Increased demand and investment have driven rapid expansion in Nigeria's construction sector

In recent years the construction market in Nigeria has been among the world’s fastest growing, forecast to have expanded by 13% in 2014 on the back of a diverse array of demand drivers, including substantial state investment in infrastructure, rising levels of foreign direct investment and rapidly increasing urbanisation rates. According to the National Bureau of Statistics (NBS), the sector made up 3.12% of the country’s GDP in 2013, up from 3.01% in 2012 and 2.88% in 2011.

With consumer purchasing power rising and demand for housing high, this figure is set to continue to grow in the coming years, albeit at a more muted pace given the recent drop in the price of oil and the weakening naira, which fell by 20% against the dollar in the six months to March 2015 and could squeeze local firms that have borrowed in foreign currency.

Challenges

At the same time, the construction industry faces a number of constraints. The cost of building, for example, is extremely high, a result of widespread dependence on imported materials and the low availability (and high cost) of project financing. Furthermore, while the government has been – and is widely expected to continue to be – a major source of new projects in recent years, public contracts are regularly put on hold or cancelled outright after being awarded, fostering uncertainty and denting many contractors’ balance sheets. As of April 2014, Nigeria’s construction industry was reportedly owed more than N100bn ($610m) in unpaid debts from state projects.

This situation can be chalked up in large part to the sheer size and number of public projects on the docket, a large portion of which have gone either unfunded or only partially funded as a result of corruption, poor planning and budgeting, or bureaucratic issues. That Nigeria lacks a nationwide building code at the federal level has also had a negative impact on the construction industry, and has likely contributed to a spate of collapsed buildings in recent years (see analysis).

Oversight & Regulation

Regulation of the construction industry is carried out by a range of public entities. The Federal Ministry of Works (MoW) oversees civil engineering projects, while the Federal Ministry of Lands, Housing and Urban Development and the Federal Housing Authority jointly manage the country’s housing sector. The MoW itself oversees a handful of regulatory bodies, including the Council of Regulation of Engineering in Nigeria and the Surveyors Registration Council of Nigeria, and is in charge of the Federal Road Maintenance Agency, a parastatal, and the Office of the Surveyor General of the Federation, an extra-ministerial department. Finally, many state-level authorities play a big role in issuing construction contracts, enforcing regulations and levying fees of various sorts. In Lagos State, for example, the Lands Bureau wields considerable power over building projects.

Besides these official entities, Nigeria is home to many professional organisations and influential private sector entities. Perhaps the most important, the Federation of Construction Industry (FOCI), is an umbrella organisation that counts more than 125 local construction firms as members. As of early 2013, these had combined assets of more than $10bn, according to the FOCI. Professional societies and segment-specific entities also play a major role, such as the Nigeria Society of Engineers and the independent institutes of architects, quantity surveyors and town planners.

Legislation

Though a draft National Building Code was drawn up in 2006, as of early 2015 the National Assembly had yet to pass it into law (see analysis). In lieu of federal benchmarks, many local contractors use in-house standards based on international building codes. Public sector tenders are carried out according to guidelines laid out in Nigeria’s 2007 Public Procurement Act, and are overseen by the independent Bureau of Public Procurement in conjunction with the public procurement department at the MoW.

In early 2013 the government began drafting a Local Content Act for the building industry. Based on similar legislation covering the oil and gas industry, the bill will lay out minimum thresholds for the participation of locals in construction projects, and is likely to be administered by the Nigerian Content Development and Monitoring Board, which was created in 2010 to manage such matters in the oil and gas industry.

Big Players

A handful of major contractors – including Julius Berger, Cappa and D’Alberto, Dantata & Sawoe, CostainWest Africa, PW Nigeria, Setraco and subsidiaries of both the Chagoury Group and the R&R Group – handle most major civil and commercial construction work in Nigeria. The FOCI, which counts many of the country’s top firms as members, reported total outstanding member contracts worth more than $80bn as of April 2014, around $50bn of these covering civil infrastructure projects, while the rest were for commercial or non-infrastructure work. In general, most construction firms earn the great majority of their revenues from government contracts or the private sector.

Julius Berger, founded in 1965, has grown into one of the country’s largest firms by employees, with 18,216 hires as of May 2014. Most of its revenues – around 62%, according to Meristem Securities, a local financial services firm – come from state-led civil projects. It has been involved in most of Nigeria’s major infrastructure projects over the past 50 years; it was lead contractor, for instance, on the Third Mainland Bridge, the longest in Africa at 11.8 km. The company is listed on the Nigerian Stock Exchange, where its market capitalisation was N58.1bn ($354.4m) as of March 2015. With positive returns posted since late 2011, Meristem projects the firm’s revenues to grow by about 14% a year through 2018. It is currently involved in a range of major projects in Nigeria, including the Lagos-Ibadan expressway and a new refinery for BUA Sugar.

