Nigeria: The Impact Of A Flexible Forex Market On Real Estate Development In Nigeria

Last Updated: 20 July 2016
Article by Perchstone & Graeys

Housing has been considered as one of the most important basic needs of man. Hence, real estate development has overtime become a huge business globally. In Nigeria, the investment in real estate development has grown over the years, as Nigerians have conceived the importance and dignity of having a place to be called their 'homes'. According to a recent Report on real estates, high net worth individuals invest 25 per cent of their assets in real estates, compared to 18 per cent or less in equities and other instruments.

According to another report by the National Bureau of Statistics (NBS), the real estate sector grew by 5.9% and contributed 8.37% to the gross domestic products (GDP) in the 4th quarter of 2014 alone, and the whole sector was valued at USD$9.16billion in that same year. The sector experienced significant growth in 2015 having a sector value of USD$11.36billion, and is expected to grow further, with a projected value at USD$13.65billion in the year 2016.

In a recent Report by the World Bank, Nigeria, being the most populous black nation with a population of over 170 million, has a housing deficit of over 17milliion. This informed the desire to set Housing and Real Estate Development as one of the major goal of the present administration. The government has therefore formulated policies to encourage investment and development in this sector, as well as, allocated designated funds in form of a loan scheme for investors in the real estate industry. Nevertheless, it is believed that market in the real estate industry is driven by an influx of institutional, foreign and private businesses into the country, as well as, the growth of local established businesses and multinational oil companies across the major cities in Nigeria. Furthermore, one of the very important factors closely connected to real estate development in Nigeria is foreign exchange. This is so because, in a bid to use high quality materials in the development process, real estate developers in Nigeria seek supply from foreign companies thereby importing this materials, hence the need for foreign exchange.

The foregoing notwithstanding, the Federal Government, through the Central Bank of Nigeria (CBN), had announced departure from the regime of fixed exchange rate being regulated by the government. The background of this decision is connected to the meeting held recently by the Monetary Policy Committee (MPC), and the bid by the Federal Government to address the recent economic recession faced by the nation and the fall in the value of the nation's currency (Naira). In simple terms, a flexible forex market (as the policy is regarded) is one that allows the exchange rate to float freely and to find its equilibrium without any form of intervention from government. The effect of this is that the value of naira in foreign exchange would no longer be regulated by the government but the value would be determined by market forces of demand and supply. We shall therefore consider the impact of the flexible forex market on real estate development in Nigeria.

The real estate sector, as earlier mentioned, has been a significant sector in the Nigeria economy, and has grown to become a huge point for investment over a short period of time. Investments in the real estate sector majorly depend on materials needed for construction, the investors and professionals/developers. Furthermore, growth in the sector is hinged on the availability of these resources or the ease at which they can be accessed without any excessive difficulties, either economic or whatsoever. Otherwise, investors and developers would be discouraged to even venture into any project in the sector, having regard to the likely difficulties that might be faced vis-à-vis the projected profit margin.

Basically, some of the challenges facing the growth and development in the real estate sector have been identified as follows; limited access to funds, bureaucratic bottlenecks and availability of relevant material. The challenge in connection with availability of materials for real estate development is as a result of the fact that, in recent times, the regime in real estate development seems to have shifted from regular building construction process. This process, which is referred to as 'wet construction', is the use of block and cement for building from the scratch, thereby increasing the cost of building in Nigeria. The new construction process, therefore, is the approach by which manufactured products (such as, Metals, Timbers, Dry-Walls) and other dry construction alternatives are used in construction projects. This project has been largely assessed to save time and cost.

The foregoing notwithstanding, the flexible forex market therefore becomes a factor that can affect the cost of real estate project development. This is because, majority of these materials are imported, thereby raising the need to factor in foreign exchange ratesin estimating the cost for each real estate project. In effect, the flexible forex policy may give rise to uncertainty in attempting to estimate the cost of developing a projects.

Arising from the foregoing, investors and developers in the real estate industry may employ the hedging mechanism in order to hedge against fluctuation in the value of Naira. Furthermore, developers may look forward to foreign investors or partners in order to secure an advantage on foreign exchange rates.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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