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To Square a Circle by Northcourt*

To Square a Circle by Northcourt*

The Short, Medium and Long-Term impacts of recent policies on the Nigeria Real Estate Market

Fuel subsidy removal | Floating of the Naira | Lifting of FX restrictions | The 2023 Electricity Act

Below is an extract from the report…..

Short Term Impacts (Present – 1 year)

Spike in construction costs

The removal of fuel subsidies will result in changes in the cost structure of the built environment.

Increased pump prices will directly lead to the overall cost of construction as some site equipment/machines are fuel-powered. Labour costs will also be hit as higher pump prices mean increased logistics costs and daily wages. A large proportion of construction projects rely primarily on road infrastructure to transport building materials to the site or dispose away debris. Previously made housing development budgets will likely be obsolete at this time as the heightened costs of construction materials will render many projects infeasible.

Increase property maintenance costs

Service charges for gated communities in core cities will increase. Residential and commercial occupants who use generators will be faced with the decision of using more efficient versions. The adoption of solar and wind power into the energy mix will expand. Property management, brokerage and facility management firms are already making adjustments to their operational cost models – impacting both real estate asset owners and occupiers. The efficiency of artisans, technicians and machine operators involved in construction projects will be affected as decisions to visit facilities for repair works may be moderated by the overall input costs. The increased costs may lead to reduced on-site involvement, delayed arrivals, and overall lower productivity during specific periods.

Shift to more intense land uses

To optimise investment outcomes, developers will attempt to intensify their residential and commercial developments by increasing floor levels and/or incorporating land use mixes. The ongoing run of mixed-use developments will more likely extend as a result, especially in urban areas where demand for residential use is high. Developers who had secured dollar-denominated credit facilities and reported revenues using the CBN pegged rate of N460 to foreign investors may need to return to the drawing board to adjust revenue targets. This is in part because developers were buying materials at black- market rates and also selling projects reflective of this. The effects will be more pronounced with Proptech startups as valuations are revisited.

A shift in diaspora investment

Diaspora investors have long benefitted from the multiple exchange rate regime as low dollar amounts could afford more naira but with the new exchange rate policy, the reverse is more likely the case and may disincentivise diaspora investors. In the last five years, residential property developers have reported a spike in diaspora purchasing oftentimes as an investment option through Buy to Let arrangements as well as maintaining ties with their home country. As asset repricing begins to factor in naira devaluation in the short term, diaspora investment in the Nigeria real estate market will slow. There will be price reviews for off- plan sale agreements as an off-shoot of the increased prices.

The increased cost of capital

The recent policies by the new administration will have impacts on both inflation and interest rates in the short run. The removal of fuel subsidy and the deregulation of the downstream oil market followed an increase to the price of PMS from N488/litre in Lagos to N555/litre in 2nd tier cities, just as floating the nation's currency and lifting of the FX restrictions on domiciliary accounts portend accelerated inflation. Analysts forecast 23.6% to 24.7% for June and July 2023, up from 22.41% in May. The exchange rate to the Dollar moved from N460 to N755 – a 64% increase. The CBN continues to remain hawkish on MPR as a result of persistent inflation and will maintain its stance as inflation rises. Mortgage rates are likely to rise. Players in the real estate market have had to navigate through the high cost of raising capital over the last six months. This will likely continue in the short term.

Adoption of flexible work models

The adoption of flexible work arrangements may deepen, following the removal of the fuel subsidy. In the short term, increased pump prices will force firms to either increase transportation components in pay or adopt more work-from-home and hybrid work models. Some firms that had previously returned fully to working from the office may need to revisit work-from-office schedules to ease the immediate impacts of elevated transportation costs. Others occupying leased spaces will adjust their space use to factor in essential on-site requirements and occupancy rates will inch up slightly especially in the grade B office market. Some businesses may reduce space requirements and even delay rent payments

Increased rent defaults

The residential sub-market will see a surge in rent defaults as households prioritise spending on groceries and energy. Tenants will struggle to meet rental obligations in the short term as they are forced to navigate increased pump prices. Barring any efficiently executed interventionist policies by the government in the short term, the removal of petrol subsidies will inevitably lead to a reduction in individuals' purchasing power. This will continue into the mid-term.