Cappa and D’Alberto has been operating in Nigeria since 1932 and is now a major player in the commercial and residential segments. In recent years, it has been involved in building a variety of new shopping malls in Lagos, including the Palms Shopping Centre and Ikeja City Mall. Dantata & Sawoe, meanwhile, subsists almost exclusively on government projects. In 2012 and 2013 the firm was awarded new contracts to expand the Lokoja-Benin road; build an airport in Bayelsa State; and carry out infrastructure work for residential estates in Abuja and Jigawa State, among other projects.

Financing

Building in Nigeria is extremely costly. The high cost can be attributed to many factors, including high land prices; expensive imported materials and other inputs; security-related costs, particularly in the north-east; and numerous fees and taxes. Another cause is constraints on lending. Commercial financing from Nigerian banks generally comes at an interest rate of 10-15% or more and can be as high as 25-35%. Most local banks refuse to extend a loan until a project is more than halfway complete. Consequently, much of the financing for construction projects comes from abroad, primarily from China, the EU and the US. Many local contractors also regularly assume a considerable amount of currency risk, as most of their expenses are in naira while financing is often in euros or dollars.

Bureaucracy and fees are another major hurdle. In the World Bank’s 2014 “Doing Business” report covering 189 countries, Nigeria ranked 147th overall (down from 138th in 2013) and 151st in the category of “dealing with construction permits”, down from 146th in 2013. According to the report, the cost of obtaining a building permit in Nigeria was equal to more than 3500% of per capita income, compared with an average of 737% in sub-Saharan Africa and 84% in OECD countries. Nigeria also ranked 185th for ease of registering property, which costs 20.8% of a property’s value, compared to 9% in sub-Saharan Africa and 4.4% in the OECD.

Infrastructure

Upgrading and expanding Nigeria’s infrastructure networks has been a government priority, and the authorities are in the midst of a series of programmes designed to overcome years of chronic underinvestment in transport and power infrastructure. The condition of roads and the electricity grid is regularly cited as one of the country’s most pressing problems and a major impediment to continued economic growth. With this in mind, the government has introduced a host of large-scale infrastructure plans in recent years. Nigeria’s 2011-15 Transformation Agenda, part of the overarching Vision 20:2020 economic development plan, focuses largely on physical infrastructure and is the source of many of the projects that are currently under way. In all, the plan is expected to cost N25.68trn ($156.6bn), with around 57% of this borne by the state and the rest sourced from the private sector, including, in some cases, through public-private partnerships (PPPs). The Transformation Agenda consists of 451 physical infrastructure projects, 382 of which were under way as of mid-2013, according to the Federal Ministry of Finance.

Transport

Much of the investment has gone to projects in transport. In 2012 the MoW brought 32 out of 80 planned road projects to “substantial completion”, covering a distance of more than 2000 km. As of June 2013, another 38% of the projects were at various stages of completion, 20% were seeking funding through PPPs and 7% were at the procurement stage. Such investment has had a positive impact on a wide variety of transport-reliant businesses in Nigeria. Indeed, in May 2013 ABC Transport, a long-distance bus operator, announced it would lower its fares as a direct result of improving highway conditions.

As in many other African countries, Chinese state-owned enterprises have taken up a major role in building infrastructure in Nigeria over the past decade. The China Civil Engineering Construction Company (CCECC), for one, is currently involved in major rail, road, port and electricity projects throughout the country, having won in 2012 a $683m contract to build new passenger and cargo terminals at several of Nigeria’s largest airports, including those in Abuja, Lagos, Kano and Port Harcourt. “Until recently, Chinese contractors were seen as providing inferior-quality services,” Michael Chu’di Ejekam, Lagos real estate director at Actis, a global private equity firm, told OBG. “Now, however, the Chinese are raising quality to match outstanding local players like Julius Berger while maintaining their low costs.”

Housing

In addition to infrastructure, many local contractors expect to see a considerable amount of new activity in the affordable housing segment in the coming years. Though the high-end residential segment has been a reliable source of revenues for developers over the past decade, Nigeria is underserved in terms of low-cost housing. Government estimates from early 2013 put total housing demand at 15m-20m units. While demand for such housing is rife – a sizable number of Nigerians live in informal housing or traditional huts – paying for it remains a major challenge. “Nigeria’s sky-high construction costs trickle down through the value chain,” Ejekam said. “Developers and owners have to maintain high rents and end-users have no choice but to pay them. This means a large portion of the population are priced out of the formal market.”

