These are unprecedented times, fraught with uncertainty. Uncertainty portends great risk but the reward for risk is often higher returns for those bold enough to study, challenge and overcome the risk.
In Nigeria, we were already grappling with declining oil prices from the heady days of $95/barrel in 2012 to $63/barrel by November 2019 when COVID came out of nowhere and blindsided us, further worsening our economic prospects.
The property market in Nigeria, like in other parts of the world will be affected by the looming recession that is the economic fall out from COVID 19. The extent to which our economy will be affected will be dependent on variable scenarios that may present such as the full extent of the pandemic on our health system and the duration of the lockdown, a lot of which is difficult to predict at the moment.
We cannot address all the possible scenarios here and are assuming a relatively mild to moderate scenario considering that China will be back to work soon and that the numbers of casualties here may not be as high as in other developed countries (even if not entirely accurate), that we enjoy the benefit of the urgent global search for a cure, and finally, that we are back up and running along with the global economy by the 3rd quarter of the year.
We have looked at 3 main areas that will impact our real estate market in the short to mid term; the Lockdown, Supply chain disruptions, and most importantly, Demand.
Lockdowns and border closures have restricted travel. COVID 19 has meant that as many businesses as possible have had to move their operations online. While virtual viewings are available, physical viewings are not currently taking place. Real Estate is slightly peculiar because with the exception of Off-plan sales, people want to also physically visit the homes that they are interested in purchasing.
Supply chain disruptions will also affect the Real estate market here especially as we rely so heavily on materials from China, with some input from Italy, Turkey and Spain. With global lockdowns, and productivity at an all time low, deadlines will be pushed back, and this will affect project cashflow and Project delivery dates. We expect that China will be open for business soon and this should ease the flow of materials, but this will take some time as China has to ramp up productivity, and logistics will also require co-ordination as lock downs continue in other parts of the world.
This is where the real issues lie. In the short term, it is anticipated that with oil prices as they currently are and the rest of the world going into a recession, we are likely to experience a decline in our GDP of between 2.5% to 3.4% in our best case scenario (Mckinsey Global Insitute). If the COVID 19 pandemic leads to a further spike in casualties here in Nigeria, further stretching our struggling health sector and necessitating containment measures such as extended lockdowns, we will see job losses, loan and mortgage defaults, businesses fail and a general contraction in our economy.
For the Real Estate market, access to finance will be difficult and our already high mortgage rates may seem even more unattractive as people avoid ‘unnecessary’ debt. Any incentives by the federal government are likely to be in favour of businesses supplying essential services. As far as job retention, there is currently no talk of paid furlough like in some other countries, and VAT still remains 7.5%.
External economic factors will also impact our Real estate market negatively as the global economy reels. Nigerians in the diaspora will be amongst the number of job losses and this will impact negatively on their ability to make Real estate investment decisions in Nigeria. Oil prices are not expected to recover beyond $40 a barrel by the end of 2020, if that at all. The petroleum sector accounts for 90% of Nigeria’s Foreign exchange revenue. Low FX revenues will impact our Foreign exchange increasing Foreign exchange risk and discouraging FDI generally. In addition, the CBN will be forced to limit the number of Businesses that will get allocated Foreign exchange, leaving even more companies scrambling for FX on the parallel market.
Consequently, in the short term it is likely that demand will contract and home purchases will be put on hold while Commercial space vacancies will increase as the international economy continues to contract.
Real Estate is an emotive decision, whether you are in it as an investor speculating for short or long term capital gains/rental yields, or as a home owner buying your dream home. There is no doubt that there is currently fear and uncertainty accompanying COVID 19, laced with tales of apocaplytic outcomes. Unfortunately, when people are afraid, they are less likely to spend (unless it is spending that isolates them from their fear) and are more likely to go into savings mode, the effect of which is to stultify growth. This, coupled with the reality of job losses and a contracting economy will weigh heavily on the real estate market in the short term to mid -term.
There is absolutely no doubt that we will all take a shaving where our real estate investments are concerned and some more than others. This may not be the most prudent time to rush off and sell all that you own in a COVID 19 inspired apocalyptic panic. Look at your portfolio properly and decide what needs to go and what still has intrinsic value and should be retained. You will need to ride this storm out if you can afford to. It may be a good idea to watch where things go for some time and then diversify your portfolio with better quality investments, and also buy relatively cheaper properties as they come into the market. For those with time, cash and a steady hand, COVID 19 presents an opportunity to make excellent investments. In the event that the “apocalypse” as peddled on social media is still a few decades or centuries away, you would at least have made a few smart investment choices in the meantime.
Generational wealth is the only certain way to consolidate real wealth. Real estate is an inevitable component of generational wealth and you have to stay focused and resolved during these times so as not to lose sight of this. Take advantage of the new opportunities that will become available for you to grow and diversify your Real estate Portfolio.
We are available to provide helpful and proactive Real Estate advice at this time. Please contact us if you have any more questions concerning some of the issues raised here or if you would like some help with your Real estate investments.
Stella N. Oguine