Concerns over effect of naira depreciation on real estate industry

The real estate and construction sector have continued to grapple with multiple effects of depreciation in the country’s naira value, as cost of raw materials, labour and transportation and contracts skyrocket.

But despite the naira hitting an all-time low of N810 against the dollar, Nigerians are hopeful of a silver lining, as a weaker naira against the dollar makes investing cheaper for Non-Resident Nigerians (NRNs) and foreign investors.

As of last week, naira continued to lose its value at the current exchange rate of about N827 to the Euro and N976.72 to British Pound sterling at the parallel market. The development has thrown up socio-economic effects in the real estate industry at both the production and consumption levels. Over 60 per cent of building materials used in the production of buildings is imported.

The continuous naira depreciation has also impacted the cost of borrowing to finance real estate projects and interest rate, which is about 30 per cent. The ripple effect is further seen in the cost of labour deployed in housing production as the majority already adjusted wages.

Nigeria’s yearly inflation rate accelerated for a sixth month at 24.08 per cent in July 2023, which is the highest since September 2005, compared to forecasts of 23.7 per cent.

Stakeholders said the prevailing circumstances have added to the cost of construction amid low disposable incomes, limiting Nigerians’ capacity to own their homes or pay for rentals.

The experts say naira depreciation has crippled the property market as many developers are recording low patronage even as they have to review initial transaction agreements for ongoing developments.

President, Real Estate Developers Association of Nigeria (REDAN), Dr. Aliyu Wamakko, said the nation is not where it was about four years ago as the recent depreciation of naira has greatly reduced the purchasing power of the people.

“It has impacted the sector tremendously because even some of the building materials have to be imported and the price keeps increasing daily with the instability in the exchange rate. So, making profit or breaking even is a problem. There is also low purchasing power among Nigerians and everybody is banking on things getting better,” he said.

According to him, the solution lies in the hands of the Federal Government to stabilise currency fluctuations through regulations, as well as provide affordable finance to ease and improve construction activities across the country.

He advised the government not to involve itself in housing production but to reduce interest rates on loans given to the private sector operators to create more employment.

A professor of Estate Management, University of Lagos, Austin Otegbulu, said when naira depreciates, it affects returns on investment and purchasing power of the people.

He said the development will discourage foreign investors in the real estate market and distort the cost of capital. “This naira depreciation affects income on investment and discourages new properties coming into the market because the materials used for most of these properties are imported.

“The Central Bank of every country strives always to enhance or stabilise the value of their country’s currency through its fiscal policies. In Nigeria, we do more of consumption than production; our foreign exchange status has much influence over purchasing power and standard of living. We import fuel, machinery, processed food, clothing, cars, and industrial raw materials.

“In the light of this, a declining value of the naira in relation to the dollars is a major source of inflation. It has a spiral effect and can trigger hyperinflation, not just inflation. Over the years, property prices and rentals have been on the increase so the question to be asked is whether it has been increasing in real terms or nominal terms,” he said.

The estate surveyor and valuer said depreciation in the value of naira, as well as inflation will impact real estate and is capable of distorting projections in property investment.

However, he suggested that rational investors must consider inflation risk in investment decisions as it can trigger an increase in lending rate, labour cost and increase cost of construction without a corresponding increase in property value.

In a report by Northcourt real estate entitled: ‘The Short, Medium and Long-Term impacts of recent policies on the Nigerian Real Estate Markets’, the Chief Executive Officer, Mr. Ayo Ibaru, observed that asset repricing will begin to factor in naira’s devaluation in the short-term, even as diaspora investment in real estate market will slow.

He said there will be price reviews for off-plan sale agreements as a consequence of the increased prices. “The price increase resulting from the foreign exchange policy change may move low to mid-income apartments and further into the realms of unaffordability,” Ibaru added.

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