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The Impact of COVID 19 in the Nigerian Real Estate Industry

by Radarr Africa

By Noah Ibrahim

The Impact of COVID 19 on the world’s economy

The world health organisation (WHO) in January 2020, declared the COVID9 virus a world health emergency. Since the virus was first diagnosed in Wuhan China, there have been more than 5.7 million infections confirmed in 188 countries and territories. This infection has since shifted from China to Europe, Italy and major countries of the world. More than 80 countries have closed their borders to arrivals from countries with infections, ordered businesses to close, instructed their populations to self-quarantine, and closed schools.

China, UK, Germany, US, France, Italy, Japan and many of the world’s most powerful economies, are at the verge of collapse as the pandemic has brought them to their knees. The world stock markets have crumbled, oil prices are currently on sinking ground, recessions and a collapse of the economic structure has hit many nations with over 80 countries requesting financial help from the International Monetary Fund (IMF)

The International Monetary Fund (IMF) estimated that government spending and revenue measures to sustain economic activity adopted through mid-April 2020 amounted to $3.3 trillion and that loans, equity injections and guarantees totalled an additional $4.5 trillion.6 As a result, the IMF estimates that the increase in borrowing by governments globally will rise from 3.7% of global gross domestic product (GDP) in 2019 to 9.9% in 2020. Among developed economies, the fiscal balance to GDP ratio is projected to rise from 3.0% in 2019 to 10.7% in 2020; the ratio for the United States is projected to rise from 5.8% to 15.7%. For developing economies, the fiscal balance to GDP ratio is projected to rise from 4.8% to 9.1%.7 According to the IMF, France, Germany, Italy, Japan, and the United Kingdom have each announced public sector support measures totalling more than 10% of their annual GDP (1)

This existing condition on businesses is quite severe, a majority of investors have pulled out from multiple businesses in line with this, $33 billion has been removed from emerging markets since the outbreak of Covid-19. The major reason why this virus is affecting the economic structure of the world is mainly that businesses are not getting revenue, therefore, most of the businesses are shutting up shops

COVID 19 effect on the Nigerian economy

Paying particular attention to the Nigerian economy, The Nigerian government before this pandemic has been struggling with its weak recovery from the 2014 oil price shock, with GDP growth tapering around 2.3 percent in 2019. In February, the IMF revised the 2020 GDP growth rate from 2.5 percent to 2 percent, Owing to the fact that oil prices are quite low in a limited fiscal space. This has been a major source of concern to the policymakers as estimates debt service-to-revenue ratio at 60 percent, which is likely to worsen amid the steep decline in revenue associated with falling oil prices. These constraining factors will further aggravate the economic impact of the COVID-19 outbreak and make it more difficult for the government to weather the crisis.

In the case of Nigeria, the price of Brent crude was just over $26 a barrel on April 2, whereas Nigeria’s budget assumes a price of $57 per barrel and would still have run on a 2.18 trillion naira ($6.05 billion) deficit. Similarly, with oil accounting for 90 percent of Nigeria’s exports, the decline in the demand for oil and oil prices will adversely affect the volume and value of net exports. This abrupt degeneration in the price of oil is affiliated with the pandemic has made it paramount for the Nigerian government to cut planned expenditure. On March 18, the minister of finance announced a 1.5 trillion naira ($4.17 billion) cut in nonessential capital spending.

In the last quarter of 2019, the Nigerian economy advanced by 2.55 percent, according to the National Bureau of Statistics (NBS) reports. If oil prices continue to fall and this pandemic is not contained, the Nigerian economy owing to her high dependency on oil receipts, negative economic growth of more than three months will plunge the economy into a recession.

The Effects of Covid19 on Nigerian Businesses.

In addition to the human impact, there is also significant economic, business and commercial impact being felt globally. In a bid to curb the spread of the Coronavirus governments have placed a lockdown on citizens and travel restrictions across countries globally, With Nigeria also being affected. This lockdown and restrictions have affected businesses directly and indirectly particularly businesses which can not be carried out from the comfort of the home. The only businesses which are allowed to operate are those which offer essential services. Entrepreneurs and businesses owners have thus adopted innovative remote work models to keep generating enough revenue to retain employees and keep their businesses afloat.