In recent years, the government has launched a variety of programmes to make housing more affordable for average citizens. Most recently, in January 2014 the president launched the Nigeria Mortgage Finance Company, a PPP that is run by the private sector and largely financed by the World Bank. The new entity will focus at first on buying bundles of existing mortgages from primary lenders, with the goal of reissuing them on more favourable terms. Eventually, it is expected to begin offering mortgages of its own. Alongside this new source of financing, the Federal Mortgage Bank of Nigeria is also working with private developers on mass housing projects, many of which will be rolled out on a rent-to-own basis. These collaborative efforts have the potential to jump-start building in the housing segment in the coming years, which bodes well for domestic contractors (see Real Estate analysis).

Major Projects

A variety of large construction projects are currently under way. The high-profile Eko Atlantic project, launched in 2006 by Lagos State, is being developed by South Energyx, a subsidiary of the private Chagoury Group, on 10m sq metres of reclaimed land off Victoria Island, an upscale district of Lagos. Provided it moves forward as planned, the $6bn project will eventually house 250,000 people and serve as a new central business district for the city. As of mid-2013, around half of the land reclamation work had been completed, and in March 2014 the firm’s managing director said the first residential tower is to open in 2016.

Lagos State is also overseeing construction of a rail mass transit system in the city. Work on the $2.5bn project was begun in 2010 by the Chinese firm CCECC. As of March 2014 the company had finished just 2 km of the $1.3bn, 27-km east-west line, at which time it had initially been scheduled to open. The project has been delayed by land disputes – nearly all of Lagos’s land is inhabited – in which the state government has had to negotiate with, and in some cases relocate, entire communities of people along the planned route. Besides the east-west line, which will run from Marina to Okokomaiko, the project includes a 35-km north-south route.

Finally, many local contractors are currently involved in or looking forward to a handful of industrial projects. In October 2013 the government approved an N58.6bn ($357.5m) shipbuilding facility in the Niger Delta region, which is expected to serve the oil and gas industry. In early 2013, meanwhile, Indorama Eleme Fertilizer and Chemicals, a subsidiary of its Singapore-based namesake, announced it would build a $1.2bn fertiliser plant on 38 ha in Port Harcourt. Upon completion, scheduled for late 2015, the facility is set to be one of the world’s largest urea manufacturing complexes, with a capacity of 1.4m tonnes per annum.

Materials

In response to the surge in the construction market, domestic production of materials has risen rapidly over the past decade. Major investments in the cement, iron and steel, aluminium, aggregates, chemicals and heavy equipment segments have boosted local manufacturing sharply since the early 1990s. Even so, inefficiencies in the domestic market have helped stoke high prices, despite steadily increasing competition. The high cost of inputs and patchy power supply have dogged the cement industry, for example, which spends inordinate sums to maintain a steady supply of power by running diesel generators around the clock. Other major expenses for makers of materials include rapidly rising labour and security costs. Many contractors have thus found it cheaper to import some materials from abroad. “The high cost of domestically manufactured materials is a major contributor to overall construction costs,” said Ejekam.

Cement

In 2002 the federal government overhauled Nigeria’s cement industry, with the goal of spurring investment and boosting domestic production. The initiative, known as the Backward Integration Policy (BIP), required all registered cement-makers to invest in local production facilities. The result was more than $6bn in investment in the segment and a major uptick in domestic capacity. From 2008 to 2012 the cement industry posted a compound annual growth rate of 43.5%, with domestic production surpassing consumption by 55% in 2012, according to a mid-2013 report by Lead Capital Equity, a local financial services firm. The cement industry is dominated by a handful of major producers, including LaFarge Cement Nigeria, a subsidiary of the French firm LaFarge, and Dangote Cement, a domestic firm and the largest producer in Africa by volume.

Steel

In early 2014 the government launched an initiative to introduce a BIP for the steel industry as well. As of the end of 2013, Nigeria produced just 2.5m tonnes of steel a year yet consumed around 17m tonnes, costing it $3.3bn a year in imports, according to the Federal Ministry of Mines and Steel Development.

Under the BIP, which was developed with input from local iron and steel manufacturers, the government is working to boost domestic production substantially. According to government officials, similar plans could be rolled out in the coming years in other construction materials segments as well.

Outlook

In recent years, the authorities have launched a host of initiatives that are aimed at addressing many of the industry’s steepest challenges – high building costs, delays in public contract payments, lateness in project delivery, lack of a national building code, reliance on state infrastructure projects and poor quality standards – though the efficacy of these schemes has yet to be confirmed.

In a clear positive sign for the sector, the new president, Muhammadu Buhari, has said that infrastructure will be a priority in his administration, pledging to implement a national infrastructure master plan with a focus on transport, including roads, rail and ports.

While long-term forecasts for the sector are positive – a report by Oxford Economics and Global Construction Perspectives put its growth at 8% a year for 2012-25 – external factors are likely to constrain growth in the short to medium term, including falling oil revenues, foreign currency spreads and political risk.

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The Report: Nigeria 2015

Construction & Real Estate chapter from The Report: Nigeria 2015

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