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FIABCI-Nigeria

By Bismarck Rewane

CEO, Financial Derivatives Company Ltd.

January 27, 2016

The Role of the Real Estate Sector in Reshaping

the Economy

+ Audience Analysis

Founded in 1948 with headquarters in Paris

Has over 40 chapters operating in more than 60

countries, Nigeria inclusive

FIABCI members represent all real estate disciplines

 Brokerage

 Property Management

 Valuation/Appraisal

 Investment

 Development

+ Audience analysis

Members cover all property types

 Commercial, Residential, Luxury, Retail, Industrial, etc

FIABCI’s objective is to link thousands of real estate

professionals worldwide

Areas of focus:

 Global networking

 International business development

 Education

 Advocacy

Background

+ Structure of Real Estate Industry in Nigeria Real estate covers:

 Commercial developments

 Residential

 Hospitality assets

 Land

Capital intensive in nature

Majority of large-scale construction projects are

undertaken by the government

Estimated housing deficit of 17 million units

+ Structure of Real Estate Industry in Nigeria

Growing focus on high-end properties

Shopping malls are gaining traction with increased

interest from private equity firms

Underdeveloped credit market for mortgages

Two major institutions issue prime mortgage loans

 Prime Mortgage banks(PMB) – e.g. Imperial Homes

 Commercial Banks

Mortgage rate ranges from 18%- 30%

+ Mortgage structure in Nigeria

Drawbacks

Issues surrounding property rights and fear of

expropriation

Unavailability of stock of property

Ineffective demand from consumers

Minimal education about what mortgages

entail

Liquidity pressures and capacity for

refinancing on the part of mortgage financiers

like the PMBs

+Structure of Real Estate Industry in Kenya

The real estate sector in Kenya has been

experiencing a boom

Following a reaction to the increase in GDP

growth since 2005

Also supported by government’s investment in

infrastructure

The office segment is stabilizing following a

period of oversupply

The residential market is one of the driving

forces in the Kenyan property market

Kenya was the highest ranked African country

based on the Prime Global Cities Index in 2013

+ Structure of Real Estate Industry in UK

The UK real estate sector is a significant component of its economy

It is the largest in Europe

The commercial real estate sector has a capitalization of £250bn

+ Objectives of Presentation

To present our view on the business and macro-

economic outlook in 2016

Highlight likely trends in the Nigerian real estate

market and where there is consistency with

international markets

Impact of government policies on the real estate

sector with special reference to the 2016 budget

Discuss the potential opportunities and risks for

the real estate sector

+ Outline

Real Estate Industry: Where are we?

Outlook and Implications of Key Economic

Indicators Relevant to Real Estate

Opportunities and Threats for Real Estate

Likely New Developments in 2016

Summary

Real Estate Industry: Where are we?

