COVID-19 and the Real Estate Market in Nigeria

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Wednesday, July 22, 2020 / 11:45 AM / by FDC / Header Image Credit: The Guardian Nigeria

 

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The real estate sector, a lagging indicator, has yet to catch up with Nigeria's economic recovery from the 2015/2016 recession. In the last four years the real estate sector contracted by an average of -4.48%. The sector is facing both demand and supply challenges. On the demand side, challenges range from dwindling consumer disposable income and suboptimal mortgage services, among others. These have affected the home ownership rate in Nigeria (25%) which pales in comparison to ownership rates in peer countries such as Kenya (75%) and South Africa (56%).

 

The supply side of the market is facing its own unique trials. A primary difficulty is the absence of government intervention in and attention to the sector. . Compared to agriculture and manufacturing, which have received government interventions, the real estate sector has received only residual intervention.

 

In the recently launched Economic Sustainability Plan (ESP), the FGN has clearly articulated plans for sectors such as aviation, agriculture and manufacturing with little to no mention of the real estate sector. In the recently launched Economic Sustainability Plan (ESP), the federal government (FGN) has clearly articulated plans for sectors such as aviation, agriculture and manufacturing with little to no mention of the real estate sector.

 

COVID-19's impact on the Real Estate Market

The pandemic has disrupted life and performance in most sectors. Some have been lucky to have the capacity to withstand the shocks. The telecommunications sector, for instance, has been the bright spot during the pandemic as business owners and individuals rely on technology for meetings and milestone celebrations. Other sectors, such as aviation, education, and trade, have crashed under the weight of the pandemic. Social distancing guidelines have affected their ability to conduct business and resulted in a significant loss of revenue.

 

Unfortunately, the real estate sector is among the significant losers of the current crisis. The impact of the pandemic on the real estate sector is unique in that it is not felt immediately by key stakeholders. The sector is a lagging indicator, which means that it can confirm long term trends but not predict them. The fragmentation of the sector means that different sub-sectors will feel the pinch of the virus differently than others. However, one common factor is that all sub-sectors will be negatively affected.

 

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The New Normal for the Real Estate Market

In a post-pandemic world, virtually all sectors will have to reinvent themselves if they are to have any chance of surviving the tide. The real estate sector is not excluded. There are two trends that will have an impact on the sector adjusts post-COVID:

 

1. Virtual reality: Before COVID-19, the idea of 'proptech' was gradually gaining traction in developed economies. Simply put, proptech is the application of technology to different aspects of the real estate lifecycle. Since COVID-19, property developers are being forced to adopt virtual tours to comply with social distancing guidelines. For Nigeria, adoption of technology within the sector may be hindered by our low broadband penetration.

 

2. E-commerce and the retail sub-sector: E-commerce is currently a bright spot of the pandemic. Malls have been replaced with online marketplaces forcing even more brick and mortar stores to close shop. While this trend is good for consumers and retail businesses, it will have an adverse impact on mall owners and occupants alike as the pressure to shut down brick and mortar shops will grow.

 

Federal Government's Intervention in the Sector

Before the pandemic, there was a call for the government to get more involved in the real estate sector as it didn't bounce back from the 2015/16 recession. Now, the sector has a limited chance of surviving the tide without appropriate and adequate government intervention.

 

A good starting point for the FGN is to develop its mortgage financing structure. As more consumers record job losses, their willingness and ability for home ownership dwindles. Easing the financial strain from potential homeowners involves developing schemes that cater to a diverse target audience. Poland, for instance, has introduced several credit schemes such as "Family's Own House" which was targeted at married couples and single parents and increased home ownership in the country. For Nigeria, the target should be reaching the Nigerian population using different schemes rather than a one size fits all.

 

Another area for the government to regulate and monitor closely is tenancy agreements. Many landlords in Nigeria are known for their unlawful terms and frivolous charges that need to be curbed by the appropriate regulatory authority.

 

The real estate sector is a vital part of any economy. The 2008 global financial crisis was triggered by the housing crisis which confirms the sector's importance. It is time for the Nigerian government to regulate and intervene frequently in the real estate sector if the sector is to have any chance of exiting the negative territory.


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