Real Estate Investment in Nigeria

8/3/2019 Real Estate Investment in Nigeria

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INVES MENT IN REAL ESTATE IN NIGERI

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INVESTMENT IN REAL ESTATE IN NIGERIA



1 THE BUSINESS AND ECONOMIC ENVIRONMENT

1.1 Overview of the National Economic Environment

1.1.1 Demographic InformationThe 2006 Population Census estimates the population of Nigeria to be over

140,003,542 persons, half of whom are estimated to be less than 15 years of age.

The population growth rate is estimated to be 2.9% annually as at 2006.

The most highly populated states are Kano with 9.38 million people followed by

Lagos – 9.01 million and Kaduna – 6.07 million. In terms of population density,

Lagos is the most densely populated with a density of 2,455/km2. This is followedby Anambra State with a density of 860/km2 and Imo – 744/km2.

1.1.2 Performance of the Economy and General Economic Outlook

The Nigerian economy is mainly an agrarian economy with agriculture (comprising

livestock, forestry and fishing) being the largest employer of labour, contributing

41.7% and 42.2% to GDP in 2006 and 2007 respectively. However, crude oil and gas

exports are the major source of revenue for the country accounting for:

• 19.35% of GDP in 2007

• 97.9% of foreign exchange earnings in 2007

• About 65% of budgetary revenues

Find below a number of relevant statistics on the performance of the Nigerian

economy between 2004 and 2007 as provided by the Central Bank of Nigeria and

the National Bureau of Statistics.



Peregrine Consulting, Nigeria 4

Indicator 2004 2005 20061

20072

Domestic Output and Prices

GDP at Current Market Prices (₦₦₦₦’ billion)3 11,673.6 14,894.5 18,222.8 22,848.9

GDP at Current Mkt Prices (US$’ billion)3 87.4 112.7 142.6 181.6

Real GDP Growth (%)3 6.6 6.5 6.0 6.2

Oil Sector 3.3 0.5 -4.2 -5.9

Non-oil Sector 7.8 8.6 9.4 9.6

Sectoral GDP Growth (%)

Agriculture 6.5 7.1 7.4 7.4Industry

4 4.2 1.7 -2.5 -3.5

Services5 8.8 8.0 9.2 9.8

Oil Production (mbd) 2.5 2.5 2.2 2.2

Manufacturing Capacity Utilisation (%)1 55.7 54.8 53.3 53.5

Inflation Rate (%) (Dec-over-Dec) 10.0 11.6 8.5 6.6

Social Indicators

GDP per Capita (₦₦₦₦)3 89,866.1 111,569.3 132,017.9 158,123.9

GDP per Capita (US$)3 673.2 847.4 1,036.2 1,256.6

Population (million) 134.1 138.5 140.0 144.5

Population Growth Rate (%) 2.8 2.8 2.9 3.2

Incidence of Poverty 54.4 54.4 54.0 54.0

Total Labour Force (million) 55.5 56.2 58.9 61.2

Total Employment6 48.1 49.5 50.9 52.3

Total Unemployment 7.4 6.7 8.0 8.9

Unemployment Rate (%)7 13.4 11.9 13.7 14.6

Sources: (1) Central Bank of Nigeria (2) National Bureau of Statistics

Table 2: Selected Macroeconomic and Social Indicators

1/ Revised 2/ Provisional 3/ Revised based on national accounts of Nigeria 1981 to 2005 Harmonised series

4/ Includes Building and Construction. 5/ Includes Wholesale and Retail Services

6/ Labour force consists of the number of people aged 15 and over who are employed (that is, those who currently have jobs) and unemployed (that is, those who

do not have jobs, but who are actively looking for work).

7/ The NBS defines unemployment as the proportion of the labour force that is available for work but did not work for at least 39 hours in the week preceding the

survey period.



GDP per capita is estimated at about US$1,257. Although overall GDP growth, has

been rising faster than growth in population the high “incidence of poverty” rate of

54.0, which has remained relatively unchanged for a number of years implies that

despite the increase in real GDP, the benefits are yet to trickle down to the

population hence.

