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Tuesday, January 31, 2023

How Naira Devaluation Impacts On Nigeria’s Real Estate Sector

Over the past few years, the Nigerian naira has lost a lot of value, especially against major currencies such as the dollar and the pound. This has led to several economic woes that have exacerbated the poor state of the Nigerian economy.

Across the various components of the economy, the rapid depreciation of the naira has affected virtually every sector of the economy, forcing industry players to adopt survival measures in order to cope with the harsh business environment that has been the bane of many business entities.

From N580/$ at the end of December 2021 to N707/$ by the beginning of October 2022, Nigeria’s currency depreciated by 22.4 per cent in the parallel market within a period of nine months. Within the same period, naira devalued from N414/$ to N425-N430/$ in the official market.

These figures underscore the challenge facing many businesses amid the continued devaluation of the local currency.

Like many other sectors of the economy, the real estate industry has not been insulated from this economic challenge. Given their reliance on the US dollar for varied purposes, property practitioners have struggled with a currency crisis that has ultimately led to a dramatic surge in the price of real estate.

Last week, the Nigerian Building and Road Research Institute said that Nigeria imported about 90 per cent of the materials used in the construction of buildings and roads across the country.

Speaking on behalf of the institute at a press conference organised by the Abuja Chamber of Commerce and Industry ahead of this month’s Real Estate and Construction Expo 2022, the Head, Building Materials Section, NIBRRI, Okuo Leonard, said efforts must be made to reduce the high imports of construction materials.

He said, “We import over 90 per cent of what we use for road construction and for buildings. Must we go out to get all these things we need?”

“Look at the doors we are using, we import them, while we have timber which people export illegally. They will develop the timber there, produce those doors and bring them to Nigeria and sell to us as value added products.

“So, it is time to look at making use of what we have, locating the deposits, conducting research and developing or producing most of the things we need when it comes to building and road construction.”

On the other side of the fence also lies the currency challenge associated with importing this vast majority of construction materials. For real estate developers, this currency challenge has taken a much more acute dimension, particularly over the past seven years.

This followed the directive by the Central Bank of Nigeria in 2015 to restrict foreign exchange for the importation of 41 items in the official market.

The circular released by the Central Bank of Nigeria in July 2015 listed 41 items which were classified as not valid for Forex.

The items on the prohibition list included rice, cement, margarine, palm kernel, palm oil products, vegetable oils, meat and processed meat products, vegetables and processed vegetable products.

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Others were poultry, including chicken, eggs, turkey, private airplanes/jets, Indian incense, tinned fish in sauce (sardines), cold rolled steel sheets, roofing sheets, wheelbarrows, head pans, metal boxes and containers, enamelware, steel drums, steel pipes, wire rods (deformed and not deformed), iron rods and reinforcing bars, wire mesh, steel nails, security and razor wire, wood particle boards and panels, wood fibre boards and panels and wooden doors.

Of all the items listed, 19 (46 per cent) were directly related to the real estate industry. These include roofing sheets, iron rods, reinforcing bars, tiles, cement, wooden doors and many more. Some of the other non-real estate-related items classified as not valid include rice, poultry, textiles, private jets and toothpicks.

Consequently, real estate developers for large and small-scale projects across the country have been faced with the monumental problem of having to move to the (more expensive) parallel market to source foreign exchange to purchase their materials.

In July 2015, the naira was exchanging at N235/$ in the parallel market while the interbank market went for N197.54/$. Seven years later, the naira trades at N745, representing 68.08 per cent depreciation within this time.

The continued devaluation of the currency has forced developers to rescale property prices on a regular basis in order to keep up with changing realities.

While speaking in an exclusive interview with The PUNCH, a former Chairman of the Nigerian Association of Small-Scale Industrialists, Segun Kuti-George, said that in the process of making building materials for construction purposes, difficulty in accessing forex to import the needed raw materials had forced up the prices of these industrial products.

He said, “In a situation where to produce, you have to use generators. The raw materials that you are using are imported, and you are buying at current dollar rate of N726, the production cost will be high. I will give you a quick example. I use resin in the manufacturing of my marble and granite as a binding agent. Less than two years ago, I was buying at N135, 000. My last consignment of two months ago was N425, 000 per drum.

“The consignment that is being cleared, that I will take delivery of next week, is N575, 000 per drum. What is going to happen? My product will have to go up, otherwise, I will go out of business. So, the cost of raw materials keeps going up. So, all these add up to form what we call the cost of production. As long as the cost of production is high, the cost of charges will also be high.”

While speaking exclusively with The PUNCH, a real estate expert and founder of Michael’s Realty, Babatunde Ajibola, said the skyrocketing cost of building materials, which had largely been driven by difficulty in sourcing the foreign exchange, had led to significant increases in the prices of property.

He said, “Some developers have this issue whereby they sold a property in their off-plan for N55m, for instance. Incidentally, the dollar rate then increases. Dollar now is about N745 as of my last check. For that kind of developer, it is a huge problem. Some of these developers are not able to go back to buyers to change the original deal.”

Another way the continuous depreciation of the naira has affected the real estate industry has been in the discouragement of investments in the sector. On Thursday, October 20, 2022, a financial literacy platform – The Money Africa – tweeted what eventually snowballed into a hot-button debate amongst personal finance enthusiasts who debated the merit of investing in real estate versus saving such funds in dollars over an extended period of time.

The tweet read “A lady bought a house at Ikate, Lekki for N60 Million three (3) years ago. She sold it last month to relocate for N85 Million. The exchange rate 3 years ago was N360/$ and now at the black market where she exchanged at is ~N720/$.”

A follow-up to the tweet said, “If she had held the money in Dollars, she would have had $166,000. When she converted the proceeds of the sale to Dollar, it amounted to $118,055. The rental income of the property was N12 Million for the 3 years.

“The Naira depreciation eroded the capital gain and the rental income she earned. She lost almost $50,000 from the financial decision she made.”

The founder of Money Africa, Oluwatosin Olaseinde, while offering investment tips to potential investors, said that over the past seven years saving one’s money in dollars offered a safer and more lucrative option than plunging such funds into real estate investments. Even though many questioned this logic, a vast majority of respondents agreed that investing in real estate did not possess the economic potential associated with currency speculation, particularly given the Nigerian situation.

In Nigeria, as well as other parts of the world, stashing one’s money in real estate through the instrumentality of land banking has remained a key instrument for investors for many centuries.

The general rule of thumb is that while the dynamic nature of human existence can quickly outmode existing systems, real estate is the one exception to this rule as it is not vulnerable to being outmoded, nor can it be phased out. However, experts believe that in a clime where local currency runs the risk of continued devaluation, investing in more stable and convertible currencies may yield more returns than plunging one’s funds into the real estate.

Reacting, Ajibola, earlier cited, argued that this point of view was only logical to the extent that a particular currency would only swing towards devaluation, without any real prospect of appreciating when prevailing economic conditions were addressed.

He further noted that there remained a significant risk in resorting to currency speculation as a form of investment in lieu of a more solid alternative in real estate.

He said, “A healthy investment portfolio is when you allocate your resources properly, assessing your risk appetite. A healthy portfolio must have low, medium and high risk, subject to how you want to manage the funds. Forex is a volatile instrument, sometimes it (depreciation) can go the other way. If you invest in real estate, you can use it as collateral, but you can’t use forex as collateral.”

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