JOSEPHINE OGUNDEJI speaks with the Head of Marketing and Corporate Communications at Knight Frank, Nigeria, Lanre Sonubi, on the financing constraints affecting the real estate sector, among others
What strategies can be employed to address infrastructure gaps in key real estate markets?
Various strategies will work for different jurisdictions. For our case here in Nigeria, aside from sufficient budgetary allocations and commitment to implementation both at the federal and state government levels, I will suggest stronger collaborations between the government and private investors through public-private partnerships for the delivery and maintenance of infrastructure projects. Issuance of infrastructure bonds will also help a lot in major infrastructure development. A recent case in mind would be the Federal Government Sukuk, which financed the rehabilitation of the Outer Marina Road, a major road connecting Lagos Island to Victoria Island, Falomo and Ikoyi. According to the Debt Management Office, the Federal Government raised N1.77tn between 2017 and 2021, and it is interesting to note that this initiative has financed a total of 44 critical road projects across the six geopolitical zones of the country.
How do financing constraints affect property development and investments in Nigeria?
Limited availability of long-term financing options, stringent lending criteria, and high lending costs restrict developers’ ability to secure capital to finance property development projects, thereby causing a slow rate of property supply. The high cost of funds also means that properties are delivered at a higher cost as the lending rate spikes. Financial constraints also affect liquidity and create a lull in transaction activities on the secondary market as more investors find it more challenging to exit a property investment and take positions elsewhere. This also negatively impacts investors’ willingness to engage in long-term projects in the property market.
What innovative financing models can be explored to overcome these challenges?
Public-private partnership is one model I will easily recommend as it helps to pull stakeholders together from both sectors to solve the mutual problem of deficit in infrastructure and property development. The PPP initiatives could be in the form of concession projects or the issuance of infrastructure bonds. On the private sector side, real estate investment trusts are a model that we need to pay more attention to as they can raise money through the sale of equity either publicly on stock markets or through private investors. The cost of the fund is usually relatively lesser and makes it possible to deliver properties at a more affordable rate. Close to REITs is raising capital through crowd-funding where real estate entrepreneurs can aggregate funds from investors of like-minds to develop projects, deliver to time, and exit more easily at a more competitive price-point since the variable of commercial lending rate has been bypassed.
How do regulatory challenges impede the growth of the real estate sector in Nigeria?
Cumbersome land titling processes, ambiguous property rights, restrictions on land use, and a lack of standardised regulations contribute significantly to an environment of uncertainty and deter potential investors. Bureaucratic red tape in obtaining construction permits and navigating zoning regulations further hampers the development of real estate projects. Additionally, the absence of a streamlined and transparent regulatory framework leads to disputes and prolonged legal battles, which dissuade both local and foreign investors from investing in the market. The overall impact is limited investment inflow, a slower pace of development, and failure to unlock the full potential of the real estate sector as a driver of economic growth.
Are there specific regulatory reforms that can enhance the ease of doing business in the Nigerian real estate market?
Several regulatory reforms can be considered. Firstly, streamlining the land titling process and improving the efficiency of property registration would significantly reduce bureaucratic hurdles. For instance, the Commissioner for Housing in Lagos recently disclosed that the state was automating its land titling processes. This will ensure a transparent and digitised land registry system, which will expedite the application processing time, providing clarity on property ownership and facilitating smoother transactions. Additionally, establishing a unified regulatory framework for the real estate sector can help standardise procedures and create a more investor-friendly environment. Clear guidelines on property development, zoning regulations, and construction permits will contribute to a more predictable and stable market, attracting both local and foreign investors.
Also, strengthening legal mechanisms to resolve disputes and ensuring the swift enforcement of property rights will instil confidence in investors. This may involve reforms in the judiciary system to simplify resolution processes. Overall, a comprehensive approach to regulatory reform, encompassing digitisation, standardisation, and legal enhancements, will go a long way in fostering a conducive environment for real estate investment and development in Nigeria.
How does a lack of market transparency impact investor confidence in the Nigerian real estate market?
The lack of transparency in the Nigerian real estate market significantly erodes investor confidence and reduces market liquidity. Investors depend on clear and reliable information to make informed decisions. Access to accurate data on property transactions, pricing trends, specialised property segment reviews, and regulatory frameworks creates an environment of uncertainty. This is why at Knight Frank, we commit a lot of resources to deliver trusted property research reports across the globe. We understand that without transparent information, investors face difficulties assessing the true value and risks associated with real estate investments.
