Yes, real estate in Lagos is overpriced. Every property in the Nigerian real estate market is at least 30% higher than it’s ideal price, and sometimes this can go as high as 60%.
Meaning any property you see listed for say 100m should actually sell for 70m.
In-fact, lets take one of the duplexes in this our current estate project for example, this 2 bed waterfront duplex is currently selling for 50m but from me to you, this property isn’t worth that much.
Why then are we selling that high?, let me explain.
My name is bond…
There are 3 Major reasons properties are overpriced in Nigeria. And they are:
- Cost of finance
- Cost of Construction
- Cost of documentation
Cost of finance: What many people don’t know is that real estate is more of a finance business than a construction business. Without money, nothing, Absolutely nothing can get done. From purchasing the land to engaging built professionals ectetra, everything needs money. Again this our estate as an example, There are 5 ways we source for funds: From personal savings, from friends and family, From the capital market, from banks, from buyers.
I will start from the cheapest to the most expensive and more risky.
The first one (personal savings) is self explanatory. You draw money from your personal funds to do a project. However this is very limiting as there is only so much personal funds you can have to carry our any significant project in real estate. For example this estate cost us x billion naira to develop, how many people have that amount of cash lying around. If you do call me sha*.
The next one is friends, family and associates. If you are a davido or a dj cuppy from a very rich family or a cubana chief priest or poco lee with rich friends, this can also be limiting too. HNIs 1. Cause friends and family find it difficult to trust friends and family(and understandably so) and there is only so much you can raise. I wonder how many people can raise 5bn from friends and family (again if thats you and you’re interested in real estate, give me a call. I will hook you up)
The next is from off takers. This is popularly known as off plan sales. Where developers sell the property at below market value to attract cheap funding from clients. I call this cheap funding cause compared to the other ones I will talk about, it isn’t too cut throat. Usually around 10%. Though this can be problematic if not properly managed.
Now we are getting into the zone of the big boys.
Capital market. To be sincere, we haven’t raised money from the capital market hence my knowledge is limited. However I know they offer better interest rates compared to banks, although you need to have a solid cooprate structure to access their funds. Their processes and due diligence can be hectic. By capital market, I mean commercial papers, bonds and what not. Interest rates for these range bte 8-15%. Also they offer the best source for long term funding if you can go through their tedious checks and due diligence.
And finally the banks. Whew. See straight up, I will advice you to avoid banks. Although there are ways to utilise their funds to reduce risk, it’s best to keep them as the last option. Reason I also saved them for last. Why are the banks bad? Their interest rates are ridiculous, currently at 23-30% and floating. Like I said, only use them at the end of your project when all hope is lost Just like going to sell your soul, anything your eyes see, take it like that. On a serious note though, bank funds are best for bridge financing. Meaning you use them at the tail end of the project, usually the finishing stage so their money doesn’t stay with you too long.
THE SECOND COST IS COST OF CONSTRUCTION
From the bricklayers to the engineers and architeched to building materials, everything needs money. Inflation in Nigeria is currently 15%, What that means is that cement I bought for 1000 in January , will be 1500 by December. This makes it very difficult to plan and therefore adds to the cost of the building. Also with the recent subsidy removal, all workers now need more money. Daily labour that used to be 4000 is now 6000 and I don’t blame them cause it now costs them more to come to site and inflation is affecting them too. Same goes for the engineer and architects.
The final cost is documentation
I wouldn’t want to say much on this in a video because of the kind of climate we are in but it currently costs us a lot of millions and a lot of time to process documents for the various construction stages. Theres also something to say about the land use act but again that is not a rant for video.
So let’s say Don jazzy wanted to build this house.
And let’s say it should typically cost him 70m to build it.
First thing he has to do is to source for funds. Before he became big, he didn’t have influential friends and family, so that’s out of the way. His business isn’t properly structured so he can’t raise from the capital market. So he either has to go to the bank or sell off plan.
Off-plan sales are slow because people don’t trust him yet to give him their funds and the project is stalling. Also cost of goods are skyrocketing everyday. So he finally decided to go to the bank.
Now a 30% markup has been added to the property. For him to break even, he has to sell for at least 90m.
It takes him 9 months to complete this house and in that period, cement went from this to that. Iron rods and wood. Let’s assuming a conservative inflation of 15%, that’s another 10m to the cost of the property. The house is now 100m.
Obviously don jazzy is not a charity he has to make a profit for all this stress and trouble and he fixes a profit of 20% for a years trouble, that’s another 14m. The nouse is now 114m. Now do you see how the house that should ordinarily have cost highest 85m, factoring his profit is now 120m?
This is the reality of the market in Nigeria. Developers are not greedy. Agents are not thieves. The economy is just bad.
Now what are the ways forward. In case there’s a govt person watching this video or their children or side chicks. You can help spread the word to Oga.
- Provide banks with tax benefits if they give cheap long term loans to real estate companies. Or release intervention funds to banks to give out to developers at low interest like they do with agriculture and energy. I mean the basic needs of man are food, clothing and shelter. So I’m surprised govt does so much for the food part but little or nothing for the shelter
- Govt should give developers subsidised land and or building materials. Govt can give dangote an incentive to supply cement cheaply to real estate companies
- Speed up the documentation process. Ease of getting approvals and perfecting/transferring titles. One policy that will real bang is to review the land use act. It is really a clog in thew hell of the real estate business that has slowed us down. AlthoughI to be fair to the government, I understand why the state governor were given such powers
