Real Estate: COVID-19 induced headwinds to compound sector’s woes

The real estate sector in Nigeria remained in recession when the National Bureau of Statistics announced the last GDP growth numbers for Q1 2020. The sector contracted by 4.75% in Q1 2020, marking the fourth consecutive quarterly decline. We highlight that the sector has recorded just one quarter (in Q1 2019) of positive growth in the last 17 quarters. Several key players in the sector have had to divest or restructure operations to a lower scale. Typical examples include UACN Properties and Primewaterview.

Although, the impact of Covid-19 is yet to be fully ascertained given that Q2 GDP data is still a few weeks away, nonetheless, we expect the sector to sustain its abysmal performance particularly due to weak demand for capital goods. The impact of Covid-19 on the finances of consumers in Nigeria has been very significant with many people losing jobs and others taking steep pay cuts. We have previously highlighted how we expect Nigerian consumers to be affected by the Covid-19 crisis as well as recent power tariff hike and fuel price hike (See CSL Nigeria Daily, July 3, 2020 – Nigerian consumers set for double whammy hit to purchasing power). Thus, we expect new home acquisitions to become less of a priority. In addition, we expect corporate demand to wane with many businesses expected to close while others continue to struggle with cash flow problems.

We note that legacy issues such as high cost of mortgage, elevated cost of building materials, Land acquisition difficulties etc. remain major stumbling blocks to growth in the real estate sector. However, we expect this to be compounded by the sustained weakness in purchasing power of consumers (Corporate & Individual) whose finances have been impacted by the pandemic. Furthermore, we expect building cost to rise due to the increase in cost of housing materials given the recent devaluation of the currency.

SOURCE: PROSHARE