Nigeria: Real Estate Suffers As a Result of Liquidity Squeeze
Charles Malize charles@cmcapitalmarketresearch.com
In the past some market
observers had maintained that the Nigerian real estate sector was safe
from the global financial crisis and would weather the storm. The high
rent and lease deposits of two to three years on units in the cosmopolitan
areas of
Central Bank of Nigeria (CBN) recently injected N620 billion (USD 4 billion) in loans and support into nine banks and sacked eight executives for the aggregate non performing loans that present further challenges for the real estate sector. The recent concluded audit on the banks revealed the magnitude of banks exposure on non-performing loans and has presented a clear picture on the companies’ balance sheets. The nine banks that showed weakness in terms of risk management and corporate governance are Oceanic Bank, Finbank, Afribank, Intercontinental Bank, Union Bank, Equitorial trust, Bank PHB, spring bank, and Wema bank. These banks provided over 60 percent of total sector borrowing. The governor of CBN ! (Lamido Sanusi) had explained that the these banks were undercapitalized and had excessive high level of non performing loans, poor corporate governance practices, tax administration processes and absence of non adherence to the bank’s credit risk management practices. With their exposure to the capital market, the real estate segment is proving to be a high risk relative to other sectors in the economy. This infraction is expected to worsen if the current mess in the financial sector is not arrested anytime soon. Challenges facing the real estate sector On the back of surging
banking and insurance stocks of 2007
Margin accounts are disappearing as banks have refused to reschedule loan facilities granted to investors. Investors are under stress to trade their shares in order to satisfy margin calls. The same banks are refusing to use share certificates as collateral for margin facilities as some of these papers are considered inflated and worthless. With default rates on margin accounts on the rise, banks have stopped giving out loans and in some cases halted real estate financing. Some investors, for fear of losing their equity investment, exchanged their stock collateral with property collateral. This bubble trend seems to have burst and is expected to worsen.
The exposure Nigerian banks have over 700 billion Naira (USD 5 billion) trapped in the real estate sector following the boom period of the last few years. The Nigerian Stock Exchange (NSE) in a recent statement acknowledged that margin loans by banks to real estate speculators hover around this number. They claim they have data of margin loan facilities in the economy due to the role played they played. Their records show that out of the N1 trillion (USD 7.1 billion) margin loans granted by banks, only N300 billion (USD 2.1 billion) are in the hand of stockbrokers, the remaining N700 billion were advanced to real estate investors and speculators. Banks can no longer advance more credit to housing speculators to complete their venture, leading to the abandonment of projects. With the nine banks’ excessive level of non performing loans there will be limited bank financing to purchase properties as investors’ confidence is eroded. Today the market is experiencing a slump in demand at the high end and yield is also dropping because investors that have loan exposures on their real estate investments are being forced to sell. Banks are in a ‘recovery mode’ of outstanding debt and not ‘lending mode’ and as a result real estate financing is expected to be squeezed further as purchasing power is limited for transactions. A typical example is the
Valuations No doubt, the increased investment from both foreign and local investors/ speculators created a record increase in the demand for prime residential and commercial property in the country. Banks were eager to finance new projects. This led to excessive appreciations that saw upward property valuations in the region of 100 to 300 per cent. But the demand drive factors at play in the market have turned sour as liquidity in the market arena dries up. Purchasing power of investors is on a downward trend as there is less money in circulation. Banks are no longer lending out money and the ones that are lending are charging upward 19 to 26 per cent. As one investor put it; "there is no surplus money for the banks to lend out, hence a decrease in demand and thus falling prices." According to him, a plot of land in Lekki that sold for N120 million (USD850, 000) last year has dropped, stabilizing at between N100 (USD 690,000) and N90 million (USD 620,000) and looks likely to drop further. He predicted that 'prudent' investors would want to sell now to avoid a loss, thereby putting more downward pressure on prices. According to a recent survey by Nigeria Institution of Estate Surveyors and Valuers shows a number of houses put up for sale early last year remained unsold. Property prices in the prime areas have suffered drop in value up to 30-40 per cent. The consensus in the market arena is that this is not looking to end anytime soon. Contact : info@cmcapitalmarketresearch.com Note: N = Naira (Nigerian currency) sources: Nigerian Stock Exchange Central Bank of Nigeria Nigerian Institute of Estate Surveyors and Valuers (NIESV) Guardian Newspaper Fitch Rating Agency
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