Default on loans rises as glut hits property market

Financing real estate development is seen as one of the most difficult things to do in Nigeria. Over the last few years, it has been made worse due to the downturn in the economy.

According to stakeholders, the real estate industry has not really recovered from the impacts of the recession.

Findings show that developers have had to take the heat as empty houses dot the landscape of major cities in the country, tying down funds while many Nigerians are homeless.

It is estimated that Nigeria has about 17 million housing deficit, a figure that has been in dispute because some stakeholders think it may be up to about 20 million considering the growing population.

But while many look up to developers to help in the provision of houses, with the support of the government, they (developers) have been constrained by low purchasing power from those who should take up the houses built, and lack of funds from banks.

Data obtained from the National Bureau of Statistics show that as of the third quarter of 2018, the real estate industry's debt to banks was over N710bn.

The figure accounts for 4.46 per cent of the total credit of N15.59tn to the private sector, making the industry the fifth highest debtor to the banks.

Although it was lower than the N798bn recorded in the same period in 2017, the situation has made it difficult for developers to access commercial banks' loans.

The Deputy President, Real Estate Developers Association of Nigeria, Mr Akintoye Adeoye, says banks are no longer interested in extending loans to developers.

He adds, "There is a high rate of default on bank loans, if you go to any bank today and tell them you want to finance real estate development, they will not talk to you because they have had their fingers burnt. The interest rate is also not helping; it currently hovers around 25 to 35 per cent and housing is long-term, so it is a mismatch to use a short-term fund to finance a long-term project.

"Now, banks are not places to go to except on some special projects where the off-takers are members of a cooperative society where they know how they will wrap up the transaction but it will also be expensive for the buyers because the cost of funds will be transferred to them."

The Chairman and Managing Director, Megamound Investment Limited, Otunba Olumide Osunsina, also says commercial banks are no longer interested in financing real estate projects.

"They have not been putting their money in the industry for a while," he adds.


The Chairman, Sparklight Property Development Company Limited, Chief Toyin Adeyinka, tells our correspondent that the low purchasing power of many Nigerians has reduced real estate transactions, limiting access to funds for developers.

He says the only viable window of funding, and which also offers single digit interest rate to developers is the Federal Mortgage Bank of Nigeria.

But even the FMBN has been weighed down by debts which it gives majorly through its Estate Development Loan window.

The mortgage bank in 2012 suspended the EDL due to default on loans, a few years after publishing names of bad debtors in 2009.

In 2016, the FMBN had solicited the help of the Economic and Financial Crimes Commission to assist in recovering about N100bn debt from developers as well as primary mortgage banks.

According to a former Managing Director and Chief Executive Officer of the FMBN, Richard Esin, who made the appeal at the time, developers have a huge debt overhang with the bank.

Also, the now defunct Skye Bank Plc, in its earnings guidance on March 23, 2016, notified shareholders and investors of "anticipated material decline in its profits for the full-year ended December 31, 2015 compared with that of 2014."

According to the bank, the expected decline in performance was attributable to management's decision to recognise "increased impairment on loans to sectors severely affected by the prevailing economic headwinds, which are yet to abate, especially the lull in oil and gas and real estate sectors".

In its Gross Domestic Product report for the third quarter of 2018, the NBS says the real estate sector contracted by -2.68 per cent from -3.88 per cent in the second quarter and -9.4 per cent in the first quarter of the year.

At the same period in 2017, the sector contracted by -4.12 per cent in the third quarter from – 3.53 per cent in the second quarter of 2017 and -7.37 per cent in the third quarter of 2016.

The sector's contribution to nominal GDP in the third quarter of 2018 was 6.88 per cent, lower than the 7.54 per cent reported in the corresponding quarter of 2017 and 7.09 per cent recorded in the preceding quarter.

Glut versus deficit

Ironically, even with the slow growth in the sector and the glut in the property market, the Federal Government estimates that almost half of the population of the country needs houses.

According to a recent statement by the Minister of State for Power, Works and Housing, Mustapha Shehuri, more than 70 million Nigerians fall into the category of those in urgent need of housing.

The President and Chairman of Council, Association of Housing Corporations of Nigeria, Mohammed Adamu, says housing all over the world remains the most basic human needs that impact directly on the physical, social and mental well-being of man irrespective of socio-economic status, colour or creed.

He, however, adds that many people are becoming homeless as a result of a non-functional housing sector.

He explains that despite the high demand for housing, there are houses in some of the major cities such as Abuja, Lagos and Port Harcourt, built over two years that are not sold and not occupied.

A recent report by the Centre for African Housing Finance, says Nigeria requires over $360bn to address its housing needs.

The Principal Partner, Bode Adediji Partnership, Mr Bode Adediji, says the luxury property market has been on lockdown for the past two to three years.

The Senior Partner and Chief Executive Officer, Nelson Thorpe Alonge, a firm of chartered surveyors and estate surveyors and valuers, Mr Victor Alonge, says the situation in the property market has been the same since 2015.

