How the Naira Devaluation is Affecting the Nigerian Real Estate Sector

EDIDIONG IKPOTO examines, in this article, the impact of the depreciation of the naira on the country’s property market

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 led to several economic problems which exacerbated the poor state of the Nigerian economy.

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

From 580 naira/$ at the end of December 2021 to 707 naira/$ at the beginning of October 2022, the Nigerian currency has depreciated by 22.4% on the parallel market in the space of nine months. During the same period, the naira devalued from N414/$ to N425-N430/$ in the official market.

These figures underscore the challenge faced by many businesses in the context of the continued devaluation of the local currency.

Like many other sectors of the economy, the real estate industry has not been immune to this economic challenge. Given their reliance on the US dollar for various purposes, real estate professionals have been grappling with a currency crisis that ultimately led to a dramatic spike in real estate prices.

Last week, the Nigerian Institute of Building and Roads Research said that Nigeria imports around 90% of the materials used in the construction of buildings and roads across the country.

Speaking on behalf of the institute at a press conference organized by the Abuja Chamber of Commerce and Industry ahead of this month’s Property and Construction Expo 2022, the head of NIBRRI’s building materials section, Okuo Leonard, said efforts should be made to reduce the heavy imports of building materials.

He said: “We import over 90% of what we use for road and building construction. Do we have to go out to get all those things we need? »

“Look at the doors we use, we import them, while we have wood that people export illegally. They will develop the timber there, produce these doors and bring them to Nigeria and sell them to us as value-added products.

“So it’s time to consider using what we have, locating the deposits, doing research, and developing or producing most of the things we need in terms of building and road construction.”

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

This follows the Central Bank of Nigeria’s directive in 2015 to restrict currency for the importation of 41 items into the official market.

The circular issued by the Central Bank of Nigeria in July 2015 lists 41 items that have been classified as invalid for Forex.

Items on the ban list included rice, cement, margarine, palm kernel, palm oil products, vegetable oils, processed meat and meat products, processed vegetables and plant products .

Others were poultry including chicken, eggs, turkey, private planes/jets, Indian frankincense, canned fish in sauce (sardines), cold rolled steel sheets , roofing sheets, wheelbarrows, pans, metal boxes and containers, enamel utensils, steel drums, steel pipes, wire rods (deformed and undeformed), iron rods and rebar , wire mesh, steel nails, security wires and barbed wire, panels and panels of wood particles, panels and panels of wood fibers and wooden doors.

Of all the items listed, 19 (46%) were directly related to the real estate sector. These include roofing sheets, iron rods, rebar, tiles, cement, wooden doors and many more. Some of the other non-real estate items classified as invalid include rice, poultry, textiles, private jets and toothpicks.

As a result, property developers for large and small-scale projects across the country have been faced with the monumental problem of having to turn to the (more expensive) parallel market to find foreign currency to purchase their materials.

In July 2015, the naira was trading at N/$235 in the parallel market while the interbank market was worth N/$197.54. Seven years later, the naira is trading at N745, representing a depreciation of 68.08% over this period.

The continued devaluation of the currency has forced developers to regularly reassess property prices 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 manufacturing building materials for construction purposes, the difficulty to access the forex to import the necessary raw materials had driven up the prices of these industrial products.

He said, “In a situation where to produce, you have to use generators. The raw materials you use are imported and you buy at the current dollar rate of N726, the production cost will be high. I’ll give you a quick example. I use resin in the manufacture of my marbles and granites as a binder. Less than two years ago I was buying at N135,000. My last shipment from two months ago was N425,000 per drum.

“The pending shipment, which I will take delivery next week, is 575,000 naira per cask. What’s going to happen? My product will have to go up, otherwise I will go bankrupt. Thus, the cost of raw materials continues to increase. So all of this adds up to form what we call the cost of production. As long as the cost of production is high, the cost of fillers will also be high.

While speaking exclusively with The PUNCH, a real estate expert and founder of Michael’s Realty, Babatunde Ajibola, said that the surge in building material prices, which had been largely due to the difficulty in sourcing foreign currency, had led to significant increases in property prices.

He said: “Some developers have this problem selling a property in their plan for N55m, for example. Incidentally, the course of the dollar then increases. The dollar is now around 745 naira since my last check. For this kind of developer, this is a huge problem. Some of these developers are unable to come back to buyers to change the original agreement. »

Another way the continued depreciation of the naira has affected the real estate sector has been through the discouragement of investment in the sector. On Thursday, October 20, 2022, a financial education platform – The Money Africa – tweeted what ultimately snowballed into a heated debate among personal finance enthusiasts who debated the merits of investing in real estate over versus saving these dollar funds over a long period of time.

The tweet read “A lady bought a house in Ikate, Lekki for 60 million naira three (3) years ago. She sold it last month to move house for N85million. The exchange rate 3 years ago was N/$360 and now in the black market where it traded at ~N/$720.

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 sale proceeds to dollars, it was $118,055. The rental income of the property was 12 million naira for the 3 years.

“The depreciation of the naira eroded the capital appreciation and rental income she earned. She lost almost $50,000 because of the financial decision she made.

Money Africa founder Oluwatosin Olaseinde, while offering investment advice to potential investors, said that over the past seven years, saving your money in dollars has provided a safer and more lucrative option than plunging those funds in real estate investments. Although many questioned this logic, a large majority of respondents agreed that investing in real estate does not have the economic potential associated with currency speculation, especially given the Nigerian situation.

In Nigeria, as well as in other parts of the world, putting money into real estate through land banks has remained a key instrument for investors for many centuries.

The general rule is that while the dynamic nature of human existence can quickly overtake existing systems, real estate is the only exception to this rule as it is not susceptible to being overtaken nor can it be removed. . However, experts believe that in a climate where the local currency is at risk of continued devaluation, investing in more stable and convertible currencies can yield more than plunging one’s funds into real estate.

In reaction, Ajibola, quoted earlier, argued that this view only made sense insofar as a particular currency would simply swing into devaluation, with no real prospect of appreciation 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 instead of a more solid alternative in real estate.

He said: “A healthy investment portfolio is when you allocate your resources correctly, assessing your appetite for risk. A healthy portfolio should have low, medium and high risk, depending on 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 cannot use forex as collateral.

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