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Economy moves without real estate, as sector contracts -3.53% in Q2 - BUSINESSDAY

SEPTEMBER 13, 2017

The recent revelation of 0.55 percent growth in Nigeria’s gross domestic product (GDP) after five straight quarters of negative growth shows the country’s economy has moved in a positive direction, but real estate is not part of this positive shift.

The Nigerian Bureau of Statistics (NBS), in its recent second quarter 2017 GDP report, announced that Nigeria had exited a 13-month economic recession, following the GDP growth, which it explained was made possible by the growth and contribution of non-oil sectors of the economy.

Agriculture, which contributed 19.31 percent to nominal GDP is leading the pack of non-oil sectors that lifted the economy from the abyss of recession. Others are manufacturing, trade and services which recorded 15.97 percent (year-on-year), 4.82 percent and 59.05 percent growth respectively.

Though the construction sector grew by 17.57 percent in nominal terms (year-on-year) during the period under review, showing an increase of 13.80 percent points, compared to the rate of 3.77 percent recorded in the same quarter of 2016, the real estate sector contracted by -4.40 percent.

More than many other sector of the economy, real estate was hard hit by the economic recession, leading to an oversupply and high vacancy rate in both residential and commercial office buildings, high rent payment default, reduced volume and value of investment.

Udo Okonjo, CEO/Vice Chair, Fine and Country West Africa, estimates the vacancy rate in the residential segment of the sector at 50 percent, blaming it on a combination of economic down turn and failure of government to resolve issues of title documentation and infrastructure.

In the latest edition of the quarterly economic review by Financial Derivatives Company (FDL), Bismarck Rewane, the company’s CEO, says residential vacancy factor index (VFIX) in the real estate market is expected to increase to 173 percent this year, up from 100 percent in 2015, the base year.

VFIX, Rewane explained, is an indicator of the state of the real estate markets in the upper class neighborhoods of Lekki, Victoria Island and Ikoyi which are areas proximate to the central business district (CBD) or downtown areas of the Lagos metropolis.

Analysts are worried that this sector, with its growth potential, is lagging in an economy that is trade-driven with significant volume of business activities. “It is a big surprise that real estate could lag so much behind other sectors”, says Femi Madamidola, an estate manager, recalling the sector’s good showing when the GDP was rebased a couple of years ago.

Among other things, the GDP rebasing exercise revealed that real estate was the sixth largest sector, after crop production and distribution, oil and gas, information and communication telecommunication.

It was discovered that the sector grew 8.7 percent in 2013 compared to GDP growth of 7.4 percent; its average growth was 6.9 percent between 2011 and 2013 while GDP average growth was 6.4 percent. It was found out further that the sector was the fastest growing, and was about 40 percent larger than it was previously thought to be.

Though in nominal terms, the sector grew by 6.17 percent in the second quarter of 2017 which is 4.05 percent points higher than the growth recorded for the same period in 2016, this was -4.40 percent points lower than the growth in the first quarter of the year. Again, the sector’s contribution to nominal GDP in the second quarter of 2017 was 7.98 percent, which was also lower than the 8.62 percent reported in the same period in 2016.

“What we have seen is a downward growth trend”, Madamidola noted in an interview, saying that this could be explained in the decline in the household, individual and institutional purchasing power, leading to a significant drop in the volume and value of investment in this sector.

But Tolu Sokenu, a principal at Actis, a private equity investment firm, believes that there is still market for good quality, well located and appropriately priced real estate products. Sokenu further observes that, “the empty houses you see in prime locations in the country, especially Ikoyi, Lagos, are owned by investors who are not for yield. Such buildings were not built with any debt or bank facility.

“If they were, the owners would, one way or another, find buyers or tenants for them. In the developed markets, when there is a situation like what we have now, landlords would lower their rents to retain old tenants and attract new ones, but we don’t see that happening here”, he noted in an interview.

 

BY   CHUKA UROKO

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