Reduced spending budget on leisure and entertainment

The hospitality submarket will feel shocks as consumer expenditure hones in essential amenities. Life style adjustments will gradually adjust. Neighbourhood malls that feature entertainment uses will be less affected in the short term compared to big brand large sized grade A malls already struggling to improve footfall and occupancy rates

Slower development activity and demand for real estate

Projects that rely on subscribers making instalment payments may encounter delays in project delivery due to some subscribers being unprepared for the change in project cost. This may lead to scenarios where the construction period is extended as new plans and financing arrangements are devised. The implementation of a floating exchange rate is expected to have a moderating effect on the pace of activities within the construction industry. The demand for residential real estate will slow and relocations will be few and far between.

Improved transaction transparency

The FX policy is designed to enhance transparency, liquidity, and price discovery within the currency market. The transparency fostered by this policy aims to mitigate the manipulation of currency values and the concealment of illegitimate funds through real estate transactions. Globally, real estate markets have historically served as an avenue for money laundering as parties involved convert unlawfully obtained proceeds to acquire properties to hide the true beneficiaries of the funds.

Mid-Term Impacts (1 – 3 years)

Construction activity resumes

In the mid-term, buyers will have to come to terms with the new policy as property prices are adjusted to reflect new realities. The construction sector will resume with adjustments in offerings. The developer and investor class alike will adjust design concepts for projects and this will feature more predominantly in the mid to low-income residential submarket in Tier one cities where competition for land is high. Housing on smaller lots and more intense land uses will see increased demand as a result of the high cost of capital, weak aggregate demand and tight revenue margins.

Exits of low-risk developers and investors

The short-term costs will place pressure on market players with a low-risk appetite, forcing their exit to other investment options such as government securities as they post mouth-watering returns. However, growth will continue with mixed sentiments opening up the market to newer investors looking to invest long-term when the dividends of FX harmonisation and fuel subsidy removal policies begin to yield.

Increased infrastructure development

According to NEITI – The Nigeria Extractive Industries Transparency Initiative, the government spent more than N13Trn on fuel subsidies between 2005 and 2021. This was equal to the total budget for healthcare, education, agriculture, and defence over the same period, adding that the funds could have been used to build electrical facilities that would have added 10,000MW to the national grid, 23,000 solar-powered boreholes with storage tanks, 70,000 classroom blocks, 38,700 irrigation units, 3,870 health centres, and fund 260 academic research programmes. The removal of fuel subsidies presents an opportunity for the government to redirect its financial resources and prioritise investment in infrastructure.

Increase in abandoned projects

The removal of fuel subsidies, coupled with escalating construction material costs, labour expenses, and transportation charges will likely contribute to the abandonment of construction projects. These factors combine to almost guarantee that the refinancing required will be unattainable. Ongoing housing estates may face the risk of abandonment as plans are put on hold with investors reassessing their involvement.

Increased urban congestion

The elimination of fuel subsidies and the subsequent increase in living costs have resulted in higher transportation expenses. As a result, occupiers are on track to spend more time near their homes, seek accommodation with friends or opt for shared apartments. This surge in population density will drive the demand for co-living spaces as people seek affordable and accessible housing options within these congested urban centres.

Adjustment to the finishing regime (we have started seeing that already)

In the construction sector, ongoing projects will likely experience a delay in delivery due to the fx policy change. While some developers, may stop construction temporarily due to the difficulty in accessing funds, others might have to change the construction and finishing materials to a more affordable standard to curb the rising prices. The removal of the fuel subsidy will disrupt the supply chain for inputs, resulting in a delay in the delivery of properties.

Long Term Impacts (Above 3 years)

A more globalised N participation in the Nigeria real estate market

With some policy consistency, fund managers are more likely to consider bets in Nigeria's real estate market. FX transparency is central to attracting foreign investment and as the 2017 circular-based policy is consistently implemented, foreign brands will likely partner with local actors likewise institutional investors looking to set up formal retail. Homegrown retailers with plans to expand footprints to the African region with Nigeria as its base will also rework their models to consolidate their position.

Shoprite and more recently, Games Store have exited Nigeria due to the challenging operating environment. While retail real estate demand on a broader scale will be affected in the short term, the recent FX policy is expected to boost the supply of foreign exchange further reducing the difficulties of accessing finance for imports, while making repatriation easier. Over time, the real estate market will adjust to the subsidy removal as developers, investors, and occupiers adapt to the new economic realities. Investors adjust to the increase in the prices of construction materials, labour costs and construction costs. This will lead to asset price rebalancing.

