March, 2015 THE NIGERIAN REAL ESTATE SECTOR

March, 2015 THE NIGERIAN REAL ESTATE SECTOR

The Nigerian Real Estate Sector Executive Summary The huge housing deficit in Nigeria estimated at about N49triillion provides key opportunities for growth in the real estate sector; this couple with the significant infrastructure gap estimated at about $510bn (N81.6trillion) makes the industry attractive to both public and private investors. The recent positive national growth over the past two-years is yet to solve Nigeria s housing deficit of about 17million units as over 87% of Nigerians live in rented apartments. Likewise, only about 30% of the country s 193,200km total road networks are paved compared to 70% and 58% for Frontier and emerging markets respectively. There are however some major issues and/or factors that are currently stifling the sector. These include; Dearth of cheap long term funds and lack of sufficient secondary mortgage market Unavailability of affordable housing stock Weak legal and administrative framework Although government s intervention is expected to drive changes, however government alone cannot meet the country s housing needs as a result of the huge financing required thus the need for private public collaboration. Business opportunities abound in the commercial and residential market, especially in the middle class which constitutes more than 65% of Nigeria s workforce. Introduction Nigeria has an estimated population of about 169 million. With a 4-year annual average population growth rate of 2.6%, the demand for new houses has continued to increase. According to the Federal Office of Statistics, the total number of households in Nigeria is estimated at 28.56 million, whilst there are only 12.8million numbers of housing units. This mismatch between the number of housing units and households underscores the housing problem in Nigeria. Part of the challenge faced by government, corporate and individual providers of housing is the finance required for providing adequate number of housing units. Consequently, the need to provide individuals with access to long-term housing funds, for the purpose of real estate development and homes acquisition necessitated various initiatives by the government, one of which is the establishment of Mortgage Banks by the government Real Estate: The Investment Case. One of the most important economic indicators or elements use to measure national development over the years has been real investments in the construction industry. This is often associated with Government s policy in financing and providing adequate housing units for the population. During the last two decades, real estate development in Nigeria has come full cycle of boom and bust. An estimated NGN28.9bn [USD183m] was reportedly spent by government owned financial institutions with the Federal Mortgage Bank of Nigeria, constructing roughly 20,000 residential estate projects in the country.

In the same vein, investments by private sector participants indicated that an estimated 30,000 residential housing estate projects have been completed. Hence, bringing the total investments to more than NGN100 billion. The housing deficit of about 17 million housing units couple with a growing population and infrastructure backlogs requires large capital outlay for real estate investments. Hence, the reason majority of investments in real estate stock come from the public sector to the detriment of private sector initiatives. Another major factor for consideration in the development of real estate projects in Nigeria is the land ownership system. The 1979 land use act vested all rights on land matters in the Governors of each state; the maximum period it allowed for free leasehold to any individual is 99years. Industry Economics The housing finance system in Nigeria consists of three markets namely; Primary Mortgage Market: This mortgage financing made funds/loans available directly to borrowers. Secondary Mortgage Market: Lenders and investors buy and sell existing mortgage loans and mortgage-backed securities (MBS). Capital Market: Investors buy and sell long-term investment vehicles such as MBS, stocks and bonds. By investing in mortgages and MBS, capital market investors help increase the flow of funds available for mortgage lending. Return on Real Estate Assets To determine returns on the Nigerian real estate investment involves sequence of approaches and flexibility in valuation model. As it is in any country, the location of the property, architectural aesthetics, shifting demography, government policy and/or intervention etc will all impact on the value of the expected returns on investment. For simplicity, returns on real estate investments will be briefly discussed in two (2) broad categories namely; 1. Returns on Real Estate Investment Trusts (REITS) in Nigeria Historically, institutional and retail investments in REITS stocks on the exchange have not recorded any significant returns on investment. All listed REITS have been characterised by illiquidity and marginal price movement such that in the past two (2) years listed REITs have largely traded flat. The trading prices of Union Homes and Skye shelter stocks had remained unchanged at N50.00/unit and N100.00/unit since August, 2010 and August 2011 respectively. 2. Returns to Real Estate Asset Owners The value of properties in Nigeria, especially Lagos, moved in tangent with the global market price following the 2007/08 global crises, however recent research indicated that property values have rebounded. At present, returns on investment to property owners in real estate is estimated between an average of 15% and 35% per annum.