Nigeria is Africa’s largest oil producer. The country has over 180 trillion standard

cubic feet of gas reserves and ranks 10th in the world in terms of proven gas

reserves. Over the last 2 decades the country has faced serious leadership and

financial management challenges. However, the outlook, in terms of leadership, for

2009 and beyond, promises to be better with the commitment by government to

turn around strategic and real sectors of the economy especially the poor

infrastructure and utilities.

Despite huge public expenditure, the state of power generation and distribution

infrastructure is poor. Power supply for domestic use and industrial energy is low

and erratic. Transportation, especially by road, is inefficient while the railway

network is virtually comatose.

Telecommunications has improved significantly with the licensing and operations of

Private Telephone Operators and the coming on board of GSM operators. Nigeria

has become the fastest growing telecommunications market in Africa, with

teledensity growing at over 100% per annum. This astronomical growth rate in the

industry has brought a number of benefits in terms of FDI inflows, employment

generation and reduction in the cost of business transactions.

There has been a positive move to diversify the economy away from oil production

to gas, agriculture, manufacturing, services, construction and retail businesses.

There has also been a renewed emphasis on the Small and Medium Scale

Enterprises tier as the engine for economic growth. Furthermore, capacity



banking reform exercise will be beneficial to the economy. Analysts have suggested

that the infusion of capital from this exercise has contributed largely to the

insulation of the Nigerian Banks from the financial crisis that recently engulfed the

US, Europe and Asia.

Other economic reforms by the Federal Government include the following:

• Monetary policy controls to stem inflation and appreciate the exchange rate

of the Naira. In the most recent past, these monetary policy controls have

been aimed at improving liquidity in the wake of the credit crunch arising

from the global economic crisis.

• Pension reforms and creation of new Pension Fund Administrators and

Pension Fund Managers.

• The political will to introduce transparency in public procurement and

fighting corruption, money laundering and financial malpractices through the

passing of laws on fiscal responsibility and public procurement at federal and

state levels.

• Liberalisation of the importation of fuel and the sustained availability of

petroleum products

• Liberalisation of the power sector to allow for the generation and sale of power by privately owned and run power plants (IPPs)

• Initiatives to eradicate gas flaring, commercialise gas resources and ensure

that gas revenue matches revenue from crude oil by 2010

• Development of a Niger Delta Development Master Plan through the NDDC

and the recent creation of a Ministry of the Niger Delta

• Proposed concessioning of infrastructural facilities such as roads, bridges andhighways to private sector organisations

The various reforms of the Federal Government have affected the economy in

several ways over the past decade. The common denominator is that they have

tended to boost confidence in the Nigerian economy and thus stimulated FDI inflows



Efforts are on to reverse the infrastructural decay through the use of concessions

and Public Private Partnership programmes in infrastructure/facility/utilities

development. The downturn in the global economy which has led to the onset of

recession in several western and Asian economies has also witnessed a fall in crude

oil prices.

Given the fact that crude oil forms the mainstay of the Nigerian economy, the dropin crude oil prices has posed a serious challenge to the reform programmes and

efforts to reverse the infrastructural decay. There are likely to be serious funding

challenges in 2009 and 2010 unless the crude oil prices stabilise. However it is

expected that the recent economic reforms in tax collections, import duty reforms,

improved internally generated revenue will likely moderate the negative impact of

the external crisis.

Indeed the CBN is confident that “the domestic non-oil sector will rise to the

challenge (of reduced crude oil earnings)”. This optimism is buoyed on the fact that

aggregate output growth for the third quarter of 2008 was 6.83% compared to

5.23% for the second quarter. The growth according to the CBN was driven by the

non-oil sector which grew by an estimated 9.16%.

1.1.3 International Rating of the Economy

Prior to the financial crisis that engulfed the USA, Europe and Asia, Standard

Chartered Bank economists had predicted a stable macro – economic outlook for

the country, which should grow at an average of 5.2% to 7% between 2007 and

2015. Interestingly, all the predictions exceeded the Federal Government’s forecast

of 5%. Goldman Sachs also tipped Nigeria to become the 20th

largest economy in

the world by 2025.

