LIVING TOGETHER

Nigeria 2017 | CONSTRUCTION & REAL ESTATE | REVIEW

Driven by large infrastructure projects spread across a number of sectors, the construction industry in Nigeria is expected to continue expanding into the medium term.

As more projects associated with Nigeria's Vision 2020 initiative enter the development and construction phase in coming years, the sector is expected to enjoy strong growth. With an estimated CAGR of almost 11.7% between 2011 and 2015, the construction sector has developed into one of the nation's key producers of economic activity. According to Business Wire, the sector is expected to have a CAGR of 9.49% between 2015 and 2020, growth driven in large part by major infrastructure projects. Rapid population growth and continued urbanization will also necessitate strong growth in residential and commercial building, and private firms and government institutions alike are developing plans to cope with these trends.

In the third quarter of 2016, the construction industry grew in real terms by 2.81% from the same period in 2015. However, the rate of growth declined compared to both the same time last year and the previous quarter, falling 2.53% and 0.96%, respectively. Though declines in global oil prices and uncertainty in the global market affected growth between the second and third quarters, with the construction industry's contribution to nominal GDP falling around 20%, quarterly data from the National Bureau of Statistics reveal this decline to be a cyclical movement. Overall, construction improved nominal GDP in the third quarter by 2.96%. According to a report from the McKinsey Global Institute, if current growth trends continue, construction and operation will become the third-largest contributor to GDP by 2030, adding roughly 16% a year.

There are serious hurdles to achieving this kind of growth, though, and Nigeria has to commit sizable resources to its shortcomings if it hopes to reach its full economic potential. According to Nigeria's National Planning Commission, the country has a large infrastructure gap, meaning economic activity and growth are severely hampered by the lack of useable infrastructure. The commission estimates that more than USD3 trillion would need to be spent in the next 30 years to ensure the country is capable of supporting and sustaining its economic growth goals, with more than USD500 billion being required in the first 10 years. Similarly, the World Bank estimated that Nigeria would need to spend USD14.2 billion a year on infrastructure for the next 10 years to ensure that system weaknesses do not hamper Nigeria's broader growth. This spending would need to be directed across a large swathe of transportation and utilities infrastructure, and global economic uncertainties have limited both the government and private industry's appetite for big spending projects. As Femi Akintunde, MD/CEO of the leading facilities management firm Alpha Mead Facilities, explained in an exclusive interview with TBY, certain privatization efforts have stalled because firms “were not prepared for the sort of decay in the infrastructure they inherited." Furthermore, with cement prices rising nearly 40% in 2016, bottom lines have been put under considerably more pressure and certain projects are likely to be put on hold.

Though there is no guarantee that these spending targets for infrastructure development can be achieved, if even a fraction of the estimates are brought to fruition the construction industry is poised to capture a large chunk of this value, growing sizably for the foreseeable future. Government officials recognize the importance of infrastructure projects, and they are hoping to use development in this area to catalyze renewed growth. Furthermore, the completion of infrastructure projects feeds a virtuous cycle for the construction industry because the positive impact of revamped infrastructure on the construction industry itself will be substantial since the severe limitations of current transport networks adversely affect the industry's ability to operate smoothly and grow. With projects to revamp and revitalize many of Nigeria's major transportation channels already underway, observers and industry leaders expect 2017 to be a good year for the industry.

Some of these projects have already entered the construction phase, and companies across the country are benefiting. A four-year, USD20 billion railway expansion is already in the works, and the plan calls for 2,650km of new tracks. Two more projects, each valued at USD2 billion, are expected to expand railway access throughout the country by retrofitting existing lines and bringing old ones back online. Additionally, the Federal Ministry of Works has 194 roadway projects in various stages of completion, and outlays for these projects are approaching USD9 billion. Port and river way expansion projects are expected to stimulate sizable growth in the construction sector as well.

