Nigerian investors find safe heaven in US property market -Lose in Dubai


Investadvocate in its usual manner sought to find out more about the effect of the Global Financial crisis on the Real Estate/Mortgage sector of the Nigerian economy.


In this interview with PETER OBIORA of investadvocate, Kingsley Snomi, a Legal Practitioner/Real Estate Consultant at Ajiboye, Snomi & Associates discusses issues relating to the Degree of impact of the global financial crisis on the Mortgage/Real Estate sector in Nigerian, Post Sub prime mortgage and the global financial crisis, Prices of homes at rock bottom prices at the global stage and Nigerians losing 73% of their investment in the Dubai property market.


Other issues discussed include way to address the Nigerian mortgage/Real Estate problems, efforts of Real Estate practitioners in solving the problems, Central Bank of Nigeria’s reform and it’s effect on the mortgage industry, the current crisis in the Nigerian Stock Exchange (NSE) and advice to investors to consider the Real Estate sector, the proposed housing projects by Ajiboye, Snomi & Associates to provide homes for Nigerians and way forward for the Real Estate Sector in Nigeria. Excerpts:



Post Sub prime mortgage and the global financial crisis



It was a fundamental issue globally, like I always affirmed, the mortgage sector in Nigeria is not vibrant; but the reason why  the effect of the Sub prime mortgage and global financial crisis was so much in Nigeria is for the simple reason that the world is now a global village; everything is interwoven.



Thus, as the major financial players were having problems, especially in Europe and America, they have to recall their funds which were invested in other countries; like Nigeria. Even though our mortgage institutions were not having problems in their operations; due to the fact that the global players were recalling their funds, it created a natural liquidity squeeze. Everybody was aware of the aftermath. Nigerian Banks were not immune; because they were also financing housing projects in Nigeria. As we speak today, most banks are not financing housing projects or anything else.





The subprime mortgage crisis is an ongoing real estate crisis and financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States , with major adverse consequences for banks and financial markets around the globe.


Approximately 80% of U.S. mortgages issued in recent years to subprime borrowers were adjustable-rate mortgages. After U.S. house prices peaked in mid-2006 and began their steep decline thereafter, refinancing became more difficult.


The crisis began to affect the financial sector in February 2007, when HSBC, the world’s largest (2008) bank, wrote down its holdings of subprime-related MBS by $10.5 billion, the first major subprime related loss to be reported.



As of August 2008, financial firms around the globe have written down their holdings of subprime related securities by US$501 billion.The IMF estimates that financial institutions around the globe will eventually have to write off $1.5 trillion of their holdings of subprime MBSs. About $750 billion in such losses had been recognised as of November 2008.



On 18 February 2009, U.S. President Barack Obama announced a $73 billion program to help up to nine million homeowners avoid foreclosure, which was supplemented by $200 billion in additional funding for Fannie Mae and Freddie Mac to purchase and more easily refinance mortgages. The plan is funded mostly from the EESA’s $700 billion financial bailout fund.


Source: From Wikipedia, the free encyclopedia



Degree of impact of the global financial crisis on the Mortgage/Real Estate sector of the Nigerian economy.



We do not really have mortgage in Nigeria , the institution is still at its developmental levels. The liquidity squeeze which came as a result of the global crisis affected a lot of companies that was into Real Estate. Most of these companies get facilities from the Banks; therefore, when the banks were no longer funding, these companies failed to complete the projects they had. This was the reason, the prices of houses at the Lekki axis came down to almost 60 to 100 percent. Properties that were sold for about N120 million came down to about N16 million in the review period.



However, from our perspective, the decreases in prices of homes at this particular point in time were actually artificial. I affirm that they were artificial because when the uprising in the Niger Delta region of Nigeria was at its peak, all the expatriates formerly based in Port Harcourt , had to relocate to places like Lekki in Lagos Nigeria and flying into the Niger Delta region to do their work on a daily basis and return to Lagos . This resulted to a high demand of houses in Lekki area of the State. When practitioners in the sector discovered these demands for homes by the expatriates, they began to acquire lands to build homes; believing that such demands would continue.



Therefore, when the liquidity issue came up, they couldn’t continue and coupled with the reduction in demands for homes in that area. However, at the Mainland area of Lagos, prices of homes didn’t change; because they weren’t artificial in the first instance. This was the reason prices are still on the high side in Mainland areas of Omole and Shangisha; because the prices of houses in these two areas had always been realistic.



At the end of it, the global financial crisis had an effect on Nigeria’s Real Estate/Mortgage sector; but not as deep as that of the Nigerian Capital Market. At this particular point in time, there were some issues plaguing the Nation’s Stock Market which eroded investors’ confidence; thereby making people to look at the Real Estate sector of the Nigerian economy. The interest in this sector absorbed the shock of the global economic crisis that it didn’t have much effect on it in the long run.