The wide range in the returns on real estate is attributed to the Location of the asset, Demand for the type of property, Aesthetics and finishing, and Quality of the property s documents. Industry Dimensioning: SWOT ANALYSIS. Strength: Rapid appreciation in value Highly skilled expertise to provide top quality construction Wide market area Steady long term income stream (from rental income) Returns are enough to provide a cushion against inflation Opportunities: Large population of about 170million growing at an average of 2.6%p.a. House deficit of about 17million units Stock of new housing less than 60,000units p.a. Intense pressure on housing Absence of mortgage facilities Concentration of primary mortgage institutions in Lagos ( about 58 out of 99 registered PMIs) Weakness: Majorly long term thereby it has an extended payback period Delay emanating from time taken to construct buildings and to trade in properties Loans are not swiftly processed Threats: Poor infrastructural facilities Unfavorable government legislation relating to ownership Rising purchase/ acquisition costs Authenticity of title to landed properties High interest rate on mortgage Source: Keystone Bank Research The Nigeria property market, in the Short to Mid Term (i.e. next 24 to 36months) looks very attractive and offers huge investment opportunities, both on capital appreciation and rental basis. This is evident in the huge housing deficit of more than 17million units (especially in the middle to low income group) and commercial use (shopping mall, parking areas and quality office blocks) CASE STUDY: The Lagos State Real Estate Market. The Lagos state s population is about 14.6million, and it continued to attract both vertical and horizontal migrants due to increasing economic activities. Some of the resultant noticeable projects as a result of this include the Opening of Eko Atlantic city, Lekki Free Trade Zone, Construction of roads and Opening of shopping malls. The housing deficit in Lagos state is estimated to be about one-third, i.e. about 6 (six) Million housing units, of the total housing gap in Nigeria, while infrastructure deficit is about one-fifth. The market is delineated into two broad segments namely Lagos Island (consisting of Victoria Island, Ikoyi and Lekki-Ajah areas) and Lagos Mainland (consisting of Surulere, Yaba, Egbeda etc). In the two markets, rent and outright sale of properties is a function of Price, Management and Facilities. However, quality facilities and good finishing are of high importance for residential properties on the Island due to the influx of expatriates.

I. Lagos Island Market: The city accommodates about 400,000 residents and a daily commuter flow of 250,000 people. Vacancy rate of residential properties, both for outright sale and rent, is high because the properties are overpriced relative to other areas of proximity to the Island. The average vacancy coverage for the Island is around 60%; further breakdown by major streets revealed that Idejo, Karimu Ikotun, Cooper road, Cameron and Lugard Avenue are averaging 22.4%, 18.09%, 39.4%, 43.76% and 63.7% respectively. Street Name No. of Houses Vacancy Factor (Houses) No. of Flats Vacant Factors (Flats) Vacant Factor (Commercial) Average Residential Vacancy Factor VICTO RIA Karimu Ikotun 25 16% 20 80% 4% 22.44% Idejo Street 21 24% 15 40% 24% 18.09% Average 19.09% 60% 10.57% 20.27% IKOYI Cooper Road 39 13% 40 70% 0 39.44% Cameron 45 20% 42 12% 0 43.76% Lugard 38 5% 80 31% 0 63.76% Average 13% 38% 41.6% Source: MCO Real Estate Consultant, Africa Property Investments. Many residential properties have been converted to commercial facilities, especially shopping malls, as landlords get more value for commercial properties. This is evident in properties around Banana Island, Oniru, Ikoyi south west and Lekki Phase1 axis. Also, the recently constructed Lekki-Ajah road has pushed up residential prices on that axis by about 35%. Average rent for a semi detached house in Lekki is now N3.5mto N4m from around N2.7mn to N3.5mn. On the contrary, vacancy rate in the shopping malls are very low. II. Mainland Real Estate Market: The lower and middle-end of the market have started showing signs of recovery after the challenging period that followed the global meltdown in 2008. The cumulative capital and rent values on properties around Gbagada and Ikeja GRA have scaled up by about 28%; while value on Yaba and Surulere properties are in the range of 10% to 15%.

Gbagada: Year Capital (N'm) Rent (N'm) ROC (YOY) 2008 40-45 1.20-1.50 13.33% 2009 35-40 1.80-2.00 11.76% 2010 45-50 1.80-2.00 26.67% 2011 45-50 1.8-2.0 10.34% Lekki Year Capital (N'm) Rent (N'm) ROC (YOY) 2009 80 95 3-3.5 35.19% 2010 60-65 3-3.5 18.57% 2011 70-80 3.5-4.0 20.00% 2012 80-90 4.5-5.3 13.33% *Comparative analysis of Capital, Rent and Returns on two major locations in Lagos state. Opportunities in the real Estate market of Lagos state. The rapid urbanisation rate, rural urban migration for job opportunities and the expanding middle class has resulted in a shift in consumption pattern, entertainment and shopping needs of people living in Lagos. This has contributed to the success recorded by the retail mall developers in the last 4 (Four) years. Return on investment and short payback periods have characterised the pioneer projects in the mall sector; average rentals is $90/square meter. The areas of opportunities are: Commercial real estate development: Lagos remains under-served in the emerging mall culture as several middle class communities do not have yet. Residential: The huge housing deficit is an opportunity to target the middle class, especially for projects with good proximity to the Island. CREDITS/SOURCE: World Bank, Africa Property Investment, FDC, MCO Consultant, and NBS Areoye Olusola Oyeniku is a husband and father, with areas of interest center around issues on Strategy and market dynamics, Economics, Research, Policy, Finance and Emerging Economies. His previous work covers topics in Economics, Industries, Policy Issues, Financial Markets, Research and Banking. He holds a MBA from Lagos Business School.