Developer explains why construction cost, selling price of properties differ by over 35%

Nigeria is one of the most expensive property markets in the world. It is the second most expensive in Africa after Angola and the reasons for this go beyond just the construction cost which is also a factor.

Other factors some of which are extraneous include high cost of funds, government agency charges, and market uncertainty or the shelf life of the property which means the time the property has to stay in the market before it is sold.

According to BusinessDay in an interview to a developer who said that these factors are the main reasons house prices, for instance, are always high, differing from construction cost by almost 40 percent.

“Finance is the reason it is difficult for a developer to construct a property that can be sold for less than N10 million,” he said, explaining, “finance is the key strategy for everything; the reason property prices are high is because funding comes at a huge cost; if you are going to the market to look for $2million to fund a project, it will come at a great cost and all the cost is buried into cost of construction.”

According to him, the actual cost of developing a house may be less than N25 million but that same property can be sold at N40 million, and this is as a result of factors like interest rate, which can cost as much as N5 million coupled with other government agency cost.

“So I think if we have a guaranteed market and the bank is ready to finance, it will be a different ball game. Even if I make N3million margin from one house, I won’t mind as long as it is bought as I construct; but in a situation where you don’t know when the house will leave the market and the cost of finance is high, we have to make provision,” he explained.

He cited an example of an Air Condition producer who manufactures 100 products in a day, and is sure of selling up to 95 of such products. “I can tell you that if I were such a producer, my margin will drop drastically, but if I don’t know when I will sell it, I will have to factor in time, and then interest rate. So, that is what increases price.”

For over a decade, Nigeria has endured more than 17 million housing units deficit in a country whose annual population growth rate has been more than economic growth pace since 2015.

According to the Association of Housing Corporation of Nigeria (AHCN), underdevelopment of Nigeria’s mortgage industry in driving home ownership is worrisome as more than 90 percent of new homes utilise funds from personal savings for incremental construction.

Developers in Nigeria are continuously in search of viable alternative sources to funding real estate projects in a country where cost of funds has made bank credit inaccessible, unaffordable and unattractive to the sector.

Commercial banks are not ideal or suitable medium for financing real estate projects because whereas commercial bank deposits are short-term in nature, real estate is for long term which is usually vulnerable to the vagaries in the economy such as changes in interest rates, exchange rates, and the rate of inflation.

“If the banks can finance, we can be making N2million on each property and we wouldn’t mind, as long as people are taking it off the market, and I am able to move to the next project but as they say, the unknown will give you doubt to want to increase your price so that it covers the unknown,” he said.

Despite the real estate sector getting out of the woods as it broke its 12 consecutive quarters of decline by recording 0.93 percent growth in the first quarter of 2019, banks’ confidence in the sector waned as credit allocation to real estate tumbled to its lowest level at 3.92 percent in four years.

Of the N15.21 trillion combined credit advanced to 17 sectors by deposit money banks, real estate got N596 billion in the first quarter of 2019 which is N26 billion or 4 percent lower than the N622 billion received in the preceding quarter.

With population that is more than 100 percent less than that of Nigeria, mortgages in South Africa account for almost 30 percent of total credit, the largest component of banks’ assets, which amounted to about ZAR5.14 trillion ($382 billion) at the end of January, according to central bank data.



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