OpinionInternational

What is driving the real estate industry in Nigeria?

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According to Knight Frank’s recent Africa Report 2015, international investors are increasingly looking for opportunities in Africa’s real estate markets.

In the past year alone, we have seen property searches from outside Nigeria increase from under 30 percent to well over 45 percent of all searches on our website.

Barely a month goes by without several inquiries from international investment firms that are seeking deeper insight into the Nigerian real estate market.

In my opinion, the primary drivers of increasing investor interest are twofold: positive macroeconomics and stability. The Nigerian economy is continuing to grow at a healthy rate, despite the recent downturns in oil prices.

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This growth is primarily due to the move away from dependency on the oil and gas industry, with massive growth in sectors such as telecoms, banking and agriculture. This growth has resulted in a healthier spread of wealth and a resurgent middle-class economy.

Nigeria’s growth is no longer seen as a blip, but a sustained transformation of Nigeria’s economic fortune. Excitingly, there is renewed confidence in the system, particularly from local investors, and high demand from a young aspiring population.

The behavior of the population is substantially impacting the country’s real estate market. Nigeria is experiencing rapid urbanization, with just under 50 percent of the population living in urban areas — and this number will continue to grow.

This growth is impacting public infrastructure, which struggles to keep up with the demand. So what we see today is property developers taking on the added burden of developing roads, water, power, drainage and commercial retail needs of the communities they are building.

Is this a good thing? Maybe. I believe that it is the future of the Nigerian economy, as the government’s role is overtaken by private developers, just to keep up with demand.

CssAndDesign / Shutterstock.com

CssAndDesign / Shutterstock.com

Secondly, Nigeria’s population is young, and getting even younger. I don’t believe we have yet begun to see the full effect of this population trend.

Take Lagos as an example, where over 75 percent of property seekers are looking for rental accommodation. So a city like this needs to adapt to demand by building far more rental properties than are available today (about 35 percent of available properties).

However, at some point, these people will decide to acquire homes of their own. I strongly suspect that at this point, you will see an upsurge in the property markets of Nigeria’s midsized cities such as Enugu, Calabar and Abeokuta.

The property market has always played a role in the overall economic growth, with a contribution of approximately 8 percent of gross domestic product (GDP).

However, when compared to the 14-17 percent contribution in other emerging markets, I would suggest there is a lot of yet untapped growth potential for real estate in Nigeria.

The proper restructuring of the mortgage market and reformation of outdated land use policies could be the key to unlocking this potential.

Financing remains a problem both for property developers and prospective homeowners. Developers might benefit in the medium term from the increasing interest from foreign investors.

But with mortgage rates stuck between 16 and 22 percent, there is strong need for structural reform to assist individual homebuyers.

When it comes to selling real estate in Nigeria, the fundamental concern is the nature of the Land Use Act, which restricts land purchase to a long-term lease and requires approval from the state.

This act is seen by most real estate stakeholders as the primary constraint on the growth of the sector, as red tape around acquisition significantly slows down projects and increases costs.

The second major hindrance is speculative pricing. Sale prices in many prime areas are driven more by perception of what might be possible, rather than the reality of the area’s demand characteristics.

I believe the market will benefit from leveraging actual data in driving pricing decisions. We would then expect property developers to factor these prices into their projects before execution — to ensure viability.

The main thing foreign buyers require from local real estate agents is support in researching not only the properties themselves but also the surrounding neighborhoods with respect to the state of local infrastructure, transport connections and so on.

Without being at the location during an average Lagos thunderstorm, for example, a prospective buyer will not be aware of the potential for flooding.

Secondly, real estate agents play a fundamental role in ensuring the authentication of any property in terms of structural integrity and available features. I would, however, always advise any prospective buyer — foreign or local — to engage legal services to carry out due diligence on the buyer’s behalf.

Nigeria possesses all the key factors for real estate investment — a growing middle-class population, growth in consumption, rapid urbanization and a young demographic compared to more mature economies.

I expect each of these factors to contribute to continued demand for both commercial and residential real estate. We are seeing smart investors already bringing more targeted products to market and catering to specific demographics.

Looking forward, in the next 10-15 years, I expect Nigeria will have solved many of its existing structural challenges. This will hopefully lead to a surge in the local economy and free up funds to tackle the infrastructure deficit.

Given the intensity of interest in solving the high rates of mortgages today, I also look forward to more affordable solutions by 2030 that enable the property market to gain traction in transactions and, as a result, smarter pricing.

Obi Ejimofo is managing director of Lamudi Nigeria.

Email Obi Ejimofo.


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