Prices of homes and rock bottom prices at the global stage



I insist and affirm that most of the prices of homes; especially in Europe and America were artificial. What transpired was that the mortgage institutions in those places were pleading with people to take mortgage facilities to acquire homes. Mortgage companies in these countries were giving out facilities that the beneficiaries could not meet up in terms of repayment.



Apart from the above point, the flexibility of  mortgage also contributed, for instance, if an individual takes a mortgage for a period of 20 years and pays certain amount of money as repayment on a yearly basis, somebody may approach that person and propose buying off the mortgage, they give you the equity which you had paid initially, the person may begin a new mortgage; meanwhile the equity that was repaid to the individual; which is a lump sum of money, may be diverted into things that were not planned before. With this trend, it was discovered that people were not able to repay their mortgages and were all defaulting.



These people may default in their agreement with say financial institution A, which might on its own part, be indebted to another company, the issue became a vicious cycle and at the end of it, people were not able to pay back their mortgages and institutions began collecting their properties back; which the people willingly relinquished.



At this point in time in the Western World, there were so many houses in the Market and people cannot afford to buy them; thus the prices must come down. Institutions have so many houses to sell and people do not have the funds to buy. I was in Atlanta , United States ( US ) in May 2010; they were begging me to buy houses for about $50,000 to $100,000 in prime areas of the city; which cannot buy a property in Ogba area of Lagos . The prices were so low; but people are not buying, so Nigerians who have funds were going there to invest in houses by acquiring them; because the prices of houses there is at rock bottom.



I affirm that it is a nice idea and Nigerians should take advantage of these opportunities, the world is a global village and investors should put there money where they can get good returns on their investments. Gone are the days people consider geographical areas before investing. If there is a good business in Malaysia , you go and invest; but you have to make a wise investment.


Some years back, a lot of Nigerian went to Dubai , United Arab Emirate (UAE) to invest in the property business; but the global financial crisis has made them loss money. I was also in Dubai in February 2010 trying to recover some funds for my client, all the companies in the place made it difficult for us to recover any money.



Nigerians and 73% loss in Dubai property market



Most Nigerians that invested in the Dubai property market have lost about 73% of their investments in that country; because prices of houses in the area came down drastically, most of the Real Estate Companies are not able to meet their obligations. Properties that they promised then would be ready in three years; most of them are still at the foundation stages. And people made their plans based on these projections. Like I affirmed earlier, if you go back to them, they will tell you that you cannot get your money back. I can confirm to you that people still prefer investing in real estate in Nigeria to other places; because in Nigeria, the sector has a way of absorbing financial shocks; unlike in the developed nations; where once there is a tilt, the whole system is affected due to the way things are arranged.



For the 73% loss in Dubai , properties that were bought for about $300,000 in year 2006 now in year 2010 worth $80,000. Apart from this, when they were acquiring these properties, they didn’t just buy; there is a way these things work over there. They begin to sell right from the planning stages; you will be told that maybe in the next three years it will be ready.



So most of these investors had projected that from years 2006/2007, they will start to reap on their investments by years 2009/2010. Some of these projects right now have been abandoned. However, a few of the good companies are beginning to start afresh, thus, if things begin to pick up again and the value of these properties appreciates, the question is what about all the returns lost previously, it is quite huge; just like what transpired in our Capital Market in the last one and half years.



Way to address the Nigerian mortgage/Real Estate problems



It is about leadership and political will, our leaders are not doing the right thing, they are interested in acquiring houses in the choice areas allover the globe and not interested on how the average Nigerian puts a roof over his head. There are so many proposals made to the them by experts on this issue, but the government does not have the political will to implement them; because these leaders do not care. Even when they allocate funds; no matter how merger for mortgage companies, our government cannot ensure that these funds get to these institutions packaging mortgages for the citizenry.



Take for instance in Dubai were they have visionary leadership, they try to make sure that things are not difficult for their citizens by making sure they get every good thing of life with ease. Such things as houses, education and so on. You cannot see a citizen of UAE that does not have a house of his own. But for our leaders they are not interested; even when they do housing projects, they do the ones that they alone can afford to buy and subsequently let same out.



These are some of the reasons our mortgage institutions are not working out, people cannot access mortgage facilities; everywhere else in the world everybody that has a fairly good job should be able to go to the Bank and access a mortgage facility; but in Nigeria it is not so. When you want to buy from a third party in Nigeria, you are expected to pay all the money and if you calculate your salary from the day you started working, it won’t buy you the house and the government is not doing anything at all, until we are able to get leaders who have the interest of their citizens at heart before these things will work.


