10 Reasons Nigeria’s Real Estate GDP Declined in Q1 2024

A country’s gross domestic product (GDP) serves as a benchmark for assessing the country’s economic health. It reflects the total market value of all final goods and services produced within the country’s borders during a given period. A rising GDP indicates a thriving economy with rising production.

The real estate and construction sectors are traditionally key drivers of economic growth. They play a key role in several key areas, such as job creation, infrastructure development, and investment and consumption.

The Nigerian Bureau of Statistics (NBS) has released its first-quarter GDP data, which revealed a decline in growth in the real estate and construction sectors in the first quarter of 2024.

The report shows that the real estate sector grew by 0.84%, down 0.50% (year-on-year) from the 0.86% growth rate in Q1 2023. On a quarterly basis, the sector grew by -27.88% in Q1 2024. This contributed to 5.20% of real GDP in Q1 2024. This is lower than the 5.31% recorded in the corresponding quarter of 2023.

The construction sector also recorded a decline in GDP in Q1 2024. The sector’s GDP stood at 4.01% in Q1 2024, down 5.41% (year-on-year) compared to the rate recorded in the previous year.

The decline in the share of real estate and construction in GDP in Q1 2024 suggests a potential slowdown in these key areas. This could lead to negative consequences, such as job losses, reduced infrastructure investment and weakening economic activity.

To understand the root causes of this decline, we have outlined 10 potential factors that could have impacted these sectors.

10 Reasons for Nigeria’s Real Estate GDP Decline in Q1 2024

1. High inflation rates

The real estate sector in Nigeria is facing a critical challenge due to rising inflation. According to the NBS (Nigeria Bureau of Statistics), inflation reached a staggering 33.69% in April 2024, which has resulted in a significant decline in consumer purchasing power. This drop in consumer demand has a direct impact on the real estate market.

For example, inflation is affecting construction costs. Basic materials such as cement have seen their prices rise, with current prices ranging from ₦10,000 to ₦14,000 per bag, compared with much lower costs seen last year.

This problem is exacerbated by the government’s withdrawal of petrol subsidies, which led to an increase in its costs and, as a result, a significant increase in transport and logistics spending in the construction industry.

This cost escalation, driven primarily by rising inflation rates and rising construction material prices, is clearly impacting the affordability of real estate. This decline in affordability directly translates into a decline in demand for real estate across the real estate market

2. Increased interest rates

High interest rates imposed by the Central Bank of Nigeria have increased the cost of borrowing. This has made financing construction projects and mortgages more expensive, deterring developers, buyers and investors from borrowing and investing in real estate.

Just last month, the CBN raised the Monetary Policy Rate (MPR) by 150 basis points to a new high of 26.25%. This is the third hike in less than three months. Higher interest rates make borrowing less attractive as the cost of servicing debt becomes higher. This discourages potential borrowers and lowers overall investment in the sector.

3. Economic volatility

Economic instability, characterized by fluctuating exchange rates and uncertain fiscal policies, has created an unpredictable environment for investors. This uncertainty has led to a cautious approach, with both domestic and foreign investors taking a wait-and-see approach to investing in real estate.

The reduced pool of available capital for real estate and construction projects ultimately translates into a reduction in the sector’s contribution to Nigeria’s GDP.

4. Declining investor confidence

Negative news or a sense that the situation is unclear can shake investor confidence in the real estate market. This can cause investors to postpone investing money in real estate projects. Investors want to feel safe and informed before investing, and negative news or a lack of clarity can make them feel uncertain. This investor hesitation can slow down the real estate sector and its contribution to the overall economy.

5. Security concerns

Safety issues in some regions may deter investors from undertaking construction projects in those areas.

This higher-risk environment can be fueled by factors such as social unrest, high crime rates, and even the threat of terrorism. Investors who have a keen eye for long-term stability may be hesitant to commit capital to areas where the future is uncertain.

This discourages investment, which may lead to stagnation or even collapse of the real estate and construction sector in these regions.

6. Changing consumer preferences

There is a growing demand for affordable housing and sustainable building practices. Existing market offerings may not be in line with these changing consumer preferences, leading to a supply-demand mismatch. Developers who fail to adapt to these trends may have difficulty attracting buyers and tenants.

7. Supply chain disruptions

Global disruptions in the construction supply chain could lead to project delays and cost increases, impacting both the construction and real estate sectors.

The cost of building materials is rising due to inflation, supply chain disruptions, and dependence on imports. High material costs make construction projects less financially viable, reducing the number of new investments.

8. Insufficient infrastructure

Poor infrastructure, such as inadequate roads, unreliable power supply, and inadequate water resources, hamper real estate and construction activities. Developers face higher operating costs and logistical challenges that can discourage new projects.

9. Market dynamics and oversupply

In some regions, there has been an oversupply of certain types of properties, particularly luxury residential and commercial buildings. This oversupply has led to rising vacancy rates and downward pressure on some property prices, discouraging further investment in new developments.

10. Decline in Foreign Direct Investment (FDI)

Political instability, security concerns and an unfavourable business environment have led to a decline in foreign direct investment in Nigeria. Foreign direct investment is crucial to financing large-scale real estate and construction projects, and its reduction limits the availability of capital for these sectors.

Application

The decline in the contribution of the real estate and construction sector to Nigeria’s GDP in the first quarter is a multi-faceted issue that is driven by economic, regulatory and market factors. Addressing these challenges requires a comprehensive approach, including economic stabilization, regulatory reforms, improved access to finance and targeted government policies. By understanding and addressing these ten potential causes, Nigeria can work towards improving its real estate sector and growing its economy.

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