Nigeria’s real estate sector – what to expect in 2011

Is the storm over? Alitheia Capital gives a review of Nigeria’s real estate sector in 2010 and tells us what to expect in 2011.

Property prices in Lagos' high end neighbourhoods have fallen by as much as 40%.

Property prices in Lagos' high end neighbourhoods have fallen by as much as 40%.

In Nigeria, economic stability and growth was achieved in second half of 2010, with increased growth in the non-oil and oil sectors. Growth was attributed to an increases in activities of the wholesale and retail trade sector and the Federal Government’s amnesty development programme for the Niger Delta, which fostered investment in the oil sector. GDP grew to 7.41% compared to 6.7% in 2009 while inflation remained at an average of 12% throughout the year.1 Foreign Direct Investment (FDI) fell by 60% from US$6 billion in 2009 to $2.3 billion in 2010.2

Reviewing the real estate sector in 2010

In the real estate sector, activities on both the demand and the supply side came to a standstill, overall growth of the sector stood at 10.48% in the second quarter of 2010 compared to 10.46% in the corresponding quarter of 2009.3 Marginal growth was achieved as a result of activities in the low end of the market, characterised by small commercial and residential developments. With limited bank lending to major developers and investors, large scale high end commercial and residential developments were stalled.

Real estate valuers report that in high end residential locations in the city of Lagos (Ikoyi and Banana Island), property values fell by as much as 40%. In emerging middle income areas of the city such as Lekki, values fell by up to 20%. Property owners now accept a year’s rent in advance compared with the demand of up to three years at the top of the property boom. The value of properties in the regeneration neighbourhoods of the city continue to appreciate and by year end had seen a nearly 10% rise.

In the third quarter of 2010, the Federal Government embarked on several initiatives to encourage economic performance and improve investor confidence; the restructuring of the Nigerian Stock Exchange (NSE), continued reformation to stabilise, enhance the quality and ensure healthy growth of financial institutions fundamentally to encourage long term funding to the real sector.4 It is hoped that by mid-2011 dividends of these initiatives will become obvious. For now, credit flow for real estate developments remain limited and new infrastructure and construction projects are almost non-existent.

The impact of the financial reform is expected to be widespread. The real estate sector will benefit from the availability of competitively priced medium long term funding and investors/developers are poised to take advantage of this. However, the current exercise appears to ignore the need for a virile mortgage system.

The economy in 2011 – despair doused with hope?

The International Monetary Fund (IMF) projects that economic rebalancing will be critical to global recovery in 2011. High unemployment rates, fiscal tightening and the failure to arrive at more coordinated policy responses may hinder economic growth for developed countries. Global activities is forecast to shrink by almost 0.5% from 4.8% in 2010, as advanced economies slash their budgets.5 FDI inflows are expected to improve and lending in international capital markets will stabilise.

Nigeria’s GDP is expected to average 7.4% between 2011 and 2014. Economic experts opine that weak global demand, infrastructural inadequacies, little or no growth in bank credits to the real sector of the economy and the general elections all pose downside risks to economic growth in 2011.6

Projected impact on the real estate sector

Market analysts in Europe and America project that major activities in the real estate sector will remain limited.7 However, as capital markets stabilise, increased liquidity could present additional drive for investing in emerging market real estate. As an example, the flow of capital into Hong Kong and Singapore is encouraging investor interest in other Asian property markets.8

The Asset Management Corporation of Nigeria (AMCON) has injected a second tranche of funds into several financial institutions with the aim of improving liquidity. This injection should enable financial institutions to resume lending activity. It is hoped that the real estate sector and other users of medium to long term funds will benefit, spurring activities in infrastructure and construction.

The Federal Government has allocated N347 billion (US$2.3 billion) for the development of critical infrastructure in 2011.9 This is in support of the plan to accelerate real sector reform and address infrastructure and institutional impediments to a more competitive and business friendly investment environment.10 If effectively implemented, the initiative is expected to be one of the main catalysts for the rejuvenation and growth of the real estate sector.

Overall, the combined efforts of the government, regulators and other market stakeholders will be required to kick start and achieve some level of growth in the sector in 2011. Some initiatives include:

Incentives for inflow of capital: Government needs to create a more attractive environment for foreign investments in real estate products on the NSE. This will help improve investors’ confidence, expand access to long term funds and help in creating effective partnerships needed to embark on large scale projects.

Effective mortgage structure: Through the recent restructuring of the financial institutions, it is imperative that the Federal Mortgage Bank of Nigeria (FMB) through its primary mortgage institutions (PMIs) create a more robust mortgage system, which allows access to long term lending and assist mortgagors and mortgagees in meeting their objectives. As soon as developers and homebuyers can access mortgages to develop or buy houses, demand will be stimulated and this will lead to increased momentum for the sector.

Reduction in construction material taxes: A reduction in taxes for housing development projects can help reduce construction cost. Imposition of the value added tax (VAT) at various levels of the housing development process constitute as much as 35% of the cost of a house. Tax holidays, deferrals or tax exemptions on materials or home sales, or similar tax-related provisions are common and have helped to reduce housing development costs in other countries.11


1 The Federal Government of Nigeria (the presidency, Revised 2009 and Estimates for Q1 – Q2 2010
2 Business Day Online – Nigeria’s Foreign Direct Invest (FDI) fell from $6 billion in 2009 to $2.3 billion in 2010
3 The Federal Government of Nigeria (the presidency), Revised 2009 and Estimates for Q1 – Q2 2010
4 Afrinvest – The Year Thus Far; Volatile Swings in a Penultimate Election Year, November 2010
5 IMF World Economic Outlook: Recovery, Risk and Rebalancing
6 Afirinvest – Nigeria: 2010 Review, 2011 Outlook; Macroeconomic Resilience Underscores Favourable Outlook
7 Deloitte – Commercial Real Estate Outlook, Top Ten Issues in 2011. Generating Momentum for Recovery
8 Global Real Estate Outlook, 2011
9 – Budget 2011 – FG Votes N347.2 Billion for Critical Infrastructure
10 Afirinvest – Nigeria: 2010 Review, 2011 Outlook; Macroeconomic Resilience Underscores Favourable Outlook
11 Challenges to providing affordable housing in Nigeria, Akeju Abimbola, 2007

This article was first published by Alitheia Capital Real Estate Insight. Alitheia Capital is an investment manager and advisor. The company’s mission is to broaden the ownership of businesses and real estate. To this end, the company is committed to doing well, while doing good. Alitheia enables socially sustainable investing and provides the opportunity for investors across the economic pyramid to invest in key sectors of the economy via structured investment vehicles. From its base in Lagos, Nigeria, the company is focused on channelling private equity investments into businesses and real estate assets.