JOSEPHINE OGUNDEJI speaks with the Head of Marketing and Corporate Communications at Knight Frank, Nigeria, Lanre Sonubi, on the financing constraints affecting the real estate sector, among others
What strategies can be employed to address infrastructure gaps in key real estate markets?
Various strategies will work for different jurisdictions. For our case here in Nigeria, aside from sufficient budgetary allocations and commitment to implementation both at the federal and state government levels, I will suggest stronger collaborations between the government and private investors through public-private partnerships for the delivery and maintenance of infrastructure projects. Issuance of infrastructure bonds will also help a lot in major infrastructure development. A recent case in mind would be the Federal Government Sukuk, which financed the rehabilitation of the Outer Marina Road, a major road connecting Lagos Island to Victoria Island, Falomo and Ikoyi. According to the Debt Management Office, the Federal Government raised N1.77tn between 2017 and 2021, and it is interesting to note that this initiative has financed a total of 44 critical road projects across the six geopolitical zones of the country.
How do financing constraints affect property development and investments in Nigeria?
Limited availability of long-term financing options, stringent lending criteria, and high lending costs restrict developers’ ability to secure capital to finance property development projects, thereby causing a slow rate of property supply. The high cost of funds also means that properties are delivered at a higher cost as the lending rate spikes. Financial constraints also affect liquidity and create a lull in transaction activities on the secondary market as more investors find it more challenging to exit a property investment and take positions elsewhere. This also negatively impacts investors’ willingness to engage in long-term projects in the property market.
What innovative financing models can be explored to overcome these challenges?
Public-private partnership is one model I will easily recommend as it helps to pull stakeholders together from both sectors to solve the mutual problem of deficit in infrastructure and property development. The PPP initiatives could be in the form of concession projects or the issuance of infrastructure bonds. On the private sector side, real estate investment trusts are a model that we need to pay more attention to as they can raise money through the sale of equity either publicly on stock markets or through private investors. The cost of the fund is usually relatively lesser and makes it possible to deliver properties at a more affordable rate. Close to REITs is raising capital through crowd-funding where real estate entrepreneurs can aggregate funds from investors of like-minds to develop projects, deliver to time, and exit more easily at a more competitive price-point since the variable of commercial lending rate has been bypassed.
How do regulatory challenges impede the growth of the real estate sector in Nigeria?
Cumbersome land titling processes, ambiguous property rights, restrictions on land use, and a lack of standardised regulations contribute significantly to an environment of uncertainty and deter potential investors. Bureaucratic red tape in obtaining construction permits and navigating zoning regulations further hampers the development of real estate projects. Additionally, the absence of a streamlined and transparent regulatory framework leads to disputes and prolonged legal battles, which dissuade both local and foreign investors from investing in the market. The overall impact is limited investment inflow, a slower pace of development, and failure to unlock the full potential of the real estate sector as a driver of economic growth.
Are there specific regulatory reforms that can enhance the ease of doing business in the Nigerian real estate market?
Several regulatory reforms can be considered. Firstly, streamlining the land titling process and improving the efficiency of property registration would significantly reduce bureaucratic hurdles. For instance, the Commissioner for Housing in Lagos recently disclosed that the state was automating its land titling processes. This will ensure a transparent and digitised land registry system, which will expedite the application processing time, providing clarity on property ownership and facilitating smoother transactions. Additionally, establishing a unified regulatory framework for the real estate sector can help standardise procedures and create a more investor-friendly environment. Clear guidelines on property development, zoning regulations, and construction permits will contribute to a more predictable and stable market, attracting both local and foreign investors.
Also, strengthening legal mechanisms to resolve disputes and ensuring the swift enforcement of property rights will instil confidence in investors. This may involve reforms in the judiciary system to simplify resolution processes. Overall, a comprehensive approach to regulatory reform, encompassing digitisation, standardisation, and legal enhancements, will go a long way in fostering a conducive environment for real estate investment and development in Nigeria.
How does a lack of market transparency impact investor confidence in the Nigerian real estate market?
The lack of transparency in the Nigerian real estate market significantly erodes investor confidence and reduces market liquidity. Investors depend on clear and reliable information to make informed decisions. Access to accurate data on property transactions, pricing trends, specialised property segment reviews, and regulatory frameworks creates an environment of uncertainty. This is why at Knight Frank, we commit a lot of resources to deliver trusted property research reports across the globe. We understand that without transparent information, investors face difficulties assessing the true value and risks associated with real estate investments.
Ambiguities in land tenure, unclear property ownership records, and inconsistent enforcement of regulations further amplify the challenges. As a result, potential investors may be hesitant to engage in the market, fearing hidden risks and encountering obstacles in due diligence processes. Establishing greater market transparency through accessible data and standardised reporting mechanisms, particularly by government agencies that sit on huge market data is crucial to promoting confidence, attracting investment, and fostering sustainable growth in the Nigerian real estate market.
What steps can be taken to improve transparency in property transactions and valuation?
I will recommend a multifaceted approach to help improve transparency in the market. The first will be to implement a digitised land registry system and centralising property information will streamline the process of accessing ownership records and transaction history. Brokers and prospecting investors can conduct due diligence in a breeze. The second will be to standardise reporting mechanisms and encourage the use of technology in property valuation for better consistency and accuracy of reports. For instance, due to a lack of consistency with international standards, valuation reports by some firms in Nigeria are not acceptable for cross-border transactions or even domestic transactions involving multinationals.
Additionally, promoting disclosure requirements for property sellers and real estate brokers, coupled with stringent enforcement of regulations, can ensure that comprehensive information is readily available to potential investors. Regular market research and data publications by relevant authorities can also provide stakeholders with up-to-date insights, fostering a more transparent and informed real estate environment.
How do security challenges in certain regions of the country influence property investments?
Security challenges in those troubled regions of the country exert significant pressure on property investments, acting as a deterrent to both domestic and foreign investors. The various security concerns create an atmosphere of uncertainty, making investors wary of potential threats to their investments. This is more worrisome due to the peculiar nature of real estate; assets are typically not portable. So, the lack of safety not only jeopardises the physical security of properties, but also disrupts business operations and cash flow, hindering the return on investment. In such environments, property values may decline, and rental yields may be compromised as investors try to cut their losses and exit their positions. Also for managed properties, the insecurity leads to an increase in the cost of facility management due to the need for improved security provision, and possible repairs and maintenance necessitated by vandalism.