+ The Ugly Side

A lot of abandoned projects due to decline in

government revenues

Contractor arrears of over N600bn

Lower disposable income affected demand for

properties

Forex restrictions increased cost of imported

building materials

Private investors adopted wait and see position

due to unclear policy direction

+ The Ugly Side

Vacancy factor rose in the high-end areas

10%

63%

32%

58%

10%

20%

30%

40%

50%

60%

70%

F e

b -1

M a

r -1

A p

r -1

M a

y -1

Ju n

-1 4

Ju l-

1 4

A u

g -1

S e

p -1

O c

t- 1

N o

v -1

D e

c -1

Ja n

-1 5

F e

b -1

M a

r -1

A p

r -1

M a

y -1

Ju n

-1 5

Ju l-

1 5

A u

g -1

S e

p -1

O c

t- 1

N o

v -1

D e

c -1

Residential Vacancy Factor Commercial Vacancy Factor

Lekki

10%

25%

13%

10%

20%

30%

40%

A p

r -1

Ju n

-1 4

A u

g -1

O c

t- 1

D e

c -1

F e

b -1

A p

r -1

Ju n

-1 5

A u

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O c

t- 1

D e

c -1

Ikoyi

23%

35%

25%

0% 10% 20% 30% 40%

Victoria Island

+ The Good Side Low-end properties performed well

Some major property developments were

completed

Name Location Type

Civic Centre Towers Victoria Island, Lagos Office

Landmark Towers Oniru, Lagos Mixed Use

Vita Towers Victoria Island, Lagos Residential

Jabi Lake Mall Abuja, Lagos Retail

Festival Mall Festac, Lagos Retail

Delta Mall Warri, Delta State Retail

Circle Mall Lekki, Lagos Retail

The George Ikoyi, Lagos Hotel

Park Inn Abeokuta, Ogun State Hotel

Outlook of Key Economic

Indicators Relevant to Real

Estate

+ Key Economic Indicators Relevant to Real Estate

GDP

Oil Price

Exchange Rate

Inflation

Interest Rate

4.9 4.3

5.4

6.3

2.8 3.3

4.3

GDP Growth Rate (%)

Slowing GDP Growth

 GDP growth would remain suboptimal at 3%

 Constrained by low activity levels in the economy and weak domestic consumption

 Expect a pick up in 2017 as increased government spending begins to have impact

 Real estate growth will move in tandem with consumption and GDP

+ Consumption & GDP

 Aggregate personal consumption spend has been

moving in tandem with GDP

 Growth in private consumption is projected to slow to

8.06% in 2016 before a recovery of 4.92% in 2017

Source: EIU

270.9 269.2

375.4

420.2 389.3

357.9 375.5

414.5414.1

461

515

568.5

493.9 457.9

492.6

550.2

100

200

300

400

500

600

2011 2012 2013 2014 2015 2016 2017 2018

Private Consumption ($bn) GDP ($bn)

+ Crude Oil Prices in a Free Fall

The probability of a rebound in oil prices in 2016

is very low

Nigeria’s yield per barrel is now only $6

 From $91 in 2014

The 93% drop in revenues means less money to

spend on sectors and on contractors

+ Impact of Oil Price Slump on Nigeria

2014 2016

Oil Price 116 31

Cost per barrel 25 25

Yield per barrel ($pb) 91 6

% Change -93.4%

Average FAAC (N’Bn) 638.1 480

 With an exchange rate adjustment, the 2016 FAAC

will be much higher

+ Oil Price Outlook and Impact

EIU’s Projection

Contractor arrears will

be paid

Funds will be released

for new projects

Infrastructure

development will

make real estate more

attractive

Optimistic Scenario

Quarters Brent ($pb)

Q1’16 48

Q2’16 57.50

Q3’16 55.70

Q4’16 57.40

FY’16 (Avg) 53.15

Impact on Real Estate

+ Oil Price – Iran Sanctions and an extra

500, 000 bpd

 Goldman Sachs revised

projections downwards to

$12pb from $20pb

 Projection based on inventory

levels and storage capacity

 Standard Chartered projects an

oil price floor of $8pb

 Supported by financial flows

caused by changes in asset

prices

Realistic/ Pessimistic Scenario

Impact on Real Estate

 Lower oil rents will limit

government spending to

priority sectors

 There will be more

abandoned projects as

revenues dry up

Realistic Scenario

Pessimistic Scenario

+ Exchange Rate Policy CBN is stubbornly holding on to exchange rate

controls

But economic realities will force an adjustment

The spread of N105 between official and parallel

market is not sustainable

 Official:N199.27/$; Parallel: N305/$

People took mortgages from banks to buy

properties abroad

It has now become ‘underwater’ investments

+ Exchange Rate - Impact on Real Estate

CBN will likely expand the forex trading band

before the MPC meeting in March

 Possibly to N185-N220

States and FGN will have more money if there is a

devaluation

Rental prices will stabilize stimulating demand for

properties

Cost of building materials will reduce with

removal of exchange rate controls

+PPP: Is the Naira Overvalued?? – N221.96

Monetary policy to be more accommodative

Gradual slide in MPR and interest rates

 Currently at 11% p.a.

A slash of 100 basis points per quarter towards

9% p.a.