Ambiguities in land tenure, unclear property ownership records, and inconsistent enforcement of regulations further amplify the challenges. As a result, potential investors may be hesitant to engage in the market, fearing hidden risks and encountering obstacles in due diligence processes. Establishing greater market transparency through accessible data and standardised reporting mechanisms, particularly by government agencies that sit on huge market data is crucial to promoting confidence, attracting investment, and fostering sustainable growth in the Nigerian real estate market.
What steps can be taken to improve transparency in property transactions and valuation?
I will recommend a multifaceted approach to help improve transparency in the market. The first will be to implement a digitised land registry system and centralising property information will streamline the process of accessing ownership records and transaction history. Brokers and prospecting investors can conduct due diligence in a breeze. The second will be to standardise reporting mechanisms and encourage the use of technology in property valuation for better consistency and accuracy of reports. For instance, due to a lack of consistency with international standards, valuation reports by some firms in Nigeria are not acceptable for cross-border transactions or even domestic transactions involving multinationals.
Additionally, promoting disclosure requirements for property sellers and real estate brokers, coupled with stringent enforcement of regulations, can ensure that comprehensive information is readily available to potential investors. Regular market research and data publications by relevant authorities can also provide stakeholders with up-to-date insights, fostering a more transparent and informed real estate environment.
How do security challenges in certain regions of the country influence property investments?
Security challenges in those troubled regions of the country exert significant pressure on property investments, acting as a deterrent to both domestic and foreign investors. The various security concerns create an atmosphere of uncertainty, making investors wary of potential threats to their investments. This is more worrisome due to the peculiar nature of real estate; assets are typically not portable. So, the lack of safety not only jeopardises the physical security of properties, but also disrupts business operations and cash flow, hindering the return on investment. In such environments, property values may decline, and rental yields may be compromised as investors try to cut their losses and exit their positions. Also for managed properties, the insecurity leads to an increase in the cost of facility management due to the need for improved security provision, and possible repairs and maintenance necessitated by vandalism.
The market conditions further diminish the attractiveness of real estate investments in those regions. Addressing security concerns through concerted efforts from government agencies and implementing measures to stabilise these regions is imperative to restore investor confidence and unlock the true potential of the real estate market in those regions of the country.
How does inadequate urban planning and infrastructure impact the sustainable development of cities in Nigeria?
Rapid urbanisation without proper planning often leads to informal settlements, indiscriminate citing of new developments, congestion, and inadequate housing and public services. A good example is the issue of the housing deficit in Nigeria of more than 20 million units. The lack of well-designed urban spaces and infrastructure not only diminishes the quality of life for residents but also impedes economic growth and investment. Insufficient transportation networks, unreliable utilities, and inadequate waste management and drainage systems contribute to environmental degradation and health hazards. Additionally, the lack of a proper urban planning framework worsens social inequalities and hinders the establishment of resilient, inclusive, and sustainable cities. To achieve sustainable development, the government must prioritise robust urban planning strategies and invest in infrastructure that supports the evolving needs of our urban population. Urban planning should happen before full-scale development takes over an area, and implementation of the plan should be delivered judiciously.
What measures should be taken to improve urban planning and infrastructure development?
We require a comprehensive and coordinated approach to improve our planning. Firstly, I will emphasize creating and implementing effective urban planning policies that consider sustainable land use, forward-looking zoning regulations, and the integration of green spaces. We also need to commit reasonable investments in infrastructure development, including transportation networks, water supply, drainage systems, sanitation and waste management, recreation, and energy systems are essential to support growing urban populations. Public-private partnerships and other initiatives suggested earlier can be leveraged to attract funding and expertise for large-scale infrastructure projects.
While doing this, stakeholder engagement and adequate consultation with industry experts should be encouraged to ensure that urban planning and development initiatives align with the overarching needs and aspirations of the various interest groups. For instance, these experts will be able to advice on key considerations like industrial layout, residential estates, commercial/business districts, etc.
How does economic volatility in Nigeria affect property prices and investment returns?
I will say that fluctuations in major economic indicators, including inflation rates, exchange rates, and overall economic performance, directly influence the real estate market. During periods of economic instability, as we have now, property prices have become more volatile, particularly for high-end properties. Conversely, on the lower end of the market, there might be a lull in transaction volume, as consumer purchasing power diminishes and demand weakens.
