Real Estate: Declining Credit Reflects Underlying Weakness


Thursday, December 12, 2019 01:40 PM / By CSL Research / Header Image Credit: CUinsight

According to the data published by the National Bureau of Statistics, commercial banks' credit to the real estate sector dropped by 17% y/y to N588.7bn in Q3 2019 from N710.2bn in Q3 2018. The data also revealed that the real estate share of banking sector credit fell to 3.62% in Q3 2019 from 4.56% in Q3 2018.

We believe the decline in the credit channeled to the real estate sector is reflective of the underlying weakness in the sector- since the economy witnessed recession in 2016, the performance of the real estate sector has been uninspiring with the sector recording just one positive growth (0.93% in Q1 2019) over the past 15 quarters (Q1 2016-Q3 2019).


In our opinion, the chief contributor to the lacklustre performance in the sector is weak disposable income among consumers which has continued to undermine the demand for housing.  The impact of this is evident in the growing number of unoccupied houses in high-brow locations across the country particularly in Lagos and Abuja. Consequently, the attendant reduction in rental income would mean that real estate developers will be unable to recoup their investment, hence the relcuctance of banks to extend credit for property development. On the other hand, the high cost of obtaining mortgage financing has also been a major deterrent to middle income earners, majority of whom now opt for rented apartments. 


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Looking ahead, we believe commercial banks will continue to limit their exposure to the real estate sector considering the bottlenecks hindering the sector's performance. That said, we believe the reduction in the cost of credit triggered by CBN's regulatory actions may spur significant demand from the upper echelon of the middle class consumers who currently opt for expensive rental payments.   

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