Why the Real Estate Market has Changed Forever

Why the Real Estate Market has Changed Forever – The most difficult effort in real estate used to be getting the money to invest. Thereafter, you sat back to enjoy the capital gains if you bought land or rents with returns between 5% to 15% and to add icing on the cake, initial rents were paid two years in advance.  For owners of property in the high-end locations there was the additional comfort of hedging against inflation and currency fluctuations by receiving rents in foreign exchange. Tax? Paid for by the tenant. Fees? Settled by the tenant.  This was an investment with all the odds stacked in your favour.

Little wonder, investors piled into the market. There were the long term Landlords who sought good rental returns. The speculators, who held land and sold when the values moved high enough to warrant selling.  Also we had the developers, who conjured large estates from bare land, mini-estates within larger ones or single dwellings. In the last ten years, the term ‘ Estate developer’ has joined ‘Lawyer’, ‘Banker’, ‘Doctor’ as a profession or business. The new styled developers pushed the boundaries of real estate. They moved from the regular locations to areas like Yaba, Ebute Metta, Ijora etc. The came up with ‘towns’ with first class services like Northern Foreshore, NICON Town. They brought new marketing techniques like ‘buy one, get one free’ of Lekki Gardens. Even manufacturing companies like The Churchgate Group pivoted from textiles to real estate

The real estate boom covered all aspects of the built industry.  While residential estates were favoured, office blocks especially of the Grade A status, hotels and shopping malls also had a look in. Land , especially in the prime locations was not sufficient so massive sandfilling  was done not only on the placid Lagos Lagoon but the riotous waves of the Atlantic Ocean were tamed to create the Eko Atlantic City. But was there demand for all these properties?

Real estate has always been seen as immune from the ups and downs of the economy. Stockmarket crisis, banking upheavals,  currency fluctuations seemingly had no effect on the impervious market. There was always demand – if you built it, they will either buy or lease it. This was true…..as long as supply was restricted. Over the last ten years, we have seen land, which is ordinarily a finite resource, expanded. It was expanded physically by sandfilling to create new estates as pointed out. It was also expanded by the sale of restricted stock – Federal Government owned land in  GRAs like Ikoyi, Victoria Island, Ikeja GRA, Apapa GRA etc. Land which was restricted to Government use fell into the hands of the developers. Land was also extended by a liberalised Physical Planning regime which allowed low density locations like Ikoyi to become high density. Lack of enforcement of planning laws also ensured that  in locations like Lekki Phase 1, land was built up to the hilt and single residences converted to multiple units.

As far back as five years ago, strategic reviewers of real estate had started to point out that there was a problem of over supply. Many chose to ignore it, celebrating individual sales and lettings as though they were the norm rather than the exception.

Today it is generally accepted that there is a supply issue in the high end locations of Ikoyi and the upper middle class locations of Ikeja GRA and Lekki. This interestingly has not resulted in a slowdown of construction activity or a reduction of price. So is real estate truly impervious to economic rules?

A review of the corruption cases will show how ill gotten gains have fuelled the market with the resultant effect that the values do not reflect the true state of the market. From bank loans which were not to be repaid back and proceeds of corrupt activities, real estate found capital that was not responsive to the vagaries of the economy.

A triple whammy of the state of the economy, anti-corruption war and vigour of the Asset Management Corporation of Nigeria (AMCON) against the recalcitrant debtors will cure the market of the pervasive influence of the ‘hot’ money in real estate investment.  It also means that there will be even more supply of building stock when all the law suits of properties involved in the ant-corruption war and AMCON are concluded.

With corrupt money sources reduced, developers have come face to face with the reality of a very shallow market. According to the Director of Research and International Relations at the Nigeria Deposit Insurance Corporation, NDIC, Alhaji Mohammed Umar,  only two percent of bank accounts in the country have more than N500,000 credit balances. Speaking at the  2016 Businessday Capital Market Development Annual Conference in Abuja,  he said “indeed, Nigerians who have more than N500, 000 in their accounts are just two per cent. What we found is that this two per cent Nigerians have 90 per cent of banks’ total deposits. Look at that – two per cent Nigerians own 90 per cent of total banks deposits, while the remaining 98 per cent have just 10 per cent of total deposits.”

This reality has been felt by tenants in high end Shopping Malls that have been developed on the assumption that a 180million population and ‘growing’ middle class are available and willing and able to shop ‘until they dropped”. Mall tenants have found to their chagrin the brutal reality of these figures and have voted against the high rents of the mall by leaving. Faced with empty shops and high maintenance costs, the malls have turned to charging for parking and other fees as sources of income.

Like the mall owners, Developers and Landlords have changed the way they do business on the back of lowered expectations. It is now the norm to expect not only a deep discount on prices offered by developers but also a payment plan where the buyer can pay over several months as well. We expect the period for repayment to extend as developers virtually start to give ‘mortgages’ on their houses to sell their houses within reasonable periods. Landlords have also succumbed to the ‘buyers’ market by accepting one year’s rent instead of the customary two years. What legislation has been unable to do, economics has sorted out. In the high end locations, the topsy-turvy nature of the exchange rate has resulted in Naira being the currency of choice in determining the value of rents.

Also read: Has the 2011 Tenancy Law made any impact?

With the impact of the war against corruption yet to be fully felt, the onslaught against bank creditors and continuous supply of property, it should be expected that the market would go through even further changes. We expect to see smaller units in  terms of construction, aggressive marketing which may result in longer payment periods (and innovative legal documentation to cover the new arrangements)   and more ‘concessions’ given to tenants. For investors in real estate, expectations will have to be critically reassessed and there will be more to investment than simply raising the cash to buy the property.