Inflation And Exchange Rate Spikes Ignite Borrowing In The Real Estate Sector

Taiwo Ajayi
4 Min Read

The real estate and construction sectors in Nigeria have witnessed a surge in bank borrowings, but this hasn’t translated into an improvement in housing stocks.

The rise in inflation and exchange rate volatility poses challenges to developers, potentially leading to a crisis as their ability to repay credits diminishes, according to experts.

Factors such as increasing inflation and fluctuating exchange rates are contributing to the higher costs of running real estate businesses. The usual funds from off-takers for project kick-starts are dwindling due to reduced consumer disposable income and diminished confidence in private developers’ project delivery capabilities. Consequently, developers are increasingly turning to financial institutions, particularly commercial banks and development agencies.

Nigeria experienced its highest inflation rate in over 27 years in December, reaching 28.92% year-on-year. The cost of borrowings is adversely affected, with banks charging interest rates as high as 28-30%, exacerbated by an unstable exchange rate against the dollar.

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Despite the challenging environment, bank credit to real estate and construction firms has shown a positive but unstable increase in the last four years (2019 to 2023). During this period, these sectors secured loans totaling N21.89 trillion, contributing N93.14 trillion to the Gross Domestic Product (GDP), according to the National Bureau of Statistics.

Further analysis reveals that real estate and construction firms obtained loans of N18.26 trillion in 2020 and N20.86 trillion in 2021. Data from the Central Bank of Nigeria (CBN) indicates that borrowing by real estate firms rose from N668.8 billion to N707.03 billion between January 2022 and October 2022.

Despite the CBN’s increase in the benchmark interest rate from 11.5% to 18.5% in May last year, credit facilities to the real estate sector amounted to N8.22 trillion, and the construction industry secured even more impressive credit facilities worth N13.77 trillion.

In an eight-month period from November 2022 to June 2023, real estate and construction companies in Nigeria secured loans totaling N2.26 trillion, marking an 18.9% increase. However, industry experts express concerns about the sustainability of increased credit, anticipating potential cyclical effects on real estate products and the finance market.

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High inflation and exchange rates are driving up the cost of construction, leading to increased borrowing by developers. The cost of development and construction has risen significantly, making it challenging for developers to fund projects without resorting to loans with high-interest rates.

Experts argue that while increased credit may temporarily boost the sector, it might not be a sustainable solution, and if borrowing trends continue, a crisis in the real estate sector may loom, affecting developers’ ability to borrow and potentially leading to a market crash. The market’s future depends on end users’ ability to fund their housing requirements, and developers’ success hinges on responsive buyer behavior and sustainable funding.

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