Real estate as the path to a sustainable economic future

BY LUKMAN SHOBOWALE

There is no doubt that these are truly challenging times. The slowdown in global economic activities — occasioned by both the impact of COVID-19 and the Russia-Ukraine crisis — has resulted in a cost of living crisis and a decline in the global volume of trade, leading to inflationary pressure at national, regional and global levels.

As one would imagine, Nigeria has not been insulated from the financial shock and rise in global inflation. The Nigeria Bureau of Statistics (NBS) put the nation’s inflation at 21.47 percent in November 2022, the highest so far recorded in the nation’s history. This has led to a rise in food inflation and a corresponding decline in purchasing power of most Nigerians, leaving more people in severe poverty.

Similar to other monetary authorities in the world, the Central Bank of Nigeria (CBN) has continued to tighten its monetary policy, as part of measures to address the growing inflation — notably through interest rates and other monetary policies to cushion the inflation. The increase in lending rate has however made Nigeria one of the countries with the highest lending rate in Africa, although while some may argue that these are necessary interventions to mitigate inflation, such interventions have had severe impacts on business and investment.

For example, following the monetary policy review in September 2022, the CBN raised the interest rate to 16.5 percent, making Nigeria the highest among other African countries, such as South Africa at 7 percent, Kenya at 9.6 percent, Morocco at 2 percent, and Egypt at 13.75 percent. These tightening measures have had a significant impact on business and investment.

Despite the economic uncertainties, the non-oil sector continues to show resilience, contributing to gross domestic product (GDP) and sustaining government revenue. In the last year, the agricultural sector contributed 25.9 percent of GDP, manufacturing 20.56 percent, while the real estate sector contributed 4.9 percent to the GDP.

There were also significant contributions from financial services, communications, entertainment and construction. The real estate sector has maintained a sustained rebound from the impact of the pandemic, maintaining a strong performance. Already, experts have predicted that the Nigerian real estate sector would expand by 5.2 percent in 2023, projecting a 6.5 percent contribution to GDP. In a few years, the contribution of the sector is expected to rise to the levels of the United States and China, where the real estate sectors contribute 14 percent and 13 percent of GDP, respectively.

As the revenue from the oil sector continues to decline as we approach a gradual global shift from oil, Nigeria must begin to consider the real estate sector, as a key contributor to the economy via its capacity to deliver sustained prosperity and the redistribution of wealth. Investment in real estate has the potential to hedge growing inflation, provide jobs, address poverty, bridge the housing deficit, redistribute wealth and enhance government revenue.

In terms of investment choices, real estate is also one of the most sustainable globally. Aside from its potential to hedge inflation, it is also insulated from price volatility. This can serve as a means to manage the impact of not just inflation but also currency depreciation. Similarly, as the country looks to reduce its poverty levels, real estate provides a sustainable approach to getting people out of poverty and providing sustainable prosperity.

For example, the government can embark on mortgage reforms and special financing strategies to provide Nigerians with financing options at a single-digit interest rate to invest in real estate and home ownership. Moreover, such interventions are not new; an example is the Anchor Borrowers Programme, aimed at achieving rice sufficiency in the country. In the long term, this policy can both create empowerment and help to bridge the housing gap, which currently stands at 28 million housing units.

The real estate sector can serve as the key to addressing the growing unemployment. More than a third of eligible workers in Nigeria are unemployed. According to the NBS, the unemployment figures as of Q4 2020, stand at 33.28 percent. The real estate sector typically involves several value chains that involve labour at every level. Increased activity in the real estate sector will significantly address the nation’s unemployment challenges and support wealth creation.

The real estate sector can also help to grow government revenue. The government is currently faced with the trifecta of mounting debts, subsidies and low revenue. Nigeria’s revenue to GDP currently stands at 8 percent, below the African average of 18 percent, showing that government revenue is one of the most inadequate globally.

The real estate sector has great potential to sustain the economy in the long term. Significant investment and enabling business reforms in the sector can help the government to increase its revenue from the sector, through land-based taxes, improved tax revenue and widen the tax net.

If properly harnessed, the Nigerian real estate sector can serve as the pathway to building a sustainable economic future. Significant investment in the sector, in addition to enabling business environment reforms and financing support for Nigerians, can accelerate the sector and its contribution to the growth of the economy and GDP.

Shobowale is the co-founder, Dukiya Investments Limited.