A number of important developments helped to change the international picture for

Nigeria. These include the following:

• The nation’s external debt was reduced to less than US$4 billion at the end of



• Development of a home – grown National Economic Empowerment

Development Strategy (NEEDS), modelled on the IMF’s Poverty Reduction

and Growth Facility for fiscal and monetary management;

• Nigeria reached a settlement with the London Club, made up of private

sector international creditors, thus further reducing its international debt

profile; and

• Nigeria was removed from the Financial Action Task Force (FATF) blacklist of

Non-Cooperative Countries and Territories (NCCT) i.e. countries without

adequate measures to combat money laundering and financial crimes.

All these helped to improve the country’s sovereign rating. On the strength of its

economic performance, Nigeria, rated for the first time in several years, earned a

BB- (BB minus) credit rating from Fitch. This has been a boost for the Nigerian

economy. This has since been revised downwards as a result of the fall in crude oil

revenues.

1.1.4 Political and Social Situation

The successful transition from one civilian administration to the other and the

resolution of several electoral disputes through the courts has led to a generally

stable polity. However, the upsurge in the activities of militants in the Niger Delta

region has led to temporary dislocation of some businesses and the reduction in the

production of Crude Oil for most of 2008. Furthermore, the upsurge in criminal

activities such as kidnapping for ransom in the wake of the Niger Delta crisis has also

resulted in the evacuation of several expatriates from Port Harcourt to Lagos.

Consequently, there have been attempts by the Federal and State Governments in

the region to address this situation through infrastructural and sustainabledevelopment programmes. Companies operating in the region are being

encouraged to give priority to the youths of the region in employment

opportunities.

In spite of the situation economic activities are still ongoing and it is expected that



1.1.5 Consumer Purchasing Power

Consumer purchasing power has been improving. For example, despite the low

income per capita, Nigeria’s telephone usage is one of the highest in the world per

line and with the subscriber base on the GSM networks still growing.

1.2

Economic Outlook The recent worldwide recession has already been felt in Nigeria through its effect on the

stock market as foreign portfolio investors withdrew from the market. The

consequence has been massive losses to investors which have been translated to

possible credit problems in the banks and a loss of confidence in the stock market that

may likely benefit the property market in the short to medium term.

It is however pertinent to point out that the financial meltdown which has contributedto the credit crunch being experienced in global financial markets has also lead to a

credit squeeze in Nigeria. Foreign lines of credit extended to banks were withdrawn and

the withdrawal of portfolio investments also led to a massive fall in the value of the local

currency, the Naira. This led to a rise in interest rates as well as foreign exchange rates

and of course a rise in inflation due to the import dependent nature of the Nigerian

economy.

1.2.1 Infrastructural Developments

Efforts are on to improve the infrastructural requirements of the country, as

provision of amenities comprise up to 60% of business costs in Nigeria. Thus most

Governments in Nigeria are entering into concessioning and PPP arrangements for

the provision of such infrastructures / amenities like roads, water and power. Many

Greenfield and brownfield developments are ongoing or proposed to develop andmodernise the various cities. Examples include:

• the Lagos Mega City project

• Asaba Business District (Delta State)

• Kano new City (Kano State)



1.2.2 Foreign Exchange Rates

The demand pressure on foreign exchange as a result of the massive withdrawal of

portfolio investments and the repayment of Banks’ foreign lines of credit led to a

sharp fall in the value of the Naira. The currency depreciated to an all-time high of

₦182:USD1.00 from the rate of ₦118:USD1.00 as at November 2008. The Central

Bank reacted by introducing a number of measures including suspending the

deregulated regime and introducing a number of controls. The measures seem to

have worked as the Naira has appreciated to ₦182:USD1.00 by end-May, 2009.

With stability returning to the crude oil market and prices on the rise, it is expected

that the Naira would further appreciate to about 153: USD1.00 by end 2009.

