Rewane: Residential, Non-residential Building Market Will Register Sluggish Growth in 2016
Nigeria’s residential and non-residential building market will register sluggish growth this year states Bismarck Rewane, CEO, Financial Derivatives Company Ltd. He also notes that government’s funding for housing will be restricted due to the fall in oil
Eko Atlantic City and major commercial projects such as shopping centres may struggle to gain traction, said the renowned Economist, Bismarck Rewane, CEO, Financial Derivatives Company Ltd. Rewane stated this from the BMI Research Outlook for Real Estate in his presentation, ‘The Role of the Real Estate Sector in Reshaping the Economy’ during the inaugural business dinner of FIABCI in Lagos, recently. FIABCI, the International Real Estate Federation, is a business network of real estate professionals worldwide.
According to Rewane, “Domestic and international investors are likely to adopt a wait-and-see approach to their projects, but the scale of potential warrants a long-term bullish growth outlook. There is still unmet demand in the commercial, industrial and residential sectors.”
He said growth would remain consistently strong, especially in Lagos, Abuja and Port Harcourt and that real estate would benefit from large and growing population, rising numbers of middle class Nigerians.
Strong fundamentals, he said would facilitate a stream of projects and that this would be led by the construction of cement and refining facilities. “As the economy recovers so will the demand for quality real estate.”
The objectives of the research, Rewane said was “to present our view on the business and macro-economic outlook in 2016; Highlight likely trends in the Nigerian real estate market and where there is consistency with international markets; Impact of government policies on the real estate sector with special reference to the 2016 budget;” and he discussed the potential opportunities and risks for the real estate sector.
He gave the negative and positive impact of the economy on the real estate industry, stating that on “the ugly side” there are “a lot of abandoned projects due to decline in government revenues; contractor arrears of over N600bn; lower disposable income affected demand for properties and Forex restrictions increased cost of imported building materials” and that “Private investors adopted wait and see position due to unclear policy direction. Vacancy factor rose in the high-end areas”
He said on the “Good Side, low-end properties performed well,” adding that “some major property developments were completed.”
Rewane listed key economic indicators relevant to real estate as; GDP, Oil Price, exchange rate, inflation, and interest rate, stating that there was slowing GDP growth. GDP growth would remain suboptimal at 3%, he said and that this was constrained by low activity levels in the economy and weak domestic consumption.
He, however, said there was hope of rebound and that people should “expect a pickup in 2017 as increased government spending begins to have impact; real estate growth will move in tandem with consumption and GDP.”
On consumption and GDP, he said an aggregate personal consumption spend has been moving in tandem with GDP, adding that growth in private consumption is projected to slow to 8.06% in 2016 before a recovery of 4.92% in 2017.
He observed that crude oil price was in a “free fall”, adding that “the probability of a rebound in oil prices in 2016 is very low. Nigeria’s yield per barrel is now only $6 from $91 in 2014. The 93% drop in revenues means less money to spend on sectors and on contractors.”
Exchange Rate Policy…
According to Rewane, an economists, the “CBN is stubbornly holding on to exchange rate controls; but economic realities will force an adjustment. The spread of N105 between official and parallel market is not sustainable-Official: N199.27/$; Parallel: N305/$.”
He said people took mortgages from banks to buy properties abroad and that it “has now become ‘underwater’ investments.”
On the impact of the exchange rate on real estate, he said the CBN would likely expand the forex trading band before the Monetary Policy Committee (MPC) meeting in March.
The forex trading band, he said could be expanded “possibly to N185-N220; States and FGN will have more money if there is a devaluation” of the Naira. “Rental prices will stabilize, stimulating demand for properties; cost of building materials will reduce with removal of exchange rate controls.” Opportunities and Threats for Real Estate… In the budget sectoral allocation, the highest capital expenditure is on infrastructure - Works, Power and Housing with N433.4 billion and recurrent expenditure of N34.25 billion.
He said real estate was one of the fastest growing sectors with 9.18% growth rate and a contribution of 7.57%. Real estate, hospitality and construction have 8% of total capital invested.
About areas where there he sees growth, he said there would be “Rebound in construction activities after budget funds are released and contractor arrears paid. Infrastructure development to make real estate more attractive; clearer policy direction will boost confidence levels of private investors; reduction of the benchmark interest rate to encourage borrowing for buyers and property developers and ongoing projects scheduled for delivery in 2016 would likely be completed.”
Nigerian Economic Outlook…
According to Rewane, oil price would remain at $25-35 in first quarter (Q1) of 2016; “budget revenue will fall by another 30%; borrowing will expand by at least 20% above N1.8trn; cost management and efficiency unit will need to deliver faster and bigger results; FGN will be more aggressive in managing agencies and organs of government.”
Also, international borrowing conditions and economic realities would force policy changes; exchange rate flexibility would lead to significant adjustment to the official rate N220-240/$; nominal amount of FAAC will increase by at least 20%; government expenditure will not be reduced especially investments in power and transport, stating that “Time lag between intended spending and actual spending will make 2016 difficult. GDP growth in 2016 will be flat at 3%.”
Drivers of growth, he said would be increased government spending, sector investment, infrastructural development, improved power supply, saying inflation would hit 12% and that “there will be at least 2 more bailouts of state governments. This time with stiff conditionalities.”
He said in the fourth quarter of this year, capital inflows will increase after currency adjustments, adding that there would be “$2-3bn of inflows as FDI plus FPI will help the naira stabilize.”
Major impediments to growth in 2016, he noted were that sectors are constrained by bottlenecks; underfunding and lack of access to capital; outdated technology; strangulated by government dominance and control.