Purchasing Power Parity Jan-16

=N= US $ PPP ('=N=/US$)

Bottle of Coke (50cl) 100 2.65 37.74

Heineken 350 2.82 124.11

Hamburger 2,100 4.59 457.52

Uncle Ben's rice (S. Pkt) 1,585 3.79 418.21

Toyota Corolla 7,300,000 16950 430.68

Bottled Water (1ltr) 100 1.43 69.93

Big Loaf Bread 300 2.39 125.52

Irish Spring Soap (1 cake) 300 1.31 229.01

Chicken Drumsticks ( 1 kilo) 800 5.80 137.93

Eggs (One dozen) 480 2.54 188.98 Average PPP 221.96

Naira Price at IFEM 199.27 PPP (%)

Decision: Naira is Over valued 11.39% Spot Rate (Parallel) 302

Outcome: Compared to IFEM rate of N199.34/$1, the Naira is overvalued by 11.39%

+ Outlook - What Charlie Robertson Said?

REER model suggests NGN305/$ is fair-value for

the currency but may be exaggerated

He suggests currency should be adjusted to 240-

250/$

 With 5-10% bands on either side

He favours wider bands to give some flexibility if

naira comes under pressure again

+ How Currencies trade against their REER Rate

20%+ less

than fair

value

5-20% less

than fair value

fair value

(+/-5%)

5-20% more

than fair value

20%+ more

than fair value

Russia 19% 24% 14% 18% 25%

Brazil 23% 16% 9% 38% 14%

South Africa 7% 27% 29% 26% 10%

Kenya 44% 10% 3% 10% 33%

Nigeria 25% 23% 11% 20% 21%

Kuwait 0% 28% 44% 25% 2%

 Green shows where we are now

 For Nigeria, it shows the dollar peg is not very suitable

 The currency rarely finds itself around fair value –

extremes of being too strong or too weak are common

Source: Rencap

12.59

13.76

10.9

12.24

8.52 8.06

9.02 9.6

8.4

Inflation (%)

Creeping Inflation Rate

 Inflationary pressures will

persist in 2016 driven by:

 Possible currency adjustment

 Higher electricity tariffs

 Increased government

spending

 Subsidy removal

 Implies lower disposable

income and lower demand for

properties

 Expect a benign inflation

environment in 2017

+ Interest Rates

Gradual slide in MPR and interest rates

 MPR currently at 11% p.a.

 Savings rate: 3.33%

 Deposit rate (6 months): 5.78%

 Lending rate: 16.96%

We expect a reduction in MPR towards 9% p.a. by

year end; other rates will follow suit

Lower interest rate is very instrumental to growth in

real estate in terms of affordability of mortgage

+ Interest and Inflation Rates

Nigeria US Differentials

Inflation rate

(December 2015)

9.6% 0.7% 8.9%

3 month treasury

bills (December

2014)

11% 0.03% 10.97%

3 month treasury

bills (December

2015)

3.63% 0.23% 3.4%

3 month treasury

bills (December

2016)

2.50% 1.50% 1%

 Relationship between inflation and interest rate

determines level of foreign investments

 Inflation in Nigeria has remained higher than that of

the US

+ Interest and Inflation Rates The previous high treasury bill rate in Nigeria has

maintained positive value for investors despite

high inflation

In 2016, the difference may decline to 1%

With this fall, high inflation in Nigeria erodes

gains from treasury bills

Implying that FDI will reduce in Nigeria

This might translate into reduced demand for real

estate investments by foreign investors

+ Interest and Inflation Rates

8.1

5.6

4.4

3.1

1.6 1.8

2.4

2011 2012 2013 2014 2015 2016* 2017*

Net FDI (US$'Bn)

+Fiscal Consolidation in a $20- $25

oil price environment

+ Fiscal Deficit has increased as oil prices declined

1.60%

1.40% 1.40%

0.90%

1.80%

2.30%

61.9

79.6

110.9 112 108.9

98.9

0.005

0.01

0.015

0.02

0.025

100

120

2009 2010 2011 2012 2013 2014 2015 2016

Fiscal deficit Brent Crude

+ Situation exacerbated by run-down of Excess crude

account

20152014201320122011201020092008

N836.9b N570B

N400B

N1,106.9B

N815B

N464.1B

N485B

N352B

•Budget Benchmark price

higher than spot price

•Slow or no accretion to ECA

•Making fiscal position

precarious

+ Oil Revenue (N’bn)

