The Nigerian real estate and construction sectors are facing heightened challenges, primarily driven by rising inflation and exchange rates. The surge in prices of imported building materials and machinery is compelling businesses to resort to increased borrowings to sustain their operations.

 

As the cost of running real estate businesses escalates, the usual funds from off-takers have dwindled due to reduced consumer disposable income and waning confidence in private developers. Financial institutions, particularly commercial banks and development agencies, have become the last resort for many, amplifying the pressure on the real estate and construction sectors.

 

 

Nigeria's inflation rate reached its highest level in over 27 years in December, intensifying the cost-of-living crisis and prompting concerns about the Central Bank of Nigeria's potential interest rate adjustments. The country's inflation rose for the 12th consecutive month, reaching 28.92% year-on-year in December, further straining economic conditions.

 

The impact of inflation and an unstable exchange rate is evident in the increased cost of borrowings, with banks charging exorbitant interest rates ranging from 28-30%. The average exchange rate against the dollar has surged from $460.418 in April 2023 to $1,300, exacerbating the financial burden on real estate development.

 

Despite these challenges, the real estate and construction sectors have witnessed a notable surge in bank credit allocation over the past four years. Between 2019 and 2023, loans totaling N21.89 trillion were secured, contributing significantly to the Gross Domestic Product (GDP).

 

However, the escalating inflation and exchange rates have prompted concerns about the sustainability of increased credit in the real estate and construction sectors. Analysts warn of potential cyclical effects on real estate products and the finance market.

 

 

The cost of development and construction has significantly risen, impacting developers who now face higher borrowing requirements. Housing finance, which is critical for long-term projects, is characterized by short-term availability, with interest rates as high as 30%, making it challenging for those pursuing rental housing.

 

While the real estate and construction sectors have managed to secure substantial loans, concerns arise about the marketability and affordability of the products to end-users. The ability of developers to borrow may face limitations in the long run if economic volatility persists, potentially leading to a crisis in the sector.

 

The market dynamics heavily depend on end-users, and their ability to fund housing requirements becomes crucial. If users cannot afford their housing needs, developers may encounter difficulties, potentially impacting financial institutions and creating challenges in the real estate sector.

 

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