Northcourt’s 2020 Nigeria Real Estate Market Outlook

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Nigeria’s economic growth in 2020 will depend on far sighted fiscal and monetary policies and prudent management of public debt, which currently stands at over N25Trn. Most developing countries possess effective formal budget systems that work but turn out ineffective because they lack disciplined budgets, effective programs or efficient operations. Solving this does not solely depend on the improvement on budget procedures but also on the Government’s adherence and its attitude towards fiscal rules.

Nigeria and neighbouring countries Benin and Niger have agreed to set up a joint border patrol force to tackle smuggling, promote intra-regional trade, and ensure migration policies are enforced. So far experts estimate that N6Trn has been spent by the CBN in dollar injections, defending the currency. This is more than the capital expenditure spend in the 2020 budget and includes N4.5Trn used to pay interest on OMO bills and N1.5Trn used to pay settlements on FMDQ. The CBN has rightly decided to amend its policy regarding investing in Treasury bills to exclude retail/individual buyers.

It is worth considering that the currency fluctuations will not be an issue if there is a focus on finding economical solutions in partnership with local investors rather than foreign investors. This could be easier if interest rates in the banking system is reviewed by the government. In all likelihood, disposable income will be affected next year by reduced oil prices, difficult but necessary economic decisions taken by the current administration, or a mix of both. Experts maintain that the increase in VAT might not be the best solution to generating revenues opting for an adjustment in the exchange rate.
LAND

Towards making land administration effective, a number of states have begun implementing the Systematic Land Titling and Registration as part of a broader plan of growing investment. The use of technology in land administration is paying off in states like Edo and Anambra and other states are considering the adoption of same. With more registered titles being issued in shorter timeframes, there is a growing case for long term investment especially in states outside the leading cities of Lagos, Abuja and Port Harcourt.

RESIDENTIAL
Modular construction is contesting to be the future of the building construction. The benefits over traditional construction should be huge: lower costs, accelerated schedules, greater predictability of both time and cost, and improved building quality. However, the modular supply chain is promising, and benefits of the approach are largest where there is a degree of repetition well beyond individual, large projects.

 

Industry fragmentation, a one-off approach construction projects, and a ready supply of manual labour kept the need for productivity improvement below that of other industries. Incumbents and investors are realising the potential of technology to accelerate projects, reduce costs, and embrace sustainability.  Building relationships with modular suppliers will be crucial. Developers should aim to form strategic partnerships to commit a pipeline of repeatable projects over several years – as opposed to one-off projects.

Landlords with large room developments (4+) near the city centres will turn to co-living and more flexible payment plans to compensate for the state of the economy and the earning capacity of the individual. Since 2017, there has been huge demand for real estate from Nigerians in diaspora and this is expected to increase in 2020. There will be products designed specially to attract diaspora investment. Locally, financial institutions are launching products that will enable renters make quarterly payments.

RETAIL

Proximity to densely populated areas, accessibility, parking and entertainment facilities remain key factors to the growth and success of the retail market. The grounds gained by family features and entertainment options as success factors in ensuring retail success are expected to deepen with more retailers now aware of its role in sustaining footfall. Having tested the mid-range sized mall concept albeit vicariously through the likes of retailers as Blenco and Ebe Ano in Lagos, investors are warming up to this development type, adding strong entertainment features for good measure.

RETAIL

Research into Global Real Estate Benchmark Indices as it relates to Nigeria’s commercial real estate market show an average yield of 3.4% for foreign direct commercial real estate investment. This falls short of the global benchmark of 5.7%. This was as a result of the fact that the growth in rental value of the properties was not commensurate with the high capital growth rate of 16.5%. Again, the performance of FDI in Nigeria’s commercial real estate sector compared favourably with the global benchmark given a higher 10-year annualised capital growth rate and mean total returns for FDIs.