306.85

233.70 236.05

203.32 219.49

182.20

230.64

286.26

151.39 145.00 148.00 142.00141.50

100

150

200

250

300

350

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16

*EIU Forecasts

Sources: EIU, CBN Q3 2015 Statistical Bulletin

+How to deal with the Impact

Option 1: DO NOTHING

Balanced Budget Assumption;

Spend only what you earn

• C + I G+ X - M = Y

• $389bn + $75bn + $41bn + $51bn - $66bn =

$494bn

• Economy Contracts

• Recession Possible

• GDP declines

• Politically Unwise

+How to deal with the Impact

OPTION 2

Deficit Budget

Expansion

If Oil Prices fall below $25pb

N6.08trn

N3.86trn

N820bn

N2.2trn

$38pb

N6.08trn

N3.58trn

N539bn

N2.5trn

Budget

Expenditure

Budgeted

revenue

Oil revenue

Budget

Deficit

Budget

Benchmark

Budget

expenditure

Budgeted revenue

Oil

Revenue

Budget

Deficit

+ After Borrowing & Deficit Financing

Import increases

(Capital Goods)

National income

increases by about

4.5%

Consumption

Increases

Export Declines

Investment Flow Increase by 12.5% to $1.8bn

+ External Reserves (US$’Bn)

32.3 32.9

44.2 43.6

34.5

29.1

2010 2011 2012 2013 2014 2015

External Rerserve (US$'Bn)

+ D e f i c i t b u d ge t n e c e s s a r y

Slow economic

growth

Reser ves capital

flows

External reser ves

depletion

Oil Revenue

Hemorrhage

2.8%

41.9%

15.5%

40%

NIGERIA CURRENTLY

FACING

+Deficit Budget Necessary

Recession can be avoided by

countercyclical spending

Reflating the economy

Economic stimulus

Sales of joint venture

investment with repurchase

option

Two consecutive quarters of negative GDP = Recession

+ Consequences

Wage

pressures

Domestic borrowing

reduces if there is a

devaluation

Profit margin

compression

Increased

inflationary

pressure due to

devaluation

Demand for forex to

reduce but not to full

extent of devaluation

+ Use of Proceeds of Borrowing

Clear trade arrears of about $4 billion

 Should borrowing be inadequate, Nigeria can sell

oil JV agreements with a call option

+ Country Comparison

 Mexico in 1994

 Peso was overvalued

 Following devaluation, there was decreased growth

(6.2%), unemployment, hyperinflation and default

 1997 Asian financial crises

 Speculative attacks due to hot money flow

 Huge current account deficits and unemployment

+ Country Comparison

Singapore depreciation success in 1997

 Gradual 20% depreciation of currency, alongside

 reform ideas helped cushion short-term slump

More recently, Angola devalued its currency by

15%

Opportunities and Threats

for Real Estate

+ Budget Sectoral Allocation

Highest capital expenditure is on infrastructure

2016 Capex (N’bn) Recurrent (N’bn)

Works, Power and Housing 433.4 34.25

Transport 202 13.80

Defence 134.6 294.53

Health 35.7 221.7

Education 37 369.56

Agriculture 47 29.75

Source: Budget Office

+ Fastest growing sector in Q3’15

 Real Estate was one of the fastest growing sectors

Activity Sector Growth Contribution

Cement 21.2% 0.83%

Real Estate 9.18% 7.57%

Education 8.0% 2.19%

Financial Institutions 6.77% 2.42%

Accommodation & Food Services 5.42% 0.89%

Road Transport Services 5% 0.96%

+ Investment trend in Nigeria

Coal, oil &

gas

53% Technology,

media and

telecommunicatio

25%

Real estate,

hospitality and

construction

Other sectors

Retail and

consumer

products

Chemicals

Top Investment Sectors – By Capital Invested

 Real estate, hospitality and construction have 8% of total capital

invested

Where do we see Growth?

