Nigeria's real estate sector was hit hard by the fall in oil prices but developers remain confident about the long-term potential of the sector.

As Nigeria has grown into one of Africa's largest economies, its real estate and construction sectors have grown in tandem. Developers have poured millions into the market across the retail, residential, and commercial sectors, aiming to establish a foothold. With a population of 185 million, all agree that potential for growth is tremendous, but the primary determinant of whether Nigeria will be able to fulfill that promise is the structure of the sector. As with many other fields, the basic regulatory and physical infrastructure is the greatest limiting factor to the industry's growth; substandard regulation has at times led to inefficiency through corruption and a lack of standardization and clear legal protections for developers. Additional challenges include a lack of necessary energy and road infrastructure in key markets, especially in the north of the country, as well as liquidity shortages brought about by economic slowdowns due to the recent fall in oil prices. Still, all this pales in comparison to the potential rewards, and the market has seen no shortage of interest from regional and international investors. With all this in mind, the Nigerian government is taking steps to build needed infrastructure and develop a more stable foundation for the future of the industry.


The long-term prospects of Nigeria's residential sector are strong for demographic reasons alone; a median age of 18 and a population expected double within the next 35 years, reaching 450 million by 2050, will keep demand high for decades to come. Recently, however, the residential sector has seen demand lessen dramatically as Nigeria deals with the worst economic downturn in decades. After a decade where GDP growth never fell lower than 4.2%, the fall in oil prices led to 2.6% GDP growth in 2015 and contraction of 1.54% in 2016, bringing the wider economy to a shuddering halt. Accordingly, the real estate sector went from being the fastest-growing sector of the economy, growing by a staggering 8.7% in 2013, to contracting by 7.37% in 3Q2016. The residential sector saw the most significant drops in the luxury sector as the oil money behind these high-end developments dried up and created an oversupply. Demand remained stronger in the affordable sector of the market; reductions in sale prices and rents were lower than in high-end sectors. Sector analysts expect this trend to continue in the short term as the economy stabilizes and continues to grow. New home residential construction is expected to slow, especially at the higher end of the market, and developers will be forced to adapt to downsizing trends. Complicating issues are societal problems that have limited developers' ability to build in sectors where new housing is most needed; in northern Nigeria, for example, violent insurgents have kept developers away from cities with high housing demand.


Likewise, the retail market also saw rents fall due to reduced consumer spending power. Analysts reported that established malls in major markets posted solid performances, but new arrivals found a more difficult landscape. The most significant shift in the retail market is the growing number of large mall developments, a format that has seen increased popularity in several other MENA countries. High-density mall developments allow developers to take advantage of economies of scale and offer unique experiences to both retailers and customers. Several major projects are underway in Lagos and other metro areas, including the USD220 million, Maitama Mall, which is projected to open in late 2018 and offer 28,355sqm of leasable retail space. Another major project, the World Trade Center, is expected to be the largest mixed-use development in West Africa once it is completed. An eight-building complex located in Abuja, the project includes residential and office space alongside the Capital Mall, which has 21,500sqm of retail space and is expected to become the centerpiece of the capital's high-end shopping sector.


As with the retail and commercial sectors, office development fell as companies downsized in the face of falling economic activity. High-end office developments faced an additional difficulty in the rising exchange rate; many high-end office facilities had rents in dollars, and as the exchange rate skyrocketed and the Central Bank adopted a dollar allocation policy, this created a shortage of dollars. This led to an official exchange rate and a black market exchange rate, scaring away foreign investors and leaving businesses that operated in dollars unable to meet their obligations. This was felt most significantly in the office space market, which saw rents 8-15% below asking prices and owners forced to loosen space and financing requirements to fill space. New construction is expected to slow over the next years, with an estimated 29,000sqm arriving in 2017 and 23,000 arriving in 2018.


The gaps in Nigeria's housing and infrastructure represent potential for the construction sector. Industry research firm Timetrec projected growth of 9% from 2017 through 2021, with this coming from a combination of state-sponsored infrastructure projects and private-sector building construction. The Nigerian government has begun to significantly increase the share of its budget that is spent on infrastructure projects; the 2017 budget calls for NGN2.18 trillion to be spent on public projects. That the allocation increased this much even in the face of the nation's fiscal difficulties reflects the government's recognition of the size of the needed infrastructure. The construction industry should gain handsomely from this new commitment to public works. Past budgets have included large infrastructure allocations but disbursed less than 20% of the allocated funds, though the shift to PPA models should reduce delays and put these projects in more capable hands, ensuring that construction actually takes place.

In the longer term, Nigeria wants to increase the stock of infrastructure from its current level of 20% of GDP to 70% of GDP by 2043. To do this, the Ministry of Budget and National Planning has developed a National Integrated Infrastructure Master plan (NIIMP) that calls for USD3.05 trillion of spending across all infrastructure sectors. In the short term, this means an average of USD25 billion per year will be spent over the next five years. Foreign financing is also poised to play a larger role here, with China, for example, playing a significant role in financing new infrastructure projects.

The construction sector faces many of the same issues that have hampered growth in housing: structural inefficiencies, excessive regulation, and high costs due to inadequate infrastructure. Instability due to Nigeria's worsening financial position has led to some projects being abandoned halfway when investors stopped receiving payment. Yet volumes are trending up and there is a sense that things are improving; consulting firm Deloitte reported that Nigeria had the greatest number of infrastructure construction projects underway in 2016, a trend that is only expected to continue. Among these projects are a series of mass housing projects that is using 653 contractors to build more than 2,700 units, creating more than 54,000 jobs.