Inflation, exchange rate spike borrowings in real estate sector
Although the real estate and construction sectors have enjoyed a significant rise in banks' borrowings, this has not translated to improved housing stocks due to inflation and exchange rate volatility. Experts say, there could be a crisis soon as the ability of developers to repay credits will be low, writes
RISING inflation and exchange rates are among the headwinds in the country’s real estate and construction sectors increasing borrowings due to higher prices of imported building materials and machinery.
Currently, running real estate business is becoming more expensive and hectic, as the usual funds from offtakers to kick- start projects have declined as consumers have less disposable income and many prospective homeowners are losing confidence in private developers’ ability to deliver schemes. The last option open to them have been through financial institutions, especially commercial banks and development agencies.
Nigeria's inflation rate rose to its highest in more than 27 years last December, exacerbating a cost- of- living crisis and piling more pressure on the Central Bank of Nigeria ( CBN) to raise interest rates. Consumer inflation rose for the 12th straight month in December to 28.92 per cent year- on- year from November's 28.20 per cent, the National Bureau of Statistics said. The nation has not climbed this high since the mid- 1996.
Inflation and unstable exchange rate are impacting negatively on cost of borrowings as banks charge as high as 28- 30 per cent as interest. The exchange rate against the dollar averaged $ 1,300 last week, compared with $ 460.418 in April 2023. While real estate is a reliable investment, developing a property requires significant amounts of money compared to other forms of investments; hence operatives often resort to banks for credit.
The Guardian gathered that bank credit allocation to real estate and construction firms in the last four years ( 2019 to 2023) has witnessed an unstable but positive increase. Real estate and construction firms were able to secure loans totaling N21.89 trillion ( tn) in four years and the sector contributed N93.14tn to Gross Domestic Product ( GDP) during the period, according to the National Bureau of Statistics.
Further analysis showed that the firms borrowed the sum of N18.26tn in 2020 and N20.86tn in 2021. Central Bank of Nigeria ( CBN) data also revealed that borrowing by real estate firms rose from N668.8bn to N707.03bn between January 2022 and October 2022. Firms borrowed N38bn between January 2022 and October 2022.
The CBN sectoral analysis of deposit money banks’ credit shows that the real estate sector secured a loan of N8.22tn, while the construction industry obtained even more impressive credit facilities worth N13.77tn despite the apex bank increasing benchmark interest rate from 11.5 per cent earlier last year to 18.5 per cent in May last year, across seven consecutive rate increases as part of strategies to reduce inflation and mopped up liquidity from circulation.
The Guardian gathered that from May 2022 to May 2023, interest rates rose by about eight per cent. However, data from the CBN revealed that borrowing by real estate firms rose from N15.16tn to N21.89tn, representing an increase of 44.4 per cent between January 2019 and December 2022. Infrastructural activities in the housing and construction sector grew from N18.13tn in 2019 to N28.94tn in 2022, representing an increase of 59.6 per cent. About N2.26trn loans were secured by real estate and construction companies in eight months of 2023
Real estate and construction companies operating in Nigeria have managed to secure loans amounting to N2.26 trillion within an eight- month period. These borrowed funds from various banks have been instrumental in expanding their service capabilities within the sector. These loans, procured between November 2022 and June 2023, have exhibited significant growth, surging from N1.90 trillion to N2.26 trillion, marking an impressive 18.9 per cent increase.
Construction industry has also obtained a more impressive credit facility, totaling N1.51 trillion. Data provided by the CBN indicates that borrowing by real estate companies surged from N712 billion to N755 billion, constituting a remarkable 44.4 per cent increase. Similarly, construction companies have seen their loans climb from N1.19 trillion to N1.51 trillion within the same timeframe. Breaking this down into a monthly perspective, loans worth N1.80 trillion were obtained in December, followed by N1.78 trillion in January, N1.82 trillion in February, N1.84 trillion in March, N1.88 trillion in April, and N1.84 trillion in May.
The increase in the benchmark interest rate has unquestionably had adverse effects on the country’s economy, borrowings, and aggravated the nations’ housing crisis. This has further made investors to adopt a more vigilant approach, given the ongoing rise in property prices.
Industry experts said increased credit to the sector may not be a sustainable situation to fund real estate and construction sectors as there could be cyclical effects on real estate products and the finance market.
Former Chairman, Faculty of Real Estate Consulting, a division under the Nigerian Institution of Estate Surveyors and Valuers ( NIESV), Mr Niyi Fadoju, said the cost of development and construction has gone higher, adding that a developer who needed about N80 million to build a block of four flats in 2019 may need more borrowings amounting to about N130 million now, because of high prices of building materials in the market.
To him, the main issue about housing finance is that inflation can increase the cost of construction but not necessarily that the numbers of units that are developed are more than what they used to be.
Fadoju said: "However, by borrowing more doesn't necessarily mean people are building more, but it means the cost of construction of the existing stocks being developed has gone higher, so investors or developers need to borrow more to develop what they are still building.
“Housing finance is high, because housing is supposed to be long- term but the finance availability is short- term. If a developer is getting finance at 30 per cent, it is only rational to build and sell. People that are building to sell are those who can afford to borrow the loans.
“But people that want to do rental housing cannot afford to borrow because the banks can't wait for you to finish construction and tenants’ income can't pay back the interest not to talk about the loans. There may be less housing stocks because for certain locations, you cannot go beyond a particular amount. The number of houses financed by the banks has dropped. So, inflation and high exchange rates affect the cost of construction and lead to increased borrowing."
An infrastructure expert, Lookman Oshodi, argued that in a volatile economy like Nigeria, where there is absence of structure to guide real estate asset delivery in a comprehensive manner, developers will continue to have their ways with financial institutions through access to funding that will enable them to deliver real estate projects. However, Oshodi said, a key question is how marketable and affordable the products are to the end users. "The higher the rate of turnover, getting the real estate products as quickly as possible to the end users, the higher the propensity to deliver more by bringing new products into the market," he said.
Oshodi, who is the Project Director, Arctic Infrastructure Limited, believes that where there is apathy on the part of the end users of real estate products, there will be glut in the market.
"In the past, if you look at a city like Lagos where the demand for real estate products is always high, you could see that in some aspects of the market, there were high numbers of vacant houses. The exchange volatility, finances and other issues are not really expanding that trend to some other type of houses. People begin to see some levels of vacancy rate in areas where houses could be taken up as fast as possible," he said.
According to him, in the immediate future some developers will continue to access bank credits but in the long run, if volatility continues, the ability of developers to borrow will be limited.
“If you are selling a product and your buyers are responding, it makes you produce more but where your buyers are not responding, and you keep borrowing to produce, the question will be, where will you get the facility to repay loans? In the long run, if the trend of increasing borrowing continues, we could have a crisis in the sector because the ability of developers to borrow will be low and we could have some level of crash. The financial institutions will be looking for whom to borrow money.
“The whole thing revolves around the end users, whether those who will rent or outrightly buy. And the end users must have disposable income apart from spending on food, transportation, housing becomes a key issue.