted in high prices for real estate products.
Although, experts are saying high-interest rate could in some way control inflation to an extent, but can exacerbate supply chain issues in turn pushing up prices in building materials and making construction projects expensive.
CEO of Eximia Realty Company Limited, Hakeem Ogunniran while talking to The Guardian said the development can cause more problems in the industry for developers and those who want to build homes.
He added that the current challenges are the high cost of funding and that long-term construction finance is not available. He also noted that if the finances are available, the tenure is short.
Ogunniran explaining the effect of the increase in interest rate said that banks would also mark up their rate from the existing 28% which to him would largely affect construction financing and the entire real estate value chain.
The former CEO of UPDC Plc also expressed his concerns over funding for real estate projects adding that a holistic approach must be made by the government. He requested that the government create a special window such as long-term bonds and financial instruments and also make use of pension funds.
Ogunniran also expressed his opinion about the low absorption capacity in the mortgage sector, adding that there was a need to pay attention to mortgages as primary mortgage institutions are now functioning as commercial banks and this is making it difficult to access mortgages with the current high rates of mortgages and tenure.
President of, Real Estate Developers Association of Nigeria (REDAN), Dr. Aliyu Wamakko, mentioned that the CBN’s new lending rate would cause commercial banks to bump up their interest rate to 32%, noting that this increase would affect members of the association who specialize in developing affordable housing in the country.
He said “Without the affordable fund, there is no affordable housing. The low-income earners have no room to get a house with the high cost of funds. It will reduce the production of housing and increase costs. Only a low-interest rate can create affordable housing and massive employment opportunities for Nigerians.”
He also added that the incoming President must understand that affordable housing requires affordable finance, and it is important to create an opportunity to access such finance. Wamakko also stated the need for synergy among agencies in the real estate sector to encourage mortgage culture.
There should be a special intervention fund for housing and an enabling environment for the private sector to thrive. The outgoing government was not able to produce the one million housing they promised. The government was not even able to complete the 3, 700 houses and that is why we felt the government had no business in the development of houses.
Basically, all over the world, housing is driven by the private sector. With an enabling environment, the private sector will strive and create opportunities for the government in terms of housing provision.
“There should be a reduction in the cost of interest rate, a review of the Land Use Act to reflect the present realities. Land acquisition is a herculean task and when governments across all levels budget for housing, it should be channeled through the private sector with single-digit interest to produce affordable housing.”