Growth in industrial real estate

Local representatives of international brands, especially in aviation have struggled to repatriate funds due to restricted access and the high cost of sourcing FX. Due to the removal of the related barriers, this will likely ease, rejuvenating the industrial market in the process. With the right partnerships, manufacturing in Nigeria will gradually become attractive. States such as Lagos, Ogun, Cross River, Delta, Rivers and Benin with ports development activity at various stages will see pent-up demand for manufacturing plants and warehousing.

Increased Investment in industrial & infrastructure real estate

A recent survey of construction contractors suggests that over 90% of construction materials used in Nigeria are imported. A large portion of these materials come in through the Apapa, Tincan, Calabar port, Warri and Onne ports. Suppliers in states without ports have to rely on road infrastructure through trucking to transport goods to warehouses and storage facilities. There will be a realignment between the real estate and manufacturing industries to spur investment in local manufacturing, especially in locales where natural resources can be harnessed. Analysts suggest that 19,686km of roads could have been constructed across Nigeria at N500m/km using subsidy payments made over 12 years. The removal of the fuel subsidy frees up government spending for infrastructure projects. Government borrowings that would ordinarily have been channelled to the payment of subsidy will be invested in infrastructure development.

Increased adoption of green energy sources

Adoption of green energy sources will be accelerated in the office submarket first, followed by residential, retail, healthcare and industrial to varying degrees. Local motor vehicle manufacturer - Innoson Motors recently launched CNG-powered trucks, minibuses, ambulances, long buses and SUVs, a strong indicator of the growing demand for alternative energy. The Lagos state government is also following suit. The rise of properties developed with sustainability features will continue as the use case becomes stronger because of lower energy consumption and enhanced credibility with the investor market.

Sustained increase in property prices

Reforms in fuel subsidies, having raised prices in the short term, will continue to support their increase – albeit at a slower rate. Landlords and property owners are likely to pass increased management costs to tenants. Consequently, individuals and businesses seeking affordable rent may have to wait a while longer for government palliative interventions to take root. With the removal of FX restrictions, foreign investors will likely be attracted to the real estate market. This increase in foreign investment stimulates demand across the lower-mid, mid and upper- mid-income classes. The rate of this growth will however be contingent on infrastructure investment in transport and security.

Increased potential for social unrest and vandalism

When palliatives are ineffective in softening the blows from the increase in the cost of living, there is a chance of social unrest. As of the time of writing this report, protests against the increased PMS prices have been restricted to media commentary.


Elisabeth Kübler-Ross's five stages of grief model, initially developed to describe the process of coping with personal loss, can also be applied to the Nigerian real estate market, the recent policy measures implemented by the government, including fuel subsidy removal, currency floating, lifting of FX restrictions and the passing of the 2023 Electricity Bill. Parties in the Nigeria real estate market have exhibited a list of traits ranging from denial to acceptance. Experts believe that these policy measures will ultimately contribute to boosting Nigeria's real estate sector, albeit with disputes regarding the timing, pace, and implementation of certain cushioning elements.

Rising prices may make purchasers and investors more cautious, leading to stagnation in property values. Moreover, the policy changes are expected to have an impact on affordable housing, as the increased prices may drive up demand for low- to mid-income accommodation.

In parallel, the 2023 Electricity Act replaces the previous 2005 Electricity and Power Sector Reform Act, with a focus on modernizing and streamlining the power sector. The new legislation aims to attract private sector investments, promote renewable energy, increase electricity availability, and establish fair and transparent regulatory frameworks that protect consumer rights. It encourages competition in the electricity supply business, supports renewable energy, ensures fair treatment for consumers, and enhances regulatory oversight to prevent unjustified billing and foster accountability.

Overall, these policy measures introduce significant changes in Nigeria's real estate and the power sector. While they may initially cause disruptions and generate mixed reactions, they also present opportunities for growth, innovation, and sustainability. Adapting to these changes, addressing challenges, and ensuring effective implementation will be key to realizing the potential benefits and navigating the transitional stages toward a more prosperous future.

* Northcourt is a real estate investment solutions company that adopts a research-based approach to developing and managing property as well as providing real estate advisory services in West Africa


Ayo Ibaru

+234 818 518 6975

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