Inflation in Nigeria at the moment is off the charts and that is messing with real estate prices. Few weeks ago I was in a meeting with one of my principal partners.
We have been working on an off-plan project which we started early this year and he had convened the meeting with all stakeholders in the project to solicit for more funds and share the news that despite all the funds raised previously, to deliver the project on time and on schedule. More funds will be needed.
After the meeting, while we were talking, he shared with me that the original planned cost of the project when construction began was just ₦2 billion, however due to significant loss in Naira’s purchasing power, the project will now cost over ₦4 billion to deliver successfully.
As it is already, all the profit margins have been eaten up and the focus now is no longer to make a profit but to deliver the entire project on schedule and on time as promised.
Now the main question is, how did the cost of a ₦2 billion Naira project balloon from ₦2 billion to over ₦4 billion?
How did we go from a for profit project to this point where all profit margins has been eaten up and eroded and the discussion now is no longer, ‘How do we make profit?’ but how do we deliver the project successfully for all our investors?
To better understand what exactly is happening we need to zoom out of the real estate market and take a look at the broader Nigerian economy.
In August of 2022 a litre of petrol was selling for just ₦158/litre. In August of 2023 a litre was selling for about ₦700/litre, today as I am writing this in November of 2024, ₦1,000 Naira can not even get you a litre of petrol.
Nigeria’s economy is built on the back of oil prices. It is too dependent on petrol so when there is a change in the price of petrol, especially an upward change, a corresponding change is experienced across all sectors and industries.
Ranging from the price of food items that now have to be changed because the market woman who previously spent ₦40,000 to bring her food items from the farm to the shop when petrol prices was ₦158/litre is now spending ₦100,000 on transportation, to the prices of real estate because all suppliers of building materials have changed their prices, all labourers have changed their daily wages because when they now go to market to buy food items for their family from the market woman, they find out that what she used to sell ₦1,000 is now ₦2,000, and what was ₦2,000 is now ₦4,000.
Are you seeing the ripple effects and how the slightest change in the price of petrol is like a rising wave that lifts the prices of goods and services across industries?
Okay, let’s continue.
In 2022, ₦10 million could get you 63,291 litres of petrol. Today in November of 2024 that same ₦10 million can only get you a 9,259 litres of petrol. The difference between 63,291 litres and 9,259 litres is as clear and wide as the distance between the United States and Nigeria.
Same amount of money, yet the purchasing power has drastically reduced. Naira has lost significant purchasing power. Naira is depreciating.
There is a common phrase that my brother loves to use, “Money na water”. Naira right now is water.
Now what are the corresponding economic effects of this Naira significant loss of value?
Come with me, let’s go from the oil market to the exchange market. Let’s take a peep.
In November of 2022, the exchange rate was about ₦449/Dollar. In November of 2023 this doubled to ₦812/Dollar. As I am writing this today, the 23rd day of November 2024, the current exchange is ₦1,718/Dollar.
The Naira is weaker against the dollar than it has ever been at any other time in history and this is not looking like it will improve soon.
Now let’s tie it all back to real estate. Come, let’s bring it all home to the love of my life, my beloved real estate.
What has been the effect of this in Nigeria real estate market?
The effects of inflation on Nigeria real estate market.
At the beginning of this year a bag of cement was ₦4,000/bag. Now it is ₦8,000/bag. A 100% increase. At certain times this year the price even peaked at over ₦10,000/bag. It is the same story with other materials like sharp sand, iron rods, granite, mention it!
Each and every material used in the construction process has increased in price by nothing less than 60%, some have even tripled to 300% their original price at the beginning of this year.
It is not only the prices of the materials used in construction that have increased in prices, far from it.
Even the construction workers and builders have increased their daily wages. Where 5k/daily was enough for them previously because their wife could cook a quality pot of soup for the family with just 3k and 1k could be enough for their transportation.
Due to the exorbitant price of petrol now, their transportation costs have gone from 1k to 3k. To cook a good soup is nothing less than 10k now. Do you still expect them to make do with 5k daily wage? Of course not. It is impossible. So they have increased their daily wage.
Many of the things used in the construction process are imported from abroad, so with dollars at ₦1, 712/dollar that’s another factor leading to an all time high costs of construction.
So there you have it. That has been the effects of Inflation on the real estate industry. It has skyrocketed the construction cost of Lagos real estate as well as the entire Nigeria real estate market, not only Lagos.
As a result of the inflation, the cost of construction is at an all time high. As you already know, nothing exists in a vacuum so what effects does this all time high construction cost have on the real estate market? What are the consequences?
Equally skyrocketing home and land prices.
