THE CONSTRUCTION AND REAL ESTATE SECTOR IN 2017 AN OUTLOOK FROM THE INSIDE.

2016, the year the word recession forcibly returned to our vocabulary in Nigeria.

Not for the first time in almost 3 decades, 1987 precisely, under the rule of General Babangida has the Nigeria economy experienced negative growth in 2 successive quarters. The recession then was comparatively mild, a decline of 0.51 percent and 0.82 percent in the 1st and 2nd quarters of 1987 according to the National Bureau of Statistics (NBS). The economy in 2016 on the other hand contracted by 0.36 percent at the end of the 1st quarter and 2.06% at the end of the second quarter. Quarter 3 likewise contracted by 2.24 percentage points.

Manufacturing is down 12.21 percent, the Oil and Gas sector is down 22%, Construction is down 6.1%, and the Real Estate sector has contracted as at quarter 3 by 7.4%. Unfortunately, the bad news doesn’t end here. The NBS estimates that as at quarter 3 inflation is up to 18.3% and unemployment up to 13.3%.

Anxiety has returned to many Nigerian households. Despite cost cutting, necessary household expenditure is at best matching income and in many instances exceeding income. Nigerians are definitely poorer with the vast majority living at below subsistence level with minimum wage frozen at =N=18,000/month.

The economic experts tell us that we always had this coming and have, as the saying goes, “failed, because we failed to plan” With the drop in world oil prices, reduced Nigeria oil production due to constant militant attacks on oil installations, and the consequent fall in government revenue, the repercussions came quickly and predictably.

Despite prevaricating for about a year the federal government had no choice than to remove subsidies on refined petroleum products and drastically devalue the Naira in the face of dwindling revenue and a shortage of foreign currency. By the time these policies were carried out, salary payments in many states and local governments were in months of arrears. This is hardly surprising given the fact that according to BudgIT Research, from the Federation Account Allocation Committee (FAAC) allocation and State Internally Generated Revenue (IGR) estimates, 33 out of the 36 states have recurrent expenditure deficits and therefore have to find literal ways and means to fund the deficits, pay salaries and meet monthly expenditure.

But what does this all mean for the Construction and Real Estate sector. The 2015 budget made provisions for capital expenditure in the sum of =N=557Billion. The 2016 budget proposed capital spending to the tune of =N=1.8 Trillion in President Muhammadu Buhari’s much delayed and much anticipated budget presentation last December, christened “Budget of Change”

The usual arguments and accusations about budget implementation did not take too long to appear, and vehemently so. The budget itself was passed almost 6 months late, an already built-in delay to commencing capital projects. Price Water House Coopers Limited, in its analysis of the 2015 budget performance notes that as at September 2015, only about =N=195Billion or 35% of the =N=557billion capital budget had been released and utilised. Recently, in June 2016 the Minister of Power, Works and Housing, Babatunde Fashola had a mild altercation with the House committee on housing over the housing budget implementation. The committee was irked that as at June no housing projects had commenced, whilst the Minister countered that proper planning to ensure affordability, slum prevention and infrastructure coordinating was necessary before proceeding.

The Nigerian Construction and Real Estate Sector is one of the largest sectors in the economy. The National Bureau of Statistics (NBS) Nigeria gross domestic product (GDP) report of Quarter one 2016, estimates construction contributing 4.13% to real GDP and Real Estate contributing 6.46%. The importance of the sectors to the Nigeria economy cannot be overstated. The multiplier effect of construction activities is apparent. It supports the manufacture and consumption of building materials. It provides employment to all levels of various workers from the top and middle management executives, to a very large cadre of skilled, semi-skilled, and unskilled workers. The Construction and Real Estate sector is also crucial to the housing sector. According to the African housing finance year book 2016, “almost half of Nigeria’s population live in cities with 64.2% living in Slum conditions”. The immediate impact of the recession in the economy has been a slow down in both sectors by 6.1% and 7.4% as stated earlier. However, the spiraling inflation has affected the prices of basic building materials such as cement, iron rods and other construction inputs. The 60% devaluation of the naira has also greatly impacted building materials’ prices. In addition, it is also important to note that 18 out of the 41 items excluded from accessing the official foreign exchange market are building / construction materials; cement, steel and roofing sheets, tiles, wood boards, iron rods and steel pipes are some of these materials.