Some industries that have been greatly impacted by this pandemic includes;

Tourism and Aviation: These sectors have taken the biggest blow, owing to the travel restrictions and the lockdown which has caused a downward slope in the demand among travellers. With all the airports closed by the order of the federal government, most local and foreign airlines have suspended operations. The International Air Transport Association (IATA) had reported an estimate that industry passenger revenues could plummet $252 billion or 44% below 2019’s figure.

The oil and gas industry: The demand for crude oil has dropped significantly since the lockdown and travel bad placed in various countries. Local consumption of Premium Motor Spirit (PMS) otherwise known as motor fuel has decreased drastically due to the restrictions on movement as a result of the lockdown. The sector generally has taken a big blow and the intervention of OPEC and leading oil-producing countries through output cuts has no impact on oil prices or stabilized the market.

Start-ups and Small businesses: Startups are forced to look for new and innovative ways to remain in business as the preventive measures enforced by the government have left entrepreneurs vulnerable. Many are adopting online solutions to extend their businesses to new markets while others are simply bidding time and waiting out the lockdown.

Hospitality Sector: Hotels have experienced little or no patronage while this is primarily due to travel restrictions and shutdown of businesses many employees are out of work, the fear of contracting the virus in public locations may also play a part in reduced patronage experienced in the industry.

The Impact of COVID19 on The Real estate sector

As the effect of the pandemic is felt around the world, the real estate sector is impacted in different ways. Real estate executives are mostly concerned with preserving value and liquidity at this period. Some aspects of the industry have been affected more than others and to different degrees;

Coworking & Office Spaces: The demand for coworking spaces and office space in recent years has provided substantial return for real estate investors. This demand has, however, fallen as a direct result of the COVID 19 outbreak. In the long run, the demand for office spaces would be truncated in some ways as more people work from home. It is expected that many Startups and Small businesses that comprise the bulk of the demand for office spaces will master the art of remote work and will find new ways to deliver their product/service offerings without physical presence. Physical office use rate will likely drop in favour of complete remote work.

Residential Real Estate: Residential real estate has maintained its resilience through the COVID 19 pandemic. The need for shelter has and will always be in demand as the housing shortfall in the nation remains eminent. The need for relocation remains as online property listings companies record increased daily search for rental properties. However, the growth in demand for residential homes seems to hover primarily around affordable housing, both offered as fully constructed and off-plan packages. Luxury properties continue to record a steep decline in demand.

Demand for developed and underdeveloped land within the suburbs like Ibeju Lekki, Arepo, Simawa, Mowe, Agbara and Ikorodu has recorded no evident change in demand compared with the 4th quarter of 2019 though most buyers remain vigilant in their purchase decisions choosing to opt for payment plans, rather than full outright purchase that allows them efficiently assess the long term effect of the lockdown on their personal finance and cash flow before making a full commitment to land investment.

Commercial Real Estate: The commercial real estate sector has taken a huge hit and might take a while to fully recover. The lockdown and social distancing policy are severely impacting the demand for commercial properties, as many businesses struggle to retain their existing commercial space. The commercial real estate sector relies on cash flow and is hugely affected by low occupancy rates in the hotel sector to the closure of commercial spaces due to social distancing and stay at home order.

As of April 3, by one estimate, the unlevered enterprise value of real estate assets had fallen 25 percent or more in most sectors and as much as 37 percent for lodging (the most extreme example). This, however, should come as no surprise that—when shoppers avoid crowds and retailers, restaurants, and hotels close their doors—owning and operating those properties is a less valuable proposition. As such, liquidity and balance-sheet resilience have become paramount.

The demand for Physical stores is expected to decline as more businesses capitalize on the web to create demand for their goods and services, the increase in Logistics solutions companies is proof of this.