Rebound in construction activities after budget funds are

released and contractor arrears paid

Lagos and Abuja same political party: impact positive

Infrastructure development to make real estate more

attractive

Clearer policy direction will boost confidence levels of

private investors

 Reduction of the benchmark interest rate to encourage

borrowing for buyers and property developers

2016 Projects

Ongoing projects scheduled for delivery in 2016 would

likely be completed

Name Location Type

Madina Tower Lagos Office

The Wings Towers Lagos Office

Eden Heights Lagos Residential

Alliance Place Lagos Office

Heritage Place Lagos Office

World Trade Centre Abuja Mixed Use

Maryland Mall Lagos Retail

Benin Mall Edo Retail

Abeokuta Mall Ogun Retail

Threats

Grew by 2.06%

in Q3’15

Contribution to

GDP: 7.57%

Increase in

vacancy factor for

high-end areas

Persistent macroeconomic headwinds to slow down

construction activities

Continuous forex restrictions to increase cost of building

materials

Lower disposable income is negative for demand

Challenges with transferability of title and weak judicial

system

Clamp down on corruption and money laundering

means new money going into real estate will reduce

Shortage expected in 2 to 3 years

Options Available in 2016

Value Capture Model

Adaptive reuse

Convert residential properties to office space

Convert warehouse to shopping malls

Properties with the right pricing, suitable

location, good finishing will not stay in the market for

long

Summary & Outlook

+Nigerian Economic Outlook

Oil at $25-35 in Q1 2016

Budget revenue will fall by another 30%

Borrowing will expand by at least 20% above

N1.8trn

Cost management and efficiency unit will need to

deliver faster and bigger results

FGN will be more aggressive in managing agencies

and organs of government

+ Nigerian Economic Outlook

International borrowing conditions and

economic realities will force policy changes

Exchange rate flexibility will lead to significant

adjustment to the official rate N220-240/$

Nominal amount of FAAC will increase by at least

20%

Government expenditure will not be reduced

especially investments in power and transport

+ Nigerian Economic Outlook

Time lag between intended spending and actual

spending will make 2016 difficult

GDP growth in 2016 will be flat at 3%

Drivers of Growth

Increased government spending

Sector investment

Infrastructural development

Improved power supply

+ Nigerian Economic Outlook

Inflation will hit 12%

There will be at least 2 more bailouts of state

governments

This time with stiff conditionalities

In Q4 after currency adjustments, capital inflows

will increase

$2-3bn of inflows as FDI plus FPI will help the

naira stabilise

+ Major Impediments to Growth in

2016

Sectors are constrained by bottlenecks

Underfunding and lack of access to capital

Outdated technology

Strangulated by government dominance and

control

+ Risk Footprints

1. Bottom line impairment due to higher taxes and

aggressive tax drive

2. Disruption to business activity due to national

security and civil unrest

3. Business disruption due to industrial

relations, breakdown on subsidies

4. Massive increase in smuggling and illicit trade

due to improved customs activity

+ Risk Footprints

5. Deterioration in macroeconomic conditions due

to sustained low oil prices

6. Adverse regulatory environment and

highhandedness

Current MTN problem

Impact

P r o

b a

b il

it y

H IG

H L

O W

LOW HIGH

3,5

1,4

Risk Footprints

+ BMI Research Outlook for Real Estate

Residential and non-residential building market

will register sluggish growth in 2016

Government funding for housing will be restricted

due to the fall in oil revenues

Eko Atlantic City and major commercial projects

such as shopping centres may struggle to gain

traction

Domestic and international investors are likely to

adopt a wait-and-see approach to their projects

But the scale of potential warrants a long-term

bullish growth outlook

There is still unmet demand in the

commercial, industrial and residential sectors

Growth will remain consistently strong

Especially in Lagos, Abuja and Port Harcourt

BMI Research Outlook for Real Estate

Real estate to benefit from:

 Large and growing population

 Rising numbers of middle class Nigerians

Strong fundamentals will facilitate a stream of

projects

Led by the construction of cement and refining

facilities

As the economy recovers so will the demand for

quality real estate

BMI Research Outlook for Real Estate

Thank You