"The truth is that there is clearly an oversupply of property for sale, it has been like that for some time especially since the current dispensation. There are few effective demands, which is why prices have not risen. We have not seen any difference and people are not buying properties like before," he says.

At the beginning of the year, real estate firm, Northcourt, in its ' 2018 Nigeria Real Estate Market Outlook', had stated that consumer purchasing power had remained low.

"Small is the new big as developers across retail, residential, industrial and hospitality sectors now favour small to moderately-sized projects. Also, there is a rising demand for much more affordable housing projects," the report says.

According to findings , the demand for smaller but functional developments is gradually taking over; from residential to retail, and many developers are beginning to explore the new trend.

The Chief Executive Officer, Global Property and Facilities International Limited, Dr MKO Balogun, says potential subscribers now look out for smaller apartments.

He says, "There are more demands for one, two-bedroom apartments. Sixty per cent of people who need houses don't need three-bedroom apartments; they need one and two-bedroom where they can graduate to bigger houses. But we are just building townhouses everywhere and creating problems.

"I know developers who are buying whole houses, knocking them down and building one, two-bedroom apartments. We can't keep doing the same thing and expect the same result."

The residential sub-sector is, however, not alone in the problem; the retail and office markets are also not faring better.

Analysts say that out of the close to 20 malls in Lagos, only about two or three are viable.

In its overview of Nigeria's real estate industry in the third quarter of 2018, an investment firm, Broll Nigeria, says the ripple effect of improved macroeconomic conditions from recessionary levels has yet to have a significant impact on the recovery of the retail market.

It adds that while the rise in oil prices has helped to boost forex inflows and exchange rate stability, it has also contributed to inflationary pressures in the market.

"Renewed signs of weakness in the wider economy have made investors increasingly cautious in their investment decisions. Over the last 12 months, underlining trends have persisted. These include contracted purchasing power, high tenant turnover rates, high rental and operational costs and an oversupply of mall space. Landlords continue to offer financial incentives in order to drive up occupancies within their malls," the report says.

Although it found a relative improvement in office market dynamics in the first three quarters of 2018, the report says the market remains a tenants' market with landlords having to offer favourable leasing terms to drive occupancy levels.

It explains that it is anticipated that activity in the office market will continue to improve, albeit at a very gradual pace, with the lingering uncertainty about the economy's growth and employment prospects.

"Vacancy levels are expected to rise, especially with the delivery of over 40,000m² of prime space over the next six to 12 months," it adds.

Balogun says the retail market started aggressively but it is currently being challenged by increasing vacancy rates.

He explains that the situation is so because some developers have not been very innovative in developing the malls, especially putting the neighbourhood into consideration.

"What we are doing is copy and paste; unfortunately most of the people we copy from do community malls. You can't build big malls in the middle of nowhere and expect to have full occupancy," he says.

Mortgage to the rescue

According to stakeholders in the industry, only the development of the mortgage industry can help reduce Nigeria's housing deficit.

But investigations show that awareness is still very low, especially in the informal sector where many do not know how to get mortgage loans.

The Founder of Dunn Loren Merrifield, an investment firm, and Chairman of Mortgage Warehouse Funding Limited, Sonnie Ayere, tells our correspondent that with the housing deficit in the country, even if a million houses are built yearly, it will take more than 20 years to reduce it.

"So, it gives an idea of how enormous the issue is and how it is important that we get people onto the mortgage ladder," he adds.

The Chief Executive Officer, Trustbond Mortgage Bank Plc and President, Mortgage Banking Association of Nigeria, Mr Niyi Akinlusi, says Nigerians have become accustomed to buying houses with cash, hence the lull in the property market.

"I think it is cultural; a lot of our people think if they cannot feel it, it does not exist. They feel the cash. But I think all we need is more education and enlightenment. That is why we encourage people to take a mortgage, which doesn't give cash but it will encourage them to understand and appreciate the fact that transactions cannot be cash-based," he says.

According to him, stakeholders in the mortgage industry are putting a lot of initiatives in place to ensure that more Nigerians consider using mortgage when acquiring houses.

Ayere, however, says that the high-interest rate on the mortgage is also a problem that needs to be addressed.

He says, "Interest rate on a mortgage is very high and makes the process very expensive. So that even with a tenor of about 20 to 25 years, people are reluctant and those who take mortgages pay it up as quickly as they can.

"In other words, any little money they get, they put it into paying up their mortgage loan, because it is just so expensive at about 22 to 25 per cent interest rate. Secondly, when you calculate the payment with the income ratio, it is also very high; a lot of people cannot afford it.

"When you look at the percentage you have to pay to the banks and the percentage of the income you have, it becomes difficult. Let's say you earn N1,000, under normal circumstance, your mortgage should not be more than N300; but when you calculate the interest rate of these mortgages, they take up about 60 to 65 per cent of your income, and you can't use that much to repay mortgage loans. So, that is one of the reasons why people still use cash; the real issue is the interest rate."

He explains that efforts are ongoing to address the problem of both interest rate and funding tenor.

Akinlusi says the government and other stakeholders are currently de-risking the mortgage market so as to improve real estate funding.