The supply of co-working spaces is rising to meet up with demand. The growing population in the CBDs will accentuate the demand for well-maintained multi-level parking facilities mixed with retail facilities. High vacancy rates are expected for Grade A offices, at least until a firm direction for the economy (and the currency) is determined. Landlords will need to be flexible and accommodating of tenant’s preferences to keep vacancy rates manageable.

INFRASTRUCTURE

New technologies fuelled by start-ups throughout the infrastructure supply chain have emerged, in areas of pricing, measurement, funding management, augmented and virtual reality. These new technologies now emphasise data gathering and supply chain efficiency. Such start-ups will have an impact on every aspect of infrastructure, from materials to contracts to design and simulation.

A renewed focus on domestic infrastructure with stimulate growth in the manufacturing sector in the country. The growth in ecommerce with customers demanding shorter delivery times will expand the opportunity for Grade A warehousing facilities close to consumers. If managed well, Nigeria’s leading cities can do more to drive the country’s economic growth. Lagos still struggles with standard city problems – overpopulation, infrastructure decay and insecurity. The positives of urbanisation are yet to fully contribute to the growth of the city. Putting the right infrastructure before population growth should be a primary objective of building smart cities, i.e. technologically advanced, green and economically vibrant locations.

Student Housing

There’s still a capacity challenge as Nigeria’s university system, which holds over 150 schools, is mostly over-populated. As such, only one in four Nigerians applying to university will get a spot. A possible first step to fixing Nigeria’s tertiary education problems would be to increase budgetary allocations to between 11% and 15% which will provide the funding required to partner developers on hostels and off campus accommodation development.

The public and private sectors have to create an enabling environment and work together with the higher education sector to achieve the country’s development goals. This is the path taken by developed countries. Over the next five years, student numbers are expected to continue increasing significantly. An additional 72M Africans will be aged 15-24 by 2028, with the highest growth – 13M in Nigeria.

HEALTHCARE

Demand rests in availability of primary care services which creates demand for mid-sized birthing centres staffed by nurses and midwives. Asides a comprehensive maintenance framework, urban areas require emergency centres, specialised maternity and pediatric care, as well as improvements to existing facilities. Need and demand, however apparent, do not provide motivation sufficient enough to attract investors.

Investor-friendly legislation and initiatives which may include the introduction of a well thought out insurance system, more government partnership structures, technology-based healthcare initiatives such as telemedicine in remote areas and help with visas for specialist staff. One of the biggest healthcare opportunities involves working with developers who are creating new neighbourhoods and incorporating modern healthcare facilities. Evidence points to greater footfall and higher rents. The demand for better healthcare facilities is clear and the role for private investment to play in servicing this demand. In Nigeria the attempt to reach a bed-to-population ratio in line with the global average would require 32M sqm of new medical facilities, representing an investment of more than $82Bn.

In 2001, all 54 members of the African Union committed to spend 15% of their state budgets on health. Few have met that commitment. Kenya currently spends $36 per person per year, or 7% of its budget, on health. According to WHO at $86 per person per annum governments of low-income countries can fund primary health care.

To stretch the healthcare budget, PHCs can invest in digital health, managerial innovation, and improve supply chains. This would ensure that the right products are available at the right prices and delivered to the right places at the right times. Experts however suggest that priority be given to the development of reproductive health centres.

General Notes

  1. Yields will favour operational real estate having development and business income. Example -Student Accommodation, Entertainment Centres (Family Entertainment Centres, Lounges, Co-working.
  1. Construction costs to rise by mid-year as development activities rise.
  1. More international entrants in retail, hospitality and proptech.
  1. Finance bill once operational to favour indirect real estate investment including REITs amongst other factors pushing for REITs.
  1. Recapitalisation of mortgage banks and insurance companies to create traction in those sectors which have positives for real estate.
  1. While Government spend on housing is budgeted to reduce (20%), activities of agencies like NMRC and FHF are expected to ramp up.
  1. A general shift from HNI-led market to a middle-income-led market has begun, a de-focus on oil & gas, to the real sector (Entrepreneurs, investment bankers, technology, agriculture, influencers, entertainers etc.)

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