Thursday, September 09, 2021 / 09:18
AM / by FDC Ltd / Header Image Credit: Showbiz Cheat
The aggregate supply of housing in any market is usually a function of housing starts (new housing) and completion of the inventory of unfinished houses. Nigeria and Lagos in particular has a huge stock of uncompleted buildings, approximately estimated at 30%. In 2020, housing starts remained stagnant because of low-interest rates and the inverse relationship between interest rates and real estate values. Developers rotated their portfolios from financial instruments into other asset classes including real estate, thereby leading to an increase in the supply of housing starts. During the lockdown, rents remained flat and the growth in the real estate and construction sectors fell sharply. In Q2'20, the real estate sector recorded the sharpest contraction in the last 14 quarters to -21.99%. The construction sector also recorded a negative growth of 31.77% in the same period.
In recent times, we have noticed that developers have gone back to site but are constrained by the sharp rise in the cost of building and finishing materials e.g., aluminum windows, roofing sheets, iron rods and cement. Also, more companies have resumed physical work, thereby leading to an increase in demand for shared residential and office spaces. This has now triggered a decline in the vacancy factor in some areas, particularly on the island. Vacancy factor is defined as the number of empty houses compared to occupied buildings. For example, in a street where there are about 50 houses, if 10 are empty that means a 20% vacancy factor.
Real Estate Sector Breakdown
The real estate sector is a lagging economic indicator. This means that growth in the sector takes place after a period of sustained GDP growth. With a population of about 200mn, the house ownership rate in Nigeria is about 25% compared to regional peers like Kenya (75%) and South Africa (56%). It is widely believed that Nigeria has a housing deficit of about 17 million units. So far in 2021, as economic activities rebound, real estate has maintained a positive growth for two consecutive quarters, with its best performance in Q2'21 (3.85%). On average, the real estate sector has grown by 2.81% in 2021 compared to -9.3% in 2020.
Aggregate demand & supply trends of real estate
The demand for and supply of real estate is currently driven by a number of factors including:
Q3'21 FDC Real Estate Survey
Our survey this quarter revealed that the vacancy factor declined to 20% from 25% in Q2'21. This indicates an improvement in sector activities driven by increased investment as interest rates in the fixed income space declined. 364-day tenor t/bills have fallen by 295bps to 6.8%pa from its peak of 9.75% in April.
Challenges & Threats
Real Estate Sector Outlook
We expect the improvement in economic activities and low-interest rate environment to support the real estate sector growth in Q3. The demand for commercial real estate, especially office space, will continue to rise as more companies resume physical work. The demand for residential housing units is likely to fall as consumer disposable income remains squeezed. Luxury real estate like hotels will keep springing up in highbrow areas. However, there is an increasing need for more government interventions to address the housing deficit in the country.