Looking to the Future

Some industry experts are looking to retail-based construction as the next source of serious growth for the construction industry. In an exclusive interview with TBY, Sudhanshu Gaurav, COO of Merald Group, described the potential in this sub-sector of the construction industry. “In malls there are a great deal of opportunities and plenty of interest," said Gaurav. “I find many similarities in Nigeria with what happened in India around 2000 when the mall revolution began. We used to buy goods along the streets the way it currently is in Nigeria, but then the mall revolution took place with a multiplex, large brands, and air conditioning." If a similar type of retail revolution takes off in Nigeria, construction firms across the country are likely to see robust growth to their bottom lines.

Real Estate

According to the McKinsey Global Institute, the real estate industry is the fifth-largest contributor to Nigeria's GDP, adding 8.2% a year, though the recent recession and global economic headwinds have taken their toll on growth and activity in the industry. The country has nearly 200 million sqm of real estate infrastructure, 80% of which (160 million sqm) is residential, 15% (30 million sqm) commercial, and 5% (10 million sqm) industrial. According to the latest report from industry analysts Knight Frank, prime rent rates for office space in Lagos is USD85/square meter/month, retail is USD80 and industrial is USD8. Prime residential rates are USD8,000 per month for a four-bedroom executive house. Though the bulk of the country's real estate supply is residential, there is a still a sizable lack of supply in most regions, and the Centre for Affordable Housing Finance in Africa (CAHF) estimates that the housing deficit approaches 17 million units.

Efforts to shore up the housing gap have been ongoing, and the Presidency has set aside NGN74 billion (USD235 million) for a plan that would allow poor Nigerians to purchase homes and land at reasonable rates. The Lagos state government has also announced the creation of the Federal Integrated Staff Housing (FISH) Program, which plans to make affordable housing available to civil servants. The 2016 federal budget also includes NGN35 billion (USD111 million) earmarked for various housing projects across the country, and there have been calls from the government to increase partnerships between the public and private sectors in both housing construction and finance. The government hopes to utilize public private partnerships to build 250,000 homes in the coming year, bettering the living conditions of the rapidbly urbanizing population, 64.2% of which live in slum conditions, according to the CAHF. An underdeveloped home finance sector is also limiting the growth of Nigeria's residential real estate market, and according to CAHF there are 35 primary mortgage banks and 19 other banks offering mortgages to Nigerian consumers. In mid-2016, prime rates varied from 11%-27%, with an average required down payment of 35% and repayment periods from 10-20 years.

Though the economy has taken its toll on the real estate industry, there are bright spots, and Nigerians are responding in novel ways. In an exclusive interview with TBY, Ibiene V.A. Ogolo, Chief Responsibility Officer of Eko Development Company Ltd., described the condition of the sector. “With the economic downturn nationally and globally, developers have started to think outside of the box, looking for more ingenious ways to increase efficiency and raise standards," said Ogolo. Additionally, the sow's ear of economic uncertainty is being transformed into a silk purse of opportunity, and, according to Ogolo, “the government is enforcing punitive measures on defaulting developers to ensure we have viable and well-built developments." Developers are taking these punitive actions to heart, and international standards are being used with greater frequency at developments across the country. “Today we are seeing such practices being valued, which is a positive evolutionary trend for the country," said Ogolo.

When asked about the state of the commercial retail market in a recent interview with TBY, Bolaji Edu, CEO of Broll Property Services, noted that, “there had been some challenges." According to the Broll, “the naira devaluation and the foreign exchange restrictions have put a pause to the growth in the sector after 10 years of exponential growth." This pause, however, can be viewed a brief rest in Nigeria's continued march toward development, and there is significant potential for the real estate industry in the country. The McKinsey Global Institute estimates that regulatory reforms in the areas of property rights and foreign investment, as occurred in India and Indonesia, could boost real estate's contribution to GDP by more than USD37 billion by 2030. In the near term, Business Monitor International Research (BMI) expects the overall value of the real estate sector will eclipse USD16.5 billion in 2017, up substantially from USD11.4 billion in 2015. Middle-class consumers, a fast-growing segment of Nigerian society, are projected to be the major drivers of this growth, and as their income base expands real estate demand in other affiliate areas, such as retail and commercial real estate, is expected to grow as well.

Ruth Obih
RUTH OBIH
CEO, 3invest
Sudhanshu Gaurav
SUDHANSHU GAURAV
COO, Merald Group