1.2.3 Interest Rate

By the end of 2008, with the credit squeeze occasioned in part by the withdrawal of foreign lines of credit, interest rates began to rise. Interest rates rose to as high as

30% on an annualised basis (inclusive of fees). To stem this tide, the Central Bank of

Nigeria placed a ceiling on interest rates. Consequently, lending rates (inclusive of

all fees) are capped at 24% p.a. till end December 2009 while deposit rates will not

exceed 15%p.a.

As the western economies come out of the recession and the credit lines arereinstated, interest rates will likely fall. Also the rise in crude oil prices also means

increased revenue to the various Governments which are the major source of bank

deposits in Nigeria. Given this scenario, we expect rates to stabilise at a maximum

of 20 – 22% by year end.

1.2.4 Inflation Rate

Inflation has also been on the rise moving from single to double digit figures frommid-2008. Core inflation rose to 10.4% in December 2008 but decelerated to 7.2%

by February 2009. The Central Bank predicts that the rate may decline further

before the end of the year as the lag effects of the naira depreciation come to an

end. The Economist magazine projects an average rate of 11.4% for 2009. It is our



2 LEGAL FRAMEWORK FOR REAL ESTATE

Nigeria operates a Federal system of government with three tiers of governance viz.

Federal, State and Local Government. The Federal Government has the right to legislate

on all issues contained in the Exclusive legislative list, while States and local governments

legislate on the Residual List, and both Federal and States can legislate on the Concurrent

list.

2.1 Laws Governing Acquisition of Land

The basic legal framework for the acquisition of land in Nigeria is the Land Use Act 1990.

This Act vests all land comprised in the territory of each state (except land vested in the

Federal Government or its Agencies) solely in the Governor of the State, as trustee of

the people.

The state is responsible for allocation of land in urban areas to individuals resident in

the state and to organisations for residential, agricultural, commercial and other

purposes. Similar powers with respect to non- urban areas are conferred on Local

Governments.

By virtue of this Act, ownership vests in the Governor while only a statutory orcustomary right to occupy land is given to a person for a maximum of 99 years. The

control and management of land is administered through the Land Use and Allocation

Committee of the state acting as an advisory committee in transactions affecting land.

It is therefore a requirement of law to obtain the consent of the Governor for any

assignment of title to land in accordance with the Act. Section 22 of the Act states as

follows:

It shall not be lawful for the holder of a Statutory Right of Occupancy granted by the Governor to

alienate his right of occupancy or any part thereof by Assignment, Mortgage, Transfer of

possession, Sublease or otherwise howsoever without the consent of the Governor first had and

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2.2 Building Regulations and Laws

Any building or real estate development of any kind must be approved by the State

Government usually through the Town Planning Authority.

Building permits must be obtained from the State Government Agency and in the case

of Abuja, from the Federal Capital Development Authority. All zoning approvals as well

as approval of the building plans (architectural drawings) must be approved prior to

commencement of development.

Depending on the size of the development, there may be need to carry out an

Environmental Impact Assessment Study which must be approved by the National

Environmental Standards & Regulatory Enforcement Authority before commencement

of development.



3 THE REAL ESTATE MARKET

3.1 Residential Property Sector

The residential sector of the property market has been on an upswing since 1999. This

has led to incredible returns on investment by developers in major cities like Abuja, Port

Harcourt and Lagos. Even smaller cities like Ibadan, Ondo and Onitsha have witnessed

an upsurge in local real estate prices in the last couple of years. As a result of this boom,there was a resurgence of the mortgage finance market as banks began to offer long-

term mortgages for prospective property buyers.

The boom in residential property has been in the high end of the market for the high

income and upper middle income segments. Demand has been for mostly owner-

occupier houses but also there has been, in the recent past, an increase in demand for

upscale lettable apartments and standalone houses in upscale areas of Lagos – Ikoyi,Victoria Island, Lekki Peninsula etc with rents being demanded and paid for in US

Dollars.