Local production and capacity is still way short to meet the needs of the industry despite government’s encouragement. The predictable result is increased prices / costs, importation of substandard materials and some potentially dangerous corner cutting by unscrupulous practitioners. Another consequence of the state of the economy, with the increase in fuel prices referred to earlier, is the negative effect on transportation costs for construction goods, further compounding the problems in the sector.

Finally, the Construction/Real Estate sector is impaired greatly by the high interest rates in the economy with very few options for funding. The Monetary Policy Committee (MPC) of the CBN recently voted unanimously to leave the base monetary rate of the economy at 14%. The Minister of Finance Mrs. Kemi Adeosun did not hesitate to state her disagreement, arguing that a lowering of the base rate would help stimulate the economy. The MPC countered by stating “the limitations of monetary policy in reversing the current stagflationary condition of the economy”. In plain language, for the Construction and Real Estate sector, interest rates for funding construction, as high as 27% in some financial institutions, would persist and further constrict the sector.

So, what is the outlook of the economy for 2017 and the way forward for the Construction and Real Estate sector in the new year. The predictions vary somewhat with the IMF predicting an eventual growth of 0.6% in 2017 and Fitch more optimistically predicting an eventual 2.6% growth. Both agencies however warn that the recession may linger with any recovery predicated on the Federal Government’s commitment to its recovery policies, in particular the freeing of the Foreign Exchange (FX) market and the ability to secure development financing. The price of energy (fuel/ electricity) may further increase as pressure is brought to bear on the regulating agencies. The recent oil price rebound encouraged by the OPEC output cutting deal and improved production output should enable the government greater access to FX to prevent further Naira devaluation of the extent seen in 2016.

Given the likely state of the economy as predicted, the Construction/Real Estate sector in 2017 will face many of the same challenges as 2016. However, the sector can be stimulated greatly with focus on the housing Sector.

Nigeria has the off stated deficit of 17 – 20 million housing units for its estimated 180million population. The factors that hinder the drive to aggressively reduce this deficit have been clear for decades and include restricted access to Land and registration of Title, prohibitive land costs, very limited access to funding at extremely high double digit interest rates, and the continued increase in the prices of basic building materials. Infrastructure to service the housing provided is also grossly inadequate.
There is a reasonable consensus that to fund the housing deficit will cost about =N=56 Trillion as estimated by the Federal Mortgage Bank of Nigeria (FMBN), at an estimated cost per unit of N3.5 million.
Without factoring in population growth and therefore the constant increase in the housing deficit, the size of the task before Nigeria is apparent. Official Statistics are scarce and largely unreliable but it is clear that housing production in the public and private sectors has not exceeded 100,000 units annually for decades. At this rate, it will take over a century to address the current deficit as stakeholders agree that at least a million (1,000,000) units will need to be produced annually.

The Minister of Housing, Babatunde Fashola, at a recent submit on affordable housing, well aware of the funding issues stated “if we can spend =N=10billion in all 36 states and the FCT annually on housing alone every year subject to the capacity to raise the money and the capacity to utilize it”.

This unfortunately works out to just a little over 100,000 units. The Minister however added that efforts are on to design and build affordable housing costing no more than $5,000 or about =N=1.5 million per unit. If this is achieved and if the funds are raised, the number of units produced by the public sector would reach 250,000 units annually.

There is therefore the need to fully involve the private sector in a partnership to increase this production target fourfold. In addition, government needs to further incentivize the private sector to focus more on functional affordable housing.

High end Construction and Real Estate has dominated the sector over the years with the construction of luxury residential apartments and units in choice areas. Many of these prohibitively priced luxury apartments and houses now sit empty, unsold and unleased. Nevertheless, the prices remain high and out of reach, and the properties do little to stimulate the larger sector.

In 2017, the Construction and Real Estate sector will do well to focus on the medium to low income housing band. Innovation is critical to success in this segment of the housing market and profits can indeed be made with creative design and building solutions. Opportunities also abound in the manufacturing of Nigerian building materials.

Despite the recession and the cautious outlook for 2017, in addition to food, health and education, we must focus on the basic need for affordable housing. Its potential economic benefits are immense, but more importantly, it is essential to improving the collective well being of Nigerians.