Growing real estate investment, input cost increase cement price

Growing investment in real estate as an alternative asset for Nigerians looking for where to hedge their funds against inflation is a major reason for the rising price of cement, BusinessDay findings have shown.

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High input cost, product scarcity or limited supply arising from shocks in the economy and disruptions in production activities is another reason for the current hike in cement price.

Nigeria is experiencing what is clearly a galloping inflation. Its March inflation figure at 18.17 percent is an embarrassment to economic analysts. Apart from eroding the value of the local currency, this has also affected food prices and crimped household/consumer purchasing power significantly.

By its nature, real estate, unlike other investment asset classes, appreciates in value over time, virtually unaffected negatively by inflation. Rather than depreciate and lose value in inflationary periods, real estate, in the worst case scenario, remains static in value.

This explains why the rising price of cement is not deterring or stopping investment in the sector.

“The knowledge of real estate as a means of financial security has attracted more players and investors into it, thereby affecting the demand and supply of cement in the country; real estate is one sector that can flow with inflation per time, hence a lot of Nigerians are currently investing in it,” Osazee Edigin, an estate developer, confirms to BusinessDay in Benin City.

Construction activities have been upbeat in the sector since the beginning of the last quarter. Ayo Ibaru, COO, Northcourt Real Estate, also confirms to BusinessDay that increased investment in real estate contributes to the rising price of cement, citing mid-income residential buildings springing up in Lagos on both Island and Mainland.

He also cites institutional investors that are doing both residential and commercial developments such as Purple Capital, which is doing mixed use developments in Lekki and Maryland in Lagos. All these push up demand for cement and, by extension, the price of the product.

But there are other reasons for the significant increase in price that cement buyers have seen. “Yes, we have seen increased demand arising from increased construction activities in real estate sector, but that is not the real cause of the price hike.



Why investors flock to Ikoyi, VI despite challenges…

Despite the challenges in the Nigerian real estate market that are deeper in highbrow locations or up-market neighbourhoods, Ikoyi and Victoria Island in Lagos remain attractive destinations for investors.

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These two locations, home for luxury real estate, have seen challenges reflected in over-supply interspersed with falling demand and widening vacancy rate, which, as at the end of 2020, was estimated at 40 percent for residential properties.

But returns on investment, especially for small size family housing units like studio, one-bedroom and two-bedroom apartments, have been good and encouraging compared to other locations.

Lay-offs, pay-cuts and economic downturn made worse by the crippling impact of COVID-19 pandemic have left consumers with shrinking wallets and low purchasing power, leading to buyers and tenants’ preference of apartment units to duplexes, maissonettes and large luxury homes.

For this reason, multi-family units, specifically apartments, top consideration for most investors in these locations. “Apartments make more economic sense to developers, more so as multiple units can be developed on a piece of land without taking up too much space,” David Mba, former manager, commercial sales at Fine & Country, explains to BusinessDay.

“Returns are higher for smaller apartment units, especially 2-bedroom, which means that demand is more for these house-types than the big-size apartments,” he states.

According to Mba, Ikoyi and Victoria Island are “promising destinations,” but the consideration has to be on smaller-unit apartments. “Any investor wanting to enter the market amid the COVID-19 pandemic should look in that direction,” he advised.

On the average, rental values in Victoria Island as at the end of 2020 stood at N1.5 million per annum for 1-bedroom apartment; N3.5 – N8.5 million for 2-bedroom; N5.5 – N15 million for 3-bedroom and N6 – N25 million for 4-bedroom apartment.

In Ikoyi, it is N4 – N5 million per annum for 1-bedroom; N6.5 million for 2-bedroom; N10 million for 3-bedroom, and N10 – N25 million for 4-bedroom apartment.

Return on investment on these apartments, according to Mbah, is quite significant. In Victoria Island, the return on the different apartment sizes stood at 2.7—3.7 percent per annum for 1-bedroom; 7—10 percent for 2-bedroom; 6.1—10 percent for 3-bedroom; 6.1—9.2 percent for 4-bedroom duplex and 3.75—6 percent for 4-bedroom terrace.

In Ikoyi, it is 9 percent for 1-bedroom; 5.4—8.6 percent for 2-bedroom; 5.3—8 percent for 3-bedroom; 4.5—8.3 percent for 4-bedroom duplex and 4.8—5-4 percent for 4-bedroom terrace.

Though most real estate investors aim for over 10 percent or 12 percent return on their investment, experts say anything above 8 percent is good.

Lekki is another Island location in Lagos where return on investment is good and encouraging. Chiedu Nweke, CEO, Periwinkle Residences Limited, argues that returns in the Lekki corridor is the highest in Lagos, but records show that Ikoyi, particularly, is still ahead.

“This is because whether you are talking about Ikoyi or Victoria Island, the story is the same that these locations remain attractive for reasons other than returns on investment,” Mba says, explaining that talking in terms of strengths, weakness, opportunities and threats (SWOT), which guide investments, opportunities are more here.