Back to Newsletter of 2009-06-12
Back to Property News Home

Nigeria Meltdown

Meltdown: Nigeria in context of global response to impact on real estate

As the global economic crisis persists, different countries of the world have devised measures for responding to its impact on real estate. CHUKA UROKO writes that top of these measures are cuts in interest rates on mortgage lending and housing loans Developed economies like United States, United Kingdom, United Arab Emirate and even South Africa-- countries where property market had experienced a boom before the crisis-are at the forefront of nations have adopted friendly measures in the bid to stave off the effect of the global financial crisis on mortgages and housing loans.

Nigeria has not shown any serious commitment in this direction, though that is understandable given that the country is yet to develop a functional mortgage system.
UK banks now provide cheap funds for loan seekers. In October last year, the country had its lending rate at 4 percent. Right now, it is as low as 0.5 percent. When it was 4 percent, most banks were lending at 4.75 percent. What this means is that the cost of funds is cheap, making it attractive for people to borrow to buy or build homes.
An international real estate investor and consultant, Gbenga Olaniyan, who disclosed this in an interview with Business Day in Lagos, stated that UK banks were trying to normalize things to enable them give out these mortgages, adding, "it is expected that by the end of this year, the effect of this move must be felt; with the cheap loan, what it means is that more people will be able to afford to buy".

This move has not only affected the new entrants in the real estate market. People who have mortgages, especially those who didn't negotiate fixed interest rates while taking mortgages, will see their monthly payments drop, say from 800,000 pounds to 500,000 pounds.
This means that a man whose house would have been repossessed and had that same house put in the market at a reduced price can now afford to hold unto his property. The property will no longer go into the market and cause mayhem, thereby reducing foreclosures because people can now afford their mortgages and keep their homes.

Olaniyan says that for new buyers, the cost of buying will be done through mortgage, adding that people who would ordinarily have rented, would rather buy now.
According to him, "it is expected that the UK market is getting to the bottom and so, by the end of this year, that market will bounce back and the effect will be felt".

South Africa has also cut its lending rate but unlike UK, interest rate in the country was not cut heavily. It was cut by just one percent from 12 percent to 11 percent. Whatever the case, at the end of the day, you find that it has made mortgages cheaper and more affordable.
In the US, where the housing situation had been worrisome with the sub-prime mortgage crisis, the number of empty houses is so staggeringly high that no one has an accurate count. The managing director of UACN Property, Abdul Bellow notes that the city estimates that 10,000 houses, or 1 in 13 are vacant, all owned by lenders who foreclosed on the properties and also by the wholesalers who are now sweeping in to pick up houses in bulk as if they were trading in baseball cards.
This situation might soon give way to something cheering as the Barrack Obama administration has taken some steps aimed to address the problem of the housing sector. Recently, Obama sent a $500 billion mortgage bill to the parliament and it is expected that when the bill is passed, it will turn the mortgage sector around and the economy as a whole will be the better for it.

The United Arab Emirate (UAE) government has also cut down interest rate on lending. Though the figures were not disclosed to this reporter, it was said to have been reduced to a level where people are encouraged to borrow to do business.
Abdul Rahman Kadiri of Ark-Gold Properties who disclosed this to Business Day noted however, that banks in the country have made modalities for lending very stringent.

According to him, "before now, what the banks required from you as a borrower was just a proof that you are working with your six months pay slip; a bank statement for six months and a declaration that all is well. If it is a business loan from a company, all they required from you was two, three years audited account; your business plan and any other thing they might consider necessary".

He said that before you get the loan now, banks have to do a lot of scrutiny to be doubly sure that you are credit-worthy. "Before this time, one of the businesses that was booming in Dubai was the property market where you could just walk in and see a property of your choice and approach a bank and within two-three working days, you get your loan", he said, adding that most banks have stopped giving loans for property transactions and even where you get an approval, you have to bring high equity contribution.

He recalled that banks once required a maximum of 10 percent contribution from you and they would provide the remaining 90-95 percent. "Now, banks demand as high as 30-40 percent equity contribution from you which has drastically reduced the turn around in property development and transactions".
Nigeria is a peculiar case because less than one percent of those who want properties have any form of mortgage or loans. Unfortunately, those are the people who need houses. The likely thing is that the man who does not have a loan is able to hold onto his property.
When, therefore, you compare other countries that enjoyed the pre-meltdown boom with our own, you find that our own situation is very peculiar because we have never really had a mortgage system.

Olaniyan says that it is even now that we should endeavour to develop our mortgage system because it remains the only way we can really arrest the slump. Unfortunately, if any bank is lending, it is lending at an interest rate of close to 30 percent. Any property investor who is in his right senses should not touch this kind of interest rate.
He however, enthused that in spite of the seemingly adverse impact of the meltdown on the real estate sector, there are still opportunities for those who have cash to move into the market.
"This is the best time to buy real estate. For example, in the US, a house that was put up for $300,000 around September last year was sold only a couple of weeks ago for $100,000. The tenant who is occupying the house now is paying $20,000 per annum. You can see that in five years, he will recoup his investment", he disclosed.

Coming back home, he said, a plot of land that was selling for N80 million as at September last year, recently, someone was offering another plot of land at the same place for N54 million, adding that some areas had gone that bad, "but mind you, the high end market has gone flat. Some parts of Lagos have not gone down that bad such as Ilupeju and other areas where supply is limited. If you want a plot of land in a place like Ilupeju, there might be just one for sale. If you want it in Lekki, you will get 20 plots, VGC-30; Oniru-15 and Ikoyi-10".
Olaniyan said that at the end of the day, a lot of opportunities are out there because the market will bounce back, stressing that this is also the time to buy and not to sell because people who sell now are those who cannot afford to hold onto their properties.