The rate of supply to the primary market may also slow down due to stiffer challenges in securing favourable financing terms, and the overall risk perception can lead to a more cautious approach, affecting investment returns. All of these, particularly the free-fall of the naira, make investment in the property market less attractive for foreign investors. Let me paint this scenario; a foreign investor brought in $1.5m (N180m at the rate of N120 to $1 in 2008) to acquire a property 15 years ago, and let’s assume that the property has appreciated in value and now sells for N1bn, which is supposed to be a return on investment of 455 per cent, but there will be a twist if he converts his proceed to dollars at the current official rate (best case scenario) of N802. He will only have approximately $1.25m to repatriate, which is a loss of $250,000 (16.6 per cent) after investing for 15 years. Clearly, the market will not be attractive even for Nigerians in the Diaspora.
Likewise, uncertainties in the business environment can result in delayed or stalled real estate projects, limiting potential gains for investors. To mitigate these effects, a stable economic environment, consistent government policies, and proactive measures to address economic challenges are essential for sustaining property prices and fostering positive investment returns.
What challenges exist in addressing the shortage of affordable housing in Nigeria?
While the challenges are multifaceted, one primary obstacle is the rapid population growth, particularly in urban areas, which strains the existing housing stock. Inadequate access to financing options, high interest rates and high inflationary pressures limit the ability of low and middle-income earners to afford homes. Additionally, the high cost of building materials, cumbersome land acquisition and titling processes, and ambiguous property rights contribute to delays and increased costs in housing delivery. Insufficient infrastructure and basic services in many areas further complicate affordable housing projects. Tackling these challenges requires coordinated efforts from the government, the private sector, and financial institutions to streamline regulatory frameworks, improve access to affordable financing, and implement sustainable urban planning strategies, respectively.
Are there risk mitigation strategies for real estate stakeholders in the face of economic uncertainties?
I will recommend diversification of real estate portfolios by investing in a mix of asset classes, such as residential, commercial, and industrial properties to help spread risks. Repurposing properties that are not performing will also be a good idea to explore. Also, conducting thorough due diligence and staying informed about market trends and economic indicators can enable stakeholders to make informed decisions. Implementing flexible financing structures and maintaining liquidity buffers can provide a financial cushion during these times of economic downturn. Additionally, engaging in long-term leases with reliable tenants and incorporating escalation clauses in lease agreements can offer stability in rental income, collaborating with experienced property management firms to ensure optimal property performance.
How are environmental concerns and sustainability challenges shaping the landscape of real estate development in Nigeria, specifically in terms of energy-efficient buildings, the rise of green-certified structures, and the integration of recycling practices?
In recent years, environmental consciousness has significantly impacted real estate development in Nigeria. Developers are increasingly incorporating energy-efficient technologies in building designs to minimise energy consumption. The surge in constructing green-certified buildings reflects a commitment to sustainable practices, promoting healthier environments, and reducing the carbon footprint. Additionally, the integration of recycling practices into real estate projects not only aligns with global sustainability goals but also addresses waste management challenges, fostering a more eco-friendly and resilient real estate sector in Nigeria.
How can the construction and operation of properties incorporate sustainable practices to address environmental concerns, considering the use of eco-friendly materials, water-efficient fixtures, and green roofs/landscaping?
To address environmental issues in the construction and operation of properties, integrating sustainable practices is essential. During the construction phase, opting for eco-friendly materials such as LED lights and energy-efficient HVAC systems promotes energy conservation. Incorporating water-efficient fixtures like rain harvesting systems and low-flow toilets not only reduces water consumption but also contributes to responsible resource management. Moreover, the inclusion of green roofs and landscaping not only enhances aesthetic appeal but also mitigates the urban heat island effect, fostering a more sustainable and environmentally friendly approach to property development and management.
How can the government and the private sector enhance collaboration through Public-Private Partnerships to effectively tackle challenges in the real estate sector, particularly focusing on joint financing for infrastructure and initiatives for affordable and social housing?
In fostering a more effective collaboration between the government and the private sector to address real estate challenges, the utilisation of Public-Private Partnerships is crucial. Joint financing for infrastructure projects allows for shared financial responsibility, ensuring the development of robust and well-connected urban infrastructure. Additionally, the implementation of PPPs in affordable and social housing initiatives facilitates a more inclusive approach, leveraging the strengths of both sectors to meet the growing demand for accessible housing. By aligning goals and resources, governments and the private sector can synergise efforts, providing sustainable solutions to challenges in the real estate sector and contributing to overall socio-economic development.