DIVERSIFY YOUR WEALTH

Nigeria 2020 | FINANCE | FOCUS: NIGERIAN INVESTORS

With new asset classes emerging, real estate is no longer the only safe haven for investment in Nigeria.

It is often said in emerging markets that cash savings have a highly volatile nature and may be stripped of their value overnight. As such, many investment strategies have evolved over time to help people preserve the value of their wealth. In addition to investments by locals, Nigeria's promising economy also attracts considerable foreign investment. The UNCTAD 2019 World Investment Report named Nigeria as the third major recipient of FDI on the continent. Just under USD2 billion was injected into the Nigerian economy by international investors in 2018, and the FDI inflow showed an additional USD909-million growth by 2Q2019.
Traditionally, real estate has been considered a low-risk form of investment in Nigeria, tempting even the most risk-averse of investors. Properties are regarded to be as close to liquid assets as an investment can get without suffering from downsides such as inflation, which threatens cash savings.
The sector is so popular with investors that a number of real estate investment trusts (REITs) have formed in Lagos, helping investors pool capital toward property development and receive interest, without ever getting personally involved in the matter.
There are only so many apartments and shopping centers, however, that a country needs, and the market will reach saturation point sooner or later. No significant change in prices was registered in the residential real estate market between 2016 and 2019, possibly suggesting a state of equilibrium between supply and demand. New asset classes are becoming more viable in the country, offering reasonable risk profiles and handsome returns. This may be—albeit with a touch of optimism—interpreted as a sign that Nigeria's economy is maturing.
Government bonds are a highly popular form of investment in developing countries with a stable bureaucracy, not least due to guaranteed yields, which are sometimes as high as 11.5% in Nigeria.
Since its launch in 2000, the Debt Management Office of Nigeria (DMO) has issued different types of bonds targeting citizens, the country's diaspora, and even foreign nationals. Vouched by the Federal Government of Nigeria (FGN), the debt securities mature on a specific date, when the original sum and the interest are paid to the holders.
In February 2020, DMO announced a rather ambitious plan to raise over USD3.3 billion in capital by the end of 2020. Though DMO prefers relatively cheap concessional loans, some eurobonds will almost definitely be issued as well. The borrowing will help Nigeria overcome its budget deficit, while fueling the development of national infrastructure projects. “The projects include those in power, transport, works and housing, aviation, health, education, agriculture and rural development," according to a DMO press release.
Thus, purchasing bonds issued by the government may be perceived as a more patriotic form of investment by some citizens than pumping cash into real estate megaprojects. The fact that eurobonds are, by definition, issued in a foreign anchor currency—and not the Nigerian naira—makes them more attractive and perfectly immune to the country's 11-12% YoY inflation.
Equities such as corporate stocks are yet another asset class worth considering. “Stocks in emerging markets have had a rough year—but that could change considerably next year," Morgan Stanley stated in its Global Strategy Outlook for 2019. As Africa's largest stock market, the Nigerian Stock Exchange (NSE) is one of those places where plenty of profits can be made. Returns in the NSE are generally higher in Europe and North America, though the risk profile is also different. And there are virtually no barriers to entry: retail investors can try their luck in the NSE with as little as USD550, and the minimum capital for entry is not that high for companies. Stocks in Nigeria are almost as good as liquid assets and can be exchanged without a fuss, which further adds to their appeal.

And, if the NSE's slogan— “the sustainable stock exchange championing Africa's growth"— is anything to go by, investing in Nigeria's stock market comes with bonus benefits for the country and the continent.