With the onset of the global recession, real estate prices for residential properties

witnessed a massive slump, with prices going down by as much as 30 – 40% in Lagos and

Port Harcourt. In Abuja prices have remained relatively firm in areas such as the Central

Business District, while in the suburbs such as Kubwa and Gwarimpa, prices have

dropped dramatically.

However not all segments of the residential sector are experiencing a slump. The letting

end of the market especially for the low and lower middle income is on the upswing.

There is currently a high demand for 1 and 2-bedroom apartments especially in towns

such as Port Harcourt, Abuja and Onitsha.

3.2 Commercial Property Sector

The demand for office space and other commercial property has been on the increase.

In Port Harcourt, despite the fall in the market for high end residential properties, the



Other types of commercial properties that are currently in high demand are:

• Hostels for students in tertiary institutions such as universities and polytechnics

in Lagos, Port Harcourt, Abuja, Calabar, Benin, Abraka, Ibadan etc.

• Multi-storey car parks for towns like Ikeja, Ikoyi, Port Harcourt, Victoria Island

and Abuja.

• Warehouses in Apapa and Tin Can island areas of Lagos.

• Events centres and conference halls both in Lagos and Abuja.

3.3 Hospitality Sector

With the increasing emphasis on developing the tourism industry in Nigeria, there is an

increasing demand for top quality hotels. Occupancy rates for 3-star hotels are over

80% in Victoria Island, Ikoyi and Ikeja all in Lagos. The same level of demand can beseen in Abuja with a large number of extended stay guests. Opportunities also exist for

hotels and restaurants in Calabar in Cross River State and Asaba in Delta State.

The latter two towns have only one major 3-star hotel each and these are completely

booked all the year round mainly by guests of the State Governments. Thus there is no

competition and a supply gap exists that needs to be filled.

3.4 Retail outlets

The demand for shops is high throughout the country. Shopping malls are not very

much in demand due to the absence of the departmental shopping organisations. The

traditional retail outlet is an open stall or a lockup shop located in a large market

complex and these are in high demand in towns such as Port Harcourt, Lagos, Onitsha,

Abuja and Asaba. Under the provisions of Nigerian Law, markets are usually the

preserve of Local Governments and therefore can be developed under a PPP mechanism

involving the relevant stakeholders such as the state government, the local government

and the developer.



4 FUNDING OF REAL ESTATE

Prior to the banking consolidation of 2007, the mortgage market in Nigeria was virtually

non-existent. Although there were several primary mortgage institutions, long term

mortgage facilities were rarely extended to borrowers. Thus in majority of cases

prospective buyers usually raised the money for the property from accumulated savings or

loans from employers.

However, with the banking consolidation, came increased resources for financing larger

ticket transactions and longer tenors. Prior to this time loans for purchase or development

of property were usually for maximum tenors of 24 months with the borrower contributing

a substantial portion of the property value.

With the onset of the recession and the associated credit squeeze the few mortgage

facilities have also dried up along with other types of credits.

Most banks and other mortgage providers are also engaged in property development

through real estate development subsidiaries.



Peregrine Consulting, Nigeria 16

5 OPPORTUNITIES AVAILABLE IN THE NIGERIAN REAL ESTATE MARKET

SECTOR TYPE LOCATION

Residential High Income (Owner occupier) Abuja CBD

Residential Medium Income rental apartments (1 & 2-bedrooms) Abuja, Port Harcourt, Onitsha

Commercial Property Multi-storey car parks Abuja and Port Harcourt

Commercial Property Multi-purpose office complex Abuja (CBD), Lagos and Port

Harcourt

Commercial Property Students’ Hostel Lagos, Abuja, Port Harcourt,Benin, Abraka, Enugu, Owerri

Commercial Property Events Centre & Conference centres Lagos and Abuja

Hospitality Industry Hotel (3-star) Abuja, Asaba, Calabar, Ikeja,

Victoria Island

Retail outlets Open stalls and lock up shops Asaba, Onitsha, Lagos and Port

Harcourt

Real Estate Investment in Nigeria

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