Kadiri agrees that the meltdown presents a fine opportunity for those who have cash to move same to Dubai property market because as he put it, "this is one market that presents almost limitless investment opportunities courtesy of the impact of the meltdown".
Before the economic crisis, Dubai property market was one of the most flourishing in the world, giving fabulous returns on investment within shortest time possible. All that has changed now and the market is currently witnessing a downturn in demand, prices and returns on investment.
Kadiri disclosed that house prices in the UAE city have dropped considerably to about 30-40 percent, adding that the market is currently witnessing considerable price correction which has also brought about a slowdown as experienced in other markets. According to him, there are some 3-bedroom apartments which about nine months ago went for $500,000-$600,000 each, but now sell for about $400,000 each while a one-room apartment which at the same period was sold for $400,000 now sells for $250,000.

"In each case, you can readily find a tenant who will be paying a rent of $30,000 per annum. You see that from the rental income, you make about 10-20 percent annual return on your investment", he explained.
Because of difficulty in getting easy loans to invest in properties, speculators have been eased out of the market, he said adding that the market is maturing and genuine investors are the ones left in there.
Again, he said that rental income can give an investor reasonable return on his investment.

"There is what looks like a fad among Nigerians to send their children to school in UAE and this is an added reason why such parents should buy homes there. What stops such people from buying homes in Dubai so that their children can move from their homes to school even as it is cheaper that way".
He noted that "a lot of people now retire to Dubai into their own homes and for some people, it is an economic pride and status symbol to have a house outside like in London, America, etc. People should also aspire to own their homes in Dubai which is today a new world".

He advised that Nigerians should go there because as at today, Nigerians are not yet on the top list of property owners in the country. "For those who have the means, this is the right time to buy because prices are very low compared to what they were before. This is the right opportunity to buy", he stressed.
Globally, the real estate sector, like other sectors of the economy, is passing through difficult times. What is intriguing however, is that while other countries are putting measures in place to save the sector from collapse, Nigeria appears to be an onlooker.

Worst price falls in 23 years

More ugly house price data - and that's after home loan rates have been slashed 4,5% since December. New Absa stats.

SA Reserve Bank Governor Tito Mboweni's dramatic slashing of interest rates over the past six months has failed to halt the trend of falling residential property prices. And there's no good property price news expected from the bank this year.

More ugly house price data has been released this week, showing the biggest year-on-year fall in residential prices in 23 years.

Absa's House Price Index up to May 2009 shows "nominal house prices in the middle segment of the market declined by 3,6% year-on-year in May, which was the biggest price drop since late 1986".

Jacques du Toit, Absa's sectoral analyst of secured lending for Absa Retail Bank, predicts that house prices are set to decline by a nominal 3%-4% in 2009.

Absa's figures suggest your home is now worth what it was in early 2007 and put the average house as priced at about R930 000.

You can place the blame for the erosion in market value of your home largely on the recession - the first since 1992 and which has made banks nervous about granting credit to home loan applicants. 

Absa's analysis

 In his note, Du Toit said: "Nominal year-on-year house price deflation, which commenced in December 2008, continued in May this year, while in real terms prices are declining on a year-on-year basis since January 2008."

The Absa break-down of house prices in terms of home sizes shows:

* The average nominal price of middle-segment housing was down by 3,6% year-on-year (y/y) to R932 000 in May 2009, after declining by a revised 3,2% y/y in April. The May price decline was the biggest since September 1986, when it was also -3,6% y/y. On a month-on-month basis, nominal house prices were 0,5% lower in May compared with April. These trends contributed to nominal house prices in the middle segment to be R35 300 lower in May 2009, after peaking at R967 300 in May last year."

Du Toit said middle-segment house prices were down by a real 10,7% y/y in April, after declining by a revised 10,2% y/y in March. "This was the biggest real year-on-year price decline since September 1992," he said, noting that real house price calculations are based on the consumer price index (CPI) for all urban areas, available from January 2008, as published by Statistics South Africa and used by the South African Reserve Bank for monetary policy purposes.

Before this date the calculations are based on the historical CPI for metropolitan areas, linked to the CPI for all urban areas, he said.

* In the category for small houses (80m²-140m²), the average nominal price dropped by 4,0% y/y in May this year, after a revised -3,2% y/y was recorded in April. "This brought the average price of houses in this segment to about R658 200. In realterms prices dropped by 10,7% y/y in April (-10,0% y/y in March)," said du Toit.

The average nominal price of medium-sized houses (141m²-220m²) declined by 2,0% y/y in May 2009 (-2,0% y/y in April), which brought the average price in this category of housing to around R930 000. The average price of medium-sized houses was down by a real 9,6% y/y in April this year.

Nominal year-on-year house price deflation, which commenced in December 2008, continued in May this year, while in real terms prices are declining on a year-on-year basis since January 2008, said the top property analyst.

* The average nominal price of large houses (221m²-400m²) declined by 3,5% y/y to around R1 344 400 in May this year, after declining by a revised 3,6% y/y in April. This caused the average price of a large house to be R53 200 below the peak of R1 397 600 reached in March last year. Prices of large houses were down by a real 11,0% y/y in April this year, after declining by 10,9% y/y in March.


Article from: Real Estate Web