"It has been slow but steady. One of the things that need to be done is to de-risk the market; for any market to be opened up, you need to de-risk it. That is when funds can come in," he adds.

Analysts, however, say that except stakeholders intensify efforts to educate Nigerians about mortgages, the various initiatives may not yield results.

Developers explore incentives

To cope with the lull in the property market, developers are devising survival methods such as giving incentives to subscribers.

Adeoye explains that several innovative options have been made available to buyers.

"As developers, we felt the need to come up with offers some of which allow subscribers to pay between 20 and 30 per cent deposit, move into the houses and spread the balance over a four to six-year period," he says.

He, however, adds that despite this very generous offer, many subscribers are not forthcoming because they are unable to come up with the deposits even on houses that are considered very cheap.

Some developers have gone further by offering bags of rice, foreign trips, cows and rams, among others, especially during festive periods to woo subscribers, especially those buying land and other affordable real estate products.

Adeoye, however, notes that the offers are merely for enticing potential subscribers as their prices have been factored into the cost of the property or land.

"Buyers need to know that whatever they are getting has been factored into what they are buying, it is not free," he says.

According to him, the process can also be counterproductive as the likelihood of default by developers doing these things is high.

He adds, "What many of them are selling are plots of land. So if someone is doing a promo and selling 1, 000 plots of land, how will he deliver? How will he process titles for these people? How will he manage the challenges of encroachment? There is a promo every time, but for me, it is not sustainable. Many of such developers have disappeared and many of them will also disappear.

"I wouldn't call it a scam because of the intention; it is possible for you to be doing something wrong innocently. But some of them may not have enough land to give or the logistics to deliver. Some developers have 10, 000 and 20, 000 subscribers, how many years will it take them to deliver the properties?"

He says subscribers to such projects need to be wise and not be carried away by such offers.

Rising cases of property scam

Housing is a basic human need and its non-availability to the average man in the country coupled with a fast-rising population, especially in the urban centres, has made the search for shelter either for lease or outright purchase a thing of near desperation.

This, according to findings, has led to a high number of fraudulent developers. Unfortunately, the industry is not regulated and has become an all-comers affair in the last few years.

Over the years, the business of property development has thrived and continues to attract new investors due to the fact that it is subjected to little or no formal regulation except for the efforts of some groups mostly made up of the developers themselves.

Adeoye says, "There are problems in the industry; whatever you are doing without experience is likely to have money as the motivation. So, it may lack depth and you may not understand the business you are doing.

"Now, there are inexperienced developers around and the industry is not regulated. People wake up and collect people's money without accounting for it and there is no one to ask them to deliver what they promised. People are being scammed every day. Developers today move about with all kinds of security operatives. We have hooligans masquerading as developers all over the country."

The Managing Director of PropertyMart Real Estate Investment Limited, Mr Deji Fasunwo, says everyone sees the real estate business as what they can do whether they have the expertise or not.

"But it takes a lot of passion and desire to make things happen for you or to remain in business. If it is about money, you will not last long and because the industry is not regulated, there have been a lot of charlatans but over time we have been able to differentiate between those in business to make a difference and those in it to make money," he says.

Experts proffer solutions

The Managing Director, Propertygate Development and Investment Plc, Mr Adetokunbo Ajayi, says the weak market demand for properties, principally due to the current difficult macroeconomic environment, is taking a serious toll on many developers and realtors.

He, however, adds that the poor conception and product deficiency of some development projects are the main obstacles to their market success.

"While it is obvious that the real estate sector is currently in a lull, it is, however, not an unusual occurrence from historical records. Patience, doggedness and innovative thinking are required on the part of players in the sector to keep sailing. The boom cycle will surely come again," he says.

Balogun says except developers begin to take into consideration the needs of those they are building houses for, the glut in the market may not be resolved soon.

"We are not building what people require, which is under our control, we don't need any government policy or intervention or activity. Industry players need to sit back and realise they are throwing money away and the banks are also suffering, depositors' money is suffering. If you don't build with sense, you waste your money," he says.

He explains that developers need to understand that houses built based on demand will not remain in the market for long.

He says, "What we need to do is to have a rethink. We should build to fulfil demand not just build because the money is available. The economy will not reflect the investment in the real estate industry if we don't change these things and like I said there are data to help us make those changes but we are not taking advantage of them."

Adeyinka posits that for developers, particularly those building for residential purposes, to reduce building houses that will remain vacant for a long time, they should explore designing for those who really need them.

"My company's development is designed for contributors under the National Housing Fund, so it is a bit better, it helps us to stay afloat," he adds.

According to the Director-General of the Nigerian Building and Road Research Institute, Prof. Danladi Matawal, at a period like this when the country is faced with high figure of housing deficit, stakeholders must begin to explore ways of reducing costs. He explains that the ability to provide shelter for the people at a cheaper rate will solve over 60 per cent of the need for housing.

"At this point when imported building materials are becoming very expensive and considering the fact that the availability of fund continues to dwindle, the solution is the alternative, locally-sourced building materials which are in abundance in Nigeria," he adds.

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Default on loans rises as glut hits property market
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