June 1, 2018/Cordros Report
Since exiting a 5-quarter long recession in Q2-17, the Nigerian economy has posted positive GDP numbers, albeit at a modest pace. Apart from the overall growth rate lagging the 5% average recorded in the pre-oil crash era, (1) per capita income remained pressured amid rising population growth rate while (2) non-oil sector fragility persists. For instance, the spread between oil and non-oil sectors growth since the second quarter of 2017 has ranged between 3.1% to 23.8%, in favour of oil output. Clearly, the need for structural reform cum concerted fiscal injection in the domestic economy cannot be overemphasized.
In the midst of the non-oil sector weakness in Q1-18, our attention was largely drawn towards output growth in real estate, which came in at a disappointing -9.4% y/y – largest contraction since Q4-15. That extended the sector’s recessionary trend to the ninth quarter in a row.
A disturbing trajectory, no doubt, particularly considering the role of real estate in generating economic capital for business and industrial development. As a percentage of GDP, the contribution of Real Estate averaged 8% between 2013-2015, before dropping to 7% over 20162017, and way lower at current 5.6%.
The economic significance of real estate was further revealed in a 2015 report by international real estate adviser, Savills, with global property value estimated at USD217 trillion (2.7 times of world’s GDP), circa 60% of mainstream global assets. In terms of importance, that represents a form of store of national, corporate, and individual wealth.
Scrutinizing historical growth and activities in the sector, we found the drivers of the current underperformance to include high vacancy rate (particularly in highbrow areas), rising cost of building, and consequently elevated prices of properties.
The high vacancy rate is attributable to the significantly pressured purchasing power amid NGN exchange rate depreciation (-13% to NGN362.9 in Q1-18, from NGN315.0 in Q1-16) and inflationary pressure.
For insight, headline inflation rate accelerated to 18.7% in January 2017, from 9.6% in December 2015, before moderating to 12.5% in April 2018. The implication of the aforementioned for building materials prices have been far-reaching, with cement price, for instance, at NGN2,570/50kg bag over Q118, 2.6x the NGN1,000/50kg bag obtainable in 2014.
While we share concern over the lingering weakness in the real estate sector, we are more optimistic about the tide turning in the near-to-medium term. Our expectation is built on Nigeria’s better macroeconomic prospect in the medium term, and more specifically, recent efforts at ramping up infrastructural spending which could potentially improve the standard of living and open up new hot spots in the real estate sector.
On housing, we highlight ongoing initiatives by the FGN to ramp up housing supply via mass housing projects (expected to deliver 2,736 units) across 33 states in the country. That is in addition to other efforts at the state level to bridge the national housing deficit gap – requiring USD360 billion, according to the Centre for Affordable Housing estimates. For instance, Lagos state is partnering with the Nigeria Mortgage Refinance Company (NMRC) to deliver 20,000 housing units by the end of the year. Also, Kaduna state is currently pursuing an affordable housing programme, in addition to passing a law to establish the State’s Mortgage and Foreclosure Authority to facilitate speedy foreclosures on defaulters to its home-ownership scheme.
The cumulative impact of the aforementioned could be positive for office occupancy rate, particularly for businesses requiring small-sized offices, as developers could look to converting residential properties to office use at competitive prices. More so, the demand for office space is expected to receive a boost from the anticipated improvement in the ease of doing business, following the recent amendment to the Companies and Allied Matters Act (CAMA) including faster and seamless business registration process.
On land, recent progress with reforms bordering on land accessibility and titling is positive, although process timeline needs to be improved for lands owned by the state governments.
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