Real Estate practitioners and solution to the mortgage problem in Nigeria



A lot of practitioners have done a couple of things as to this regard, by giving people the opportunity to buy and pay instalmentally, however, there is not much they can really do; there are so many factors militating against their progress. One of these is the Land Use Act, all properties belongs to the government; even when you get from third parties, the process of getting consent, Certificate of Occupancy (C of O), the fees you pay and other bottlenecks, by the time you do all that, you will discover that your cost as a player in the industry is so high that you would have defeated your purpose of making the cost of your houses affordable for people to buy.



Also, when you approach the government for land; which is the original idea behind the Land Use Act, government should give people land to develop either jointly or individually, you will be denied all these; with the exception of Abuja the Federal Capital Territory (FCT) where they have tried a little. But even at that, most of the things they do there, is giving same to people at commercial rates; meaning that at the end of it, you can only acquire the little you can afford.



Central Bank of Nigeria’s reform and the mortgage industry in Nigeria



Most of us practitioners in the industry were very hopeful at that time that the reforms began, we thought it would make a lot of impact, but up till now we are not seeing much; though some Banking Analysts are affirming that it is too soon for us to begin to see the impact of the CBN on this sector; but I do not see it as too soon. The saying goes that the journey of 1,000 miles begins with a step, but from that one step, you know you are embarking on a journey.  I will affirm there is not impact right now and we are not foreseeing one in the near future.




The CBN in its bid to stabilise the nation’s financial sector June 2010 proposed an increase in the capital base of Primary Mortgage Institutions (PMIs) from N100 million to N5 billion.


Joseph Ajewole, Acting Director of Banking Supervision of the Apex Bank conveyed the ddecision to PMI Operators.


The proposed increase in the PMIs’ shareholders’ fund is the fourth in the history of mortgage banking in the country. The initial minimum share capital for PMIs was N5 million; and thereafter moved to N20 million and later to N100 million.


Another aspect of the mortgage reform is the cancellation of mortgage engagement in property management and equity investment in property development. Others are new prudential requirements that include capital adequacy ratio: Minimum 10% against risk assets, maximum equity investment holding of 25% of shareholders’ funds



On the current crisis in the Capital Market and take on the Real Estate


The Real Estate Sector has always being the place to put your money in, because it is real that is why it called “Real Estate” the Capital Market no doubt maybe suitable for long term investors; for any real investment though, it is Real Estate; while the Stock Market is just for mid-term funds; but if you want a lasting investment, it is the Real Estate.


Focus on Ajiboye, Snomi & Associates (Legal Practitioners/Property Consultants)


We have sold out most of the estates we developed; but right now, we are on the drawing board, we have again just acquired some land on the Mowe, Ogun Nigeria axis and negotiating for about 40 acres somewhere after Ajah in Lagos. We are going to concentrate on these areas between now and year 2011. We are willing to make a different by giving Nigerians affordable houses and we wish to actualise this by negotiating with those who supply building materials for us to be able to cut cost and achieve our objective. This is another problem players in the Real Estate sector face, like I affirmed earlier government policies. The Government came out with a policy in year 2008 which increased the price of sand in Lagos to about 200%; which affected the cost of building in the State; luckily this is now over, they have made a U-turn and are now giving out sand dredging licenses again and we hope that the prices of sand would come down. If we are able to minimize our cost, then we should be able to come out with houses that the average Nigerian can afford; which was the reason we chose these locations. These are our plans for now.


What are the house types in these projects?


We are looking at twin Bungalows and Duplexes, in the Bungalows, we are going to be constructing two and three bedrooms, while in the Duplexes, we are going to do three and four bedrooms respectively; this is for the low and middle income earners.


We would commence operations for these projects in November 2010 and once we start building, we begin to sell; all we will do is to come out with the actual costing and fix prices, so people that are coming at the early stages would benefit more; because the prices will not be the same when the houses are completed.


On packaging mortgages for those who will be interested in acquiring these houses, we are already talking with some of our Bankers on that; this is why we are going to start marketing the houses at inception; so that they can start to pay instalmentally. If you start paying at the beginning, you might make an initial deposit of $2,000 dollars and by the time the project is over; maybe in the next 12 months, you have virtually paid up everything, it depends on the level of commitment of individuals, we can handover the houses to people and they continue payment thereafter. We are working out the modalities and before the end of next month; all will be set for us to commence work.


Way forward for the Real Estate Sector in Nigeria


The way forward is for Nigerians to start holding their leaders responsible; though most of our problems are leadership based, if you look at the other countries that had worst crisis, they are all recovering; because they have sincere leaders. In the United Kingdom now, people are beginning to take new mortgages; though like I affirmed earlier, there was a time it was down; but now it is already picking up again. But in Nigeria , if we do not hold our leaders responsible, in a few years time, there will be nothing to look forward to anymore; because there is a big financial hole behind all these happenings and if they don’t start to work earlier to cover it up, all the efforts we are putting would just be in vain. It is not about economic theories anymore; because the policies are there, Nigeria has always had good economic policies; but if they are not implemented, it is just a waste of people’s time.









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