* Interest rate too high for affordable housing
The Head of Real Estate Finance, West Africa, Stanbic IBTC, Tola Akinhanmi, speaks to JOSEPHINE OGUNDEJI on the need to employ real estate financing as a catalyst for economic development
Why is it significant to ensure adequate funding for the real estate sector?
Real estate is capital intensive and requires a deep understanding of real estate finance and how the various capital formation is deployed during the life cycle of a real estate asset as this has a significant impact on the yield or returns of an investment. Stanbic IBTC continues to support its key clients with bespoke and innovative debt structuring solutions tailored specifically to the funding requirement which is critical for developing real estate infrastructure in Nigeria.
In addition, financing real estate projects require an understanding of each asset class and underlying cashflow inherent capabilities through economic cycles given the long-term nature of the asset class, thus being able to engage collaboratively with clients in proffering unique solutions which support asset creation and stabilisation is fundamental to growth is critical.
In addition, given our strong investment banking capabilities, Stanbic IBTC can deliver an end-to-end capital formation benefit through the asset creation cycle via traditional debt solution to each special purpose vehicle until the consolidation phase with portfolio-type deal structures which are increasingly administratively flexible and accretive to the client growth strategy.
Stanbic IBTC continues to play a market-leading role in supporting and providing bespoke and structured funding options for many landmark projects in retail, office, residential, and other alternative assets. Capital formation is critical, and it cuts across debt, equity, and mezzanine options, thus ensuring the optimal funding structure is the most important decision to be taken prior to breaking ground on any development.
Much has been said about the inability of REITS to succeed in Nigeria. Do you think more work needs to be done in terms of convincing property owners to come on board?
Real Estate Investment Trusts remain a viable asset class that ensures exit and liquidity for real estate. In Nigeria, REITs have evolved with regulatory support provided in terms of unlocking the tax benefits as well as specific REITs regulations by SEC driven to ensure guidance and standardisation on the structure. However, what is critical at this stage is getting the right quality and type of assets into a REIT portfolio. Equally important is the cash flow sustainability tied to each asset in the portfolio. Finally, sponsor consideration helps to bring it all together as the capacity and capability will be critical in managing the REIT portfolio post-close to ensure positive cash flow and generate returns that not only meet investors’ expectations. In addition, investor education and awareness of the sponsor and underlying assets in the portfolio have to be continuous to ensure increased trading and capital market participation. Essentially, there remains continuous conversation where certain misconceptions are better addressed, enabling alignments in the ecosystem.
How would you describe the impact of the country’s rising inflation on the real estate sector?
The real estate sector is not insulated from macro headwinds including inflationary pressures and the impact will be seen in terms of rising construction costs for development projects. However, developers can mitigate the same by project value engineering and advance procurement during construction. However, post-construction, real estate assets effectively act as inflation hedges depending on the asset class and income profile which may be structured with lease escalation clauses to hedge and align with market norms. More importantly, real estate is a long-term, permanent and defensive asset class, and if well managed, total returns (yield and capital appreciation) typically exceed inflation.
The concept of land banking has been getting increasing attention in recent times. How safe is land banking as an investment option?
Land is a key asset and foundation of any real estate development and investment. Depending on its location and zone usage, it offers alternative best usage options. In order to develop any asset or property, the first thing to put into consideration is the ability to own and control the land, and this is by having a verifiable title, also depending on the location and zoning principles, which determines their best usage. As an asset, it acts as an inflation hedge and has profound appreciation characteristics as has been demonstrated over time. However, the concept of land banking is such that the focus is driven to taking a forward position on future developments aligned with urban planning and evolution.
How can investors take advantage of the over 22 million housing deficit in Nigeria? investors?
The reality is that we are a growing nation, and the housing deficit also provides significant opportunities that if well harnessed will have a catalytic effect that will scale the residential segment of the market.
The housing sector remains the largest part of real estate assets. The National Pension Commission recently approved a policy to enable contributors to access their pension contributions to be used as equity contributions for home ownership and this portends a significant opportunity to boost the housing ecosystem as it would boost effective demand together with the opportunity to align with mortgage products. The key thing of the demand aspect is to sustainably service mortgage payments, thereby creating more solutions. There are a number of financial and primary mortgage institutions including Stanbic IBTC Bank that provide mortgages with tenures of up to 20 years, which will be dependent on the purchase price of the end product, buyers’ income earnings, and interest consideration, which ultimately determines the loan amount a buyer is able to access. On the supply side as well, there are numerous job opportunities through the value chain, commencing from predesign, design, procurement, construction, and property management post-completion. A key part of the equation is ensuring adequate infrastructure to support housing growth. This, however, starts from where the land is located, whether it is close to where people want to live, or close to key infrastructure such as transportation nodes, and health and education facilities both existing and in the future. Joint venture arrangements thus ensure that a viable land bank can benefit either via private access to land, or government support which helps to reduce the cost of owning a home.
How can mortgages be made more affordable and accessible to low-income earners?
The affordability of mortgages is not only dependent on interest rates but there are also other factors that impact affordability by low-income earners which include the ability to make the required equity contribution and more fundamentally the acquisition costs of the property through the value chain. Nonetheless, for real estate to have affordable mortgages, are there ways to ensure that interest rates are at the lower end of the market? To create sustainable and effective demand within the mortgage market, you need at the minimum, the interest rate to be at sub 14% or lower at single-digit rates to encourage increased take up and market activity. It is a multi-pronged approach as there is the tenure consideration, the income of the buyer, the interest rate, and affordability. So, developers need to come together to agree on what the right price for the market is for a certain demographic, and then look to build products that cater to that.
Many Nigerians do not have access to mortgages. What needs to change?
Firstly, I think there may be insufficient awareness of the product or perhaps misunderstanding and clearly, more work needs to be done by both commercial banks and primary mortgage institutions in creating awareness and product education generally. In addition, as mentioned earlier, the recent pension policy which allows contributors access to pension savings should help increase interest and participation.
According to a recent report, over 70 per cent of the global population will migrate to urban centres by 2050. How ready is the Nigerian real estate industry for this surge?
Housing is a key business infrastructure and a catalytic sector that enables economic development along those value chains. If the mismatch between demand and supply is minimised, then data is needed to understand how the sector would evolve, so that on the side of the private sector and that of the government, the issue is able to be effectively addressed and solutions created to resolve them.
How has the country’s sluggish economic growth in 2022 affected the real estate sector?
Interestingly, the real estate sector remains resilient and has continued to grow across the various asset classes, and these have evolved with post-pandemic recovery, with expansion being seen across the traditional asset classes including retail, offices, industrial and residential, and “new” alternative asset classes including digital (data centres), education (student accommodation) and medical assets. In addition, the participants in the market continue to grow with increasing offshore and local players.
The real estate market has evolved and matured over the last 10-15 years whilst transiting through an asset creation and stabilisation phase which saw the development of several retail offerings across both primary and secondary cities and resilience through two economic down cycles and the COVID pandemic to the current consolidation or portfolio optimisation phase with the initial seed capital or investors being substituted with permanent capital to complete the investment cycle.
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