By Dotun Akintomide
With the vacancy rate reaching an all-time high, triggered by fallouts from the nation’s ailing economy, the time is rife for developers who fancied high-end developments, as against medium and low-end areas to re-consider such business thinking or rather continue to struggle in business, Barrister Oluseye Fasoranti has told Nigerian NewsDirect in an interview.
Fasoranti, whose years of legal expertise borders primarily on corporate and investment law, with wealth of experience as a registered real estate practitioner, said developers who had hitherto neglected medium and low-end segments of the property market must begin to have a rethink as to how to capture all market segments to stay in business, considering the increasing number of properties making daily entrants into the market, especially at the high-end amid glut which had become phenomenal to the current recession.
“The demand for high-end properties has really dropped drastically and the time has come for real estate operators to go for medium developments as against high-end ones. No doubt about the fact there are lots of vacancies and those vacancies are prevalent in areas like Ikoyi, VGC and the like, but there is actually no vacancy in medium housing schemes. If you have 100 houses in Ogba for instance, before you say Jack Robinson, they are gone. If you have 200 flats in Opebi-Ikeja or Toyin street, it won’t take long to fill up the vacancies, but in GRA Ikeja, we still have quite a few properties we have been trying to sell for two years now because of the cost of value.” He said.
He observed unlike before, everybody is trying to downsize and adjust their income saying, despite the non-increase in people’s income coupled with an eroding purchasing power, housing cost continues to be on the rise. Blaming the situation on the cost of building materials which are on the high side and almost becoming unaffordable to citizens, he said, “everything has gone astronomically and almost doubled. For instance, if you are selling houses at N100 million sometimes ago, today you can’t just decide and sell for N200 million. Nobody is going to buy it.
“The only thing you can do is to probably sell for N120 million giving the same hypothetical example. For there are fewer buyers right now, people are either holding onto their cash or putting it into foreign exchange. It’s a disheartening situation we have found ourselves right now.”
On diasporans’ investments into real estate, whom many believed are heavily reaping from the naira slide to mop up properties at the market with fewer dollars in the bag, the legal expert argued that it’s never a strait jacketed thing due to diminishing returns on investment.
“The truth of the matter is that, there are fewer people benefitting from that, but it’s not everybody, the return on investment may not help, imagine if you have brought $1 million from America at a time when USD was N420, by the time you want to repatriate your fund back to the United States and it becomes N500, what do you do? If you have ventured into real estate or property development when dollar was N380 and your estimated profit at the time was N120 million and when you finish the construction to begin to sell, dollar rose to N500, it means the entire duration of the transaction was a total waste of time.
“It’s really a ripple effect on everything and not just construction materials, I mean on everything since Nigeria is an import based economy. The cost of borrowing is high and the recession is making people to streamline their pockets and businesses. The cost of maintaining a bigger property is even an issue because of failure of public utilities, like electricity and other power sources. Businesses are not thriving and the cost of borrowing is ridiculous, even the banks don’t have money to borrow.” He lamented.
The legal expert noted that, considering the staggering lending rate between 24 – over 30% among different banks, it has become suicidal now to take loan at such lending rates for property development. “For instance, if you borrow at N100 million and with an added N30 million to pay at the end of the year, I don’t know how much you will be selling the property with an increased cost of materials to be able to make the right returns.”
He added that the often delay in project’s completion which characterizes most developments in the country is always rubbing off negatively on interest rates as time races. “If you have access to foreign funds, let say at 2% or 5% interest rate, you must be careful so that the exchange rate will not erode all the investment. The government needs to create an enabling environment, stabilize the naira, and the borrowing and lending rates will have to come down before talking of any meaningful investment in the sector.”
Corroborating experts’ projection that the Non-Performing Loans (NPL) at the nation’s commercial banks could hit N2.3trn at 15% in the early quarter of 2017 with banks becoming insolvent trying to recover borrowed loans in spite of squeezed liquidity, Fasoranti disclosed that the legal profession is recording an unprecedented cases of loan, mortgage and even rent defaults.
“Now they are only trying to exercise their legal right or legal mortgage to acquire properties used as collateral. The fund, people can’t repay back. They can’t even pay the principal, let alone the interest. You see borrowers giving out their properties at will as concessional sales to banks because of the accruing interest and banks are not in the business of selling properties. This accounts for one of the reasons why the market is currently experiencing a glut.” He added.
The increasing bad debts, notwithstanding, he said, the Asset Management Company of Nigeria (AMCON) is already stressed now to acquire more properties from financial institutions, especially in a porous financial system.
“For example, if someone borrows N5bn loan from a bank and it’s not collaterised to the tune of N5bn, maybe it’s only collaterised to the tune of N2.5bn. For the bank not to go down, AMCON will be forced to buy and the bank will now doctor their books to increase the value of the property and they will do a valuation to that effect. Therefore, AMCON invariably might be buying off debt and shortchanging the government by buying a debt of N5bn that’s only worth N2.5bn or less. And by the time the property would be sold, it will not worth the actual amount it has been bought for,” Fasoranti pointed out.
The entire situation, he said is affecting the legal profession because financially challenged clients are increasing, but also cautioned that it does not juxtapose reasons for taking up cases on pro-bono bases by legal practitioners.
“It’s definitely affecting the legal profession, but you have to define your practice and it depends on who you work for. Corporate organizations will always pay for your services, however, when you deal with an indigent person, you can decide to do a pro-bono to help resolve his/her matter or to foster relationship, but it doesn’t mean a lawyer will continue to do a pro-bono job because there are no jobs.” He said.