Managing impact of FX volatility on real estate sector

The real estate sector in Nigeria is facing significant challenges due to the recent drop in the value of the naira against the U.S. dollar, coupled with high inflation and logistics costs. Analysts believe that these factors are driving prices in the real estate and construction sector higher, impacting developers, investors, and occupiers alike. Ayo Ibaru, the Chief Operating Officer and Director of Real Estate Research at Northcourt, discussed the outlook for the real estate sector in Nigeria during a recent interview on CNBC Africa. The interview shed light on the various implications of foreign exchange volatility on the real estate market in the country. Ibaru highlighted the struggles faced by stakeholders in the sector and provided valuable insights into the current state of affairs. One of the key takeaways from the discussion was the impact of foreign exchange imbalances on the real estate industry. With over 90% of construction materials in the Nigerian real estate market being imported and paid for in foreign exchange, the sector has witnessed a significant increase in costs. This has made real estate development more expensive, disrupting return on investment calculations for investors and leading to challenges in rent payments and renewals for occupiers. The exchange rate fluctuations have also affected gated communities, where increased costs of living have sparked conflicts between residents and property managers over expenses like security and utilities. Another crucial point raised in the interview was the implications of foreign investment, particularly from the diaspora, on Nigeria's real estate sector. While diaspora investment could have been beneficial in the past, the current cost of building due to exchange rate imbalances has diminished the value of such investments. Foreign capital inflow has also been hampered by challenges in repatriating profits, impacting sectors like hospitality and retail. Ibaru emphasized the need for a smoother process for repatriating funds to encourage foreign investment in the real estate market. The discussion also delved into the performance of different market segments within the real estate sector. Industrial real estate, including manufacturing and warehousing, emerged as a promising area of growth due to increased focus following the onset of the COVID-19 pandemic. With a surge in demand for storage and logistics facilities, industrial properties have seen high occupancy rates, driven by improvements in port operations and anticipated benefits from projects like the Dangote refinery. Mid-market and low-income residential segments have shown resilience, while high-end residential properties have faced challenges, except for luxury offerings catering to a niche market. Additionally, the healthcare sector presents opportunities for growth, given Nigeria's substantial healthcare tourism industry. Local clinics and hospitals are stepping up to meet demand, although infrastructure and talent shortages remain obstacles. The interview concluded with a discussion on the impact of policy changes, such as the unbanning of certain building materials, on the real estate sector. While such policy reversals signal governmental responsiveness, the underlying challenges posed by exchange rate fluctuations persist. Developers and industry players are faced with uncertainties in planning and project execution, leading to a cautious approach characterized by land sales over new construction. Despite the prevailing challenges, stakeholders in Nigeria's real estate sector are hopeful for improvements in the economic landscape that would support sustainable growth and stability. The insights shared by Iyo Ibaru shed light on the complexities of navigating FX volatility in the real estate market and underscore the need for adaptive strategies to weather the storm.