In September I wrote an article breaking down an Instagram post from one of the top Lagos developers and what it means for the prices of real estate in Lagos and Nigeria ass a whole and I concluded it by saying that if you are intending to buy a house whether for an investment or for family residence, you should go ahead and buy it now!
Whatever you do, make sure that you don’t make the mistake of waiting for next year, don’t wait, don’t delay. Delay right now in the Nigeria real estate market especially Lagos is a luxury, a luxury you can’t afford!! Irrespective of how many zeros you have in your bank account.
Why?
That is because the prices you are seeing today are nothing compared to what you will see next year. Right now you can still get some reasonably priced houses. They are reasonably priced because they were built with cement at ₦4,000 or they were started with cement at ₦4,000.
By next year, most of the houses that were started and finished with cement at ₦8,000 or ₦10,000 will be completed and will flood the market.
Once they do do you know what happens next, the pricing landscape will change because even the ones that were built with cement at ₦4,000 that are still in the market will review their prices to match the new market entrants
Few of them are already in the market but the majority of them are yet to enter the market. So by next year all will enter the market and they will change the pricing landscape.
In locations where a 2 bedroom apartment used to go for ₦100 million, in 2025 they will be going for nothing less than ₦150 million. Soon to get a fully detached house anywhere close to Lekki you will have to bring half a billion and that will be on an affordable end. It is already happening.
The people that love to say that Lagos real estate is overpriced should get their mic, camera and lights ready because they haven’t seen anything yet. They can say all they want but it is not really the developer’s fault. You can’t blame them. This is a business not a charity.
Think about it, please tell me, how can any developer or company price their houses reasonably when the prices of building materials is not reasonable at all?
How can they keep the price of properties the same when they are buying cement and other construction materials 2X, 3X what it was before?
How?
How can they continue selling at the old prices when what they could have previously imported with ₦100 million is now costing them ₦350 million to import?
Of course they will factor in everything and put it back on you the off takers. It is a business.
In a nutshell that has been the effects of inflation on Lagos real estate market and prices.
Nigeria’s high inflation has caused an unprecedented surge in the cost of building materials and with all things being equal, this unprecedented surge in prices of materials and labour in turn has caused and will continue to cause and maintain an equally unprecedented surge in the prices of real estate properties. Be it houses or lands.
The winners in all of this are the people who are buying houses now. All the people buying houses now ahead of the boom in prices.
That is why I will repeat the same warning I gave in my previous article in September, any house you want, buy it now! Make sure this year does not come to an end with you in possession or contract for that property.
High cost of building materials and an equally high cost in the prices of real estate properties are not the only effects of inflation on the prices of real estate.
Another effect is an increase in rent by over 50%.
The thing about real estate is that it always outperforms inflation. How does it do this? By appreciating in price faster than inflation is eating into the economy. That is why the prices of already built houses are appreciating, same with land. Rent too is increasing.
Why?
Do you remember the analysis I did at the beginning of this article where I analyzed just how much purchasing power the Naira has lost?
That’s why.
If previously you paid ₦10 million per annum as rent to your landlord, with the ₦10 million he could do a thing or two but now that Naira has lost significant purchasing power, all of a sudden ₦10 million can’t do much for him anymore. So what does he do?
He increases his rent of course.
Same way the price of properties are surging, the price of rents are equally surging and this will continue in the near future because CBN is yet to get inflation under control.
Till they do, the price of real estate in Lagos and all other parts of Nigeria will continue to skyrocket. Also there will be a continuous and steady increase in the price of rent.
There are no other ways to sugarcoat it. Nothing else that can be done about it.
You can complain, lament or you can actually be smart about the whole thing.
Buy that property you want now! Today, buy that house today!!
Don’t say tomorrow, tomorrow the price will only be higher.
Also being that you now know that the price of rent will continue to rise, it is time for you to acquire a cash flow asset, be it an apartment or house and either rent it out or use it for short lets. This way you position yourself so that the market favors you.
So that’s it. That’s the effect of inflation on the Lagos real estate market.
Inflation is causing a massive increase in the cost of construction, this is leading to a massive increase in the prices of real estate properties. Additionally because inflation is quickly eroding the purchasing power of Naira, rents are set for over 50% increase.
So what should you do? How should you respond to this market?
Make all your real estate moves now. If you are planning to buy a house, then buy it now! This year, I say this because I guarantee you if you don’t buy it now, if you don’t secure it this year, it will even be harder for you to buy it next year because the prices of houses next year will not be funny.
Also it is time for you to become a landlord, if you already are, it won’t hurt to get more cash flow assets and add to your portfolio. With rent set to continue increasing, this is a good way for you to position and get more returns.
I remain Ugochukwu.
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