01 Mar 2017

Stimulating Nigeria’s Economy through the Real Estate by Damola Akindolire

With two months into 2017 and economic indices yet to take the desired turn, the reality of another year in recession is gradually dawning on everyone – including the most optimistic economic pundits. While the one percent growth rate in the Gross Domestic Product (GDP) projected by the World Bank indicates some light to end of the tunnel – notwithstanding how deem – the big question most people ask is: how much impact this will amount to in lives of estimated 180 million Nigerians?

A close look at the country’s 2017 budget puts the nation’s total oil and non-oil revenue at N4.9trn. This, in the face of increasing recurrent expenditure of which the National Assembly accounts for N2.9trn, while our creditors take up another N1.6trn; is bound to leave the nation with tough choice of borrowing as much as N2.36trn from local and international sources to fund capital projects.

Interestingly, Nigeria is a place where, regardless of the shortfall in revenue, the recurrent expenditure always get 100% funding allocation at the expense of capital projects. In fact, over the past five years, the nation has spent more 5 times more on recurrent expenses than capital projects. This presupposes that capital expenditure always have to scramble for crumbs or survive on inflows from creditors, who may consider our plight through high-yield government instruments that overcrowd the private sectors ability to borrow, grow the economy and create jobs.

In the face of these challenges, Real Estate and Construction remains one of the most viable sectors that the government can concentrate on to stimulate the economy. It is not by chance that the sector is the second largest employer of labour behind the Agricultural sector in Nigeria; it is a demonstration of the opportunities it has brought to other economies.

If judiciously explored, these opportunities have the capacity to create jobs, increase spending and then return confidence to the Nigerian economy. While this is not a blanket position on the possible ways out of the current economic challenges, as a player in the Real Estate space, this article is about immediate actions that I believe can help Nigeria explore Real Estate as one of its economic drivers in 2017.

Foreign Exchange policy

A rather inconsistent foreign exchange policy in the last 24 months significantly contributed to the country sliding into an era of Stagflation. If not fixed, our anticipated growth will only be momentary. The Nigerian FX market can be likened to a borrower who needs to borrow money without having the cash flow (which is FX inflows) to repay its obligation or collateral security (FX reserves) to even secure it.

In my view, the 41 items that were banned can be seen as one of the major issues creating this issues and the divide between the inter-bank market and the parallel market rates. Most of the items on the banned list are responsible for $4bn to $5bn worth of imports annually.

Secondly, our country is structured as an import dependent economy and cannot have a ‘floating rate’ or ‘flexible rate’. Countries like Egypt who have implemented this policy are dealing with high inflation in excess of 24 percent. In view of these situations, it is obvious the government needs to shore up its position through assets disposal and a slight devaluation to N350-380 range to encourage investments and reduce impact on our lean reserves.

To do this successfully, government will have to eliminate capital controls cancel the so called “floating rate” and peg the exchange rate, shore up its foreign reserves to boost confidence, devalue the naira to a mid-range average of N330-N350 and lift the ban on the 41 items excluded from the inter-bank market and provide more transparency in FX dealings.

Release Pension Guidelines for Homeownership

There’s an urgent need for the immediate release of the required guidelines for pension fund investment in Real Estate assets, which will dovetail to the mortgage sector.

Equity finance has been one of the major constraints of home buyers and this a strategic policy guideline would immediately unlock access to N5trn, which is sufficient to provide equity down payment for 300,000 to 500,000 houses.

By extension, this is capable of generating between 15 – 20 million jobs and positively affect job creation along the construction value chain. It will also create a mortgage industry estimated at $35bn. This simple action would attract capital investment, drive growth for mortgage-backed securities and deepen the capital markets. I believe if 7.3 million Nigerians contribute to the pension scheme program, they should also have a say on how it’s spent; it should at least be spent to their direct benefit instead of letting some of them retire in rented apartments with nothing to show for their years of meritorious service.

Privatization/Securitization of Federal Government Assets

A close look at the 2017 budget shows the Federal Government will be investing almost N100bn of tax payers’ money in building Office towers for MDA’s. Rather, Office development for MDA’s should be advertised to the general public for purchase, to stimulate the Real estate sector,

Alternatively, these assets can be listed through a REITs product to attract foreign investments. The immediate benefits include: more money for the Federal Government to execute social projects and focus on infrastructure, long term preservation of these assets, growth of new service sectors such as Facility Management (which is currently one of the largest employer in the UK and constitute 5 percent of the United Kingdom’s GDP), better efficiency in space use and so on. I am not ignorant of the legal constraints to get this done, nevertheless, I am convinced that; where there is a will, there is a way.

Utilize the Nigeria Sovereign Wealth Fund on Infrastructure Development

The Nigeria Sovereign Wealth Fund is currently about $1bn (N500 billion) in various investments. This is more than the total budget of the Ministry of Power, Works and Housing and also enough to act as counterpart funding for crucial and critical infrastructure development.

In addition, I will advise viable projects within the country should be concessioned to facilitate interstate trade especially in the area of transportation to support laudable initiatives such as LAKE Rice project and the proposed LAKAJI project. There are many more like that, and this intervention would improve our general infrastructure and ease of doing business within the country. This needs to be given urgent attention because buying bonds and other financial instrument are good for the long term but may not be able to provide the short term wins we desperately need to get our economy out of the woods.

 Effect a Title Regularization / Title Insurance system

While most people believe that the land use act is a major problem, and a repeal will set the real estate industry free, I think the major issue here is efficiency. In a country where trust is a major issue, an abolition of the land use act may not be a magic wand as it’s be taunted. What is key in this process is for state government to set up an efficient one-stop-shop for title registration and planning approval – which may even become a viable Internally Generated Revenue (IGR) channel for them. Taxes are major revenue drivers for State Government for example Lagos State has demonstrated this  improving its IGR on land transactions from N11bn in 2011 to 27bn in 2013 and currently in excess of N50bn through efficiency, more can be done in this regard if the state government can aim to regularize title within 30 days and adopting title insurance to provide the necessary comfort within this period, this will increase the volume of transactions and deepen the insurance industry and its contribution to Nigeria’s GDP and job creation.

Damola Akindolire is the Executive Director, Real Estate Development, AMFacilities.

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