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Nigeria’s Real Estate Sector Faces Rising Interest Rate Challenge

Developers Seek Government Aid Amidst Escalating Financial Strain

by Adenike Adeodun

In Nigeria, the real estate sector, a cornerstone of economic stability and growth, is facing unprecedented challenges due to the surge in interest rates, which is exacerbating the country’s housing crisis. This concerning trend has sparked a call to action among property developers, mortgage operators, and real estate professionals, urging government intervention to safeguard affordable housing rates and support the economy. The escalating interest rates, which have reached a record high of 22.75% as of February 2024, are significantly impacting the cost of borrowing, dampening demand from developers and investors alike, and influencing a cautious market approach due to the inflation-induced rise in building materials.

This financial environment poses a stark contrast to the traditionally inflation-hedging nature of real estate, prompting a shift in strategies among stakeholders in the industry. The Central Bank of Nigeria’s (CBN) decision to hike the key benchmark interest rate to 22.75%, coupled with the commercial lending rates hovering between 27.07 and 30%  and an inflation rate of 31.7% as of February 2024, signals a critical juncture for the sector. This situation demands a multifaceted response, focusing on sustaining development while navigating the challenges posed by increased borrowing costs and reduced affordability for potential buyers and developers.

The adverse effects of rising interest rates are multifarious, impacting not just the feasibility of new projects but also altering the landscape of commercial real estate transactions. This shift from a seller’s to a buyer’s market underscores the nuanced impact of interest rates on supply and demand dynamics within the commercial property market. Experts within the field highlight the nuanced challenges faced by the sector, from reduced occupancy rates and increased vacancy rates in commercial properties to the heightened cost of financing for real estate developers, which could lead to a deceleration in construction and development activities.

The nuanced implications of these financial adjustments are particularly evident in the residential segment, where higher interest rates have led to increased demand for rental properties, thereby inflating residential rent rates. This dynamic reflects a broader economic strain, affecting property values and prompting industry leaders to call for strategic interventions. Dr. Samson Agbato, Director of the School of Environmental Studies at Moshood Abiola Polytechnics, emphasizes the critical impact of rising interest rates on borrowing costs and the real estate development process, advocating for a cautious approach to managing fluctuating costs and securing financial stability.

The situation necessitates a strategic reevaluation among developers, who are urged to diversify investment portfolios, implement financial safety nets, and explore innovative financing strategies to navigate the volatile market. This includes the adoption of tax-efficient investing, utilization of short-term and high-yield savings accounts, and hedging against interest rate risks to mitigate potential impacts on project feasibility and profitability.

Industry leaders, such as Adetokunbo Ajayi, Managing Director/CEO of Propertygate Development and Investment Limited, and Dr. Yemi Adelakun, Managing Director/CEO of NISH Affordable Housing Ltd, underscore the broader implications of high interest rates on the real estate sector. They highlight the dire need for government incentives and interventions to stabilize the market, ranging from price interventions for building materials to special lending rates for affordable housing sectors and enhanced access to affordable mortgages. These measures are deemed essential not only for the sustainability of the real estate sector but also for the overall economic well-being of the nation.

The Mortgage Banking Association of Nigeria (MBAN) echoes this sentiment, with Executive Secretary/CEO Dr. Adedeji Ajadi advocating for government intervention to counteract the adverse effects of rising interest rates on the housing and mortgage sectors. Such intervention is critical to maintaining affordable rates for citizens, supporting the provision of shelter, ensuring financial security, and fostering the economic development of Nigeria. As the real estate sector grapples with these challenges, the collective call for strategic, multifaceted solutions highlights the urgency of addressing the housing crisis and safeguarding the future of real estate financing in Nigeria.


Source: The Guardian

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