Commercial real estate owners have made so much money collectively a year as the economy blossomed. Now, they are feeling the heavy blow dealt by the pandemic fueled economic crisis and this industry might be changed by it.

What lies ahead in the real estate industry?

The Nigerian International Monetary Fund (IMF) has estimated the Nigerian economy to shrink by 3.4 percent this year and Africa’s largest economy could face a recession lasting until 2021. Oil-rich Nigeria has been hit by the plunge in the demand for energy set off by the global lockdown against COVID-19. The country’s jobless rate, already at 23 percent, is expected to climb even higher. With a looming recession, it would be pivotal to find a balance between staying ahead of economic activities and avoiding unnecessary anxiety.

In spite of the devastating impact of the coronavirus on the global economy, Risk-averse investors seeking high returns on their investment still see the real estate market as viable. The net asset value (NAV) of real estate funds climbed to N45 billion as of April 24, 2020, representing a 2 percent increase when compared to the N44.15 billion reported on February 28, a day after Nigeria recorded its first Covid-19 case.

The investors who began reconsidering portfolio composition due to the impact of coronavirus on Nigeria’s economy injected N883.39 million into the real estate funds within two months of the virus outbreak, as reflected in the Securities and Exchange Commission (SEC) data.

There are various opportunities which are likely to arise within the post-recession housing sector. There would be more affordable housing projects with medium-term payments, residential real estate would stabilize and rent prices would increase as individuals would rather rent than buy.

PPP (Public-Private Partnership) was recognized as an option to end the current crisis of housing shortage and affordable housing in the country by the Nigerian government in line with UN recommendation. This can be encouraged to help provide more affordable houses post-recession while putting investments in eco-friendly buildings into consideration.

Owing to the undersupply of standard and feasible priced housing, there should continue to be a drive in the demand in co-living once the pandemic is over. The area of co-living apartments may experience a little challenge but considering the cost of housing is expected to increase astronomically, sharing would become an inevitable option.

For investors, returns will be stronger in certain developing cities and suburbs than in primary markets, thereby driving interest toward less-established markets. More residents will appreciate homes in the cities, easily accessible to their place of work or school but with heightened security and moderate population, which will give rise to small estates and courts within already populated cities. Generally, suburban neighbourhoods are expected to see faster rent growth than urban neighbourhoods that are already nearing their ceilings for sustainable rent growth. Developers would need to improvise smarter ways to deliver on affordable housing projects as the extent of the economic downturn will depend on the duration in which we’re able to end the pandemic.

Conclusion

The COVID-19 pandemic will undoubtedly change the way we live and work for the foreseeable future, and new trends will emerge that will become part of our ‘new normal’. This pandemic has indeed been a wakeup call for nations and every industry. There has to be a more integrated response across various sectors

Reference
1. Number of cases
2. https://www.economist.com/graphic-detail/2020/03/16/more-than-80-countries-have-imposed-travel-bans-to-curb-the-new-coronavirus
3. https://fas.org/sgp/crs/row/R46270.pdf
4. https://www.brookings.edu/blog/africa-in-focus/2020/04/08/understanding-the-impact-of-the-covid-19-outbreak-on-the-nigerian-economy/
5. http://cseaafrica.org/understanding-the-impact-of-the-covid-19-outbreak-on-the-nigerian-economy/
6. https://www.iata.org/en/pressroom/pr/2020-03-24-01/
7. https://www.aljazeera.com/news/2020/04/coronavirus-fallout-imf-nigeria-economy-shrink-3-4-200416073214680.html
8. https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/commercial-real-estate-must-do-more-than-merely-adapt-to-coronavirus
9. https://businessday.ng/real-estate/article/nigerias-property-industry-investment-still-rewarding-despite-pandemic/

 

Noah Ibrahim is a young, innovative entrepreneur and real estate professional and is the MD/CEO of Novarick homes and properties. To get more insightful views by Noah Ibrahim visit his blog www.noahibrahim.org

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