Rapid population growth, steadily increasing urbanisation and rising incomes – particularly among the middle class – have fuelled steady expansion in Nigeria’s real estate sector over the past decade, and are expected to continue to drive growth in the industry for the foreseeable future. While most segments have seen rising levels of investment in recent years, the country remains undersupplied in virtually every area, particularly affordable housing, high-quality retail space and grade-A office space. The demand-supply gap in these areas represents a major opportunity for the real estate industry. Consequently, and despite the challenging local business environment, the sector has seen steadily increasing interest from local and international investors alike in recent years.

OVERCOMING CHALLENGES: While most local players agree that there is huge potential for growth, the sector also faces numerous challenges. The underdeveloped mortgage market is considered to be a hurdle to both homeownership and the further maturation of the residential real estate market, for example. A report released by CBO Capital, a Lagos-based investment firm, stated that as of late 2012 mortgage loans and advances were equal to 0.5% of GDP, compared to 30-40% on average in emerging economies and 60-80% in advanced economies. Boosting access to mortgages and other types of property financing is considered to be a key component of the government’s long-term goal of increasing access to affordable housing and driving down residential housing prices.

Another deterrent to real estate development in Nigeria is the Land Use Act of 1978, under which most of the land in the country was granted to government entities at the state and local level. Additionally, property registration and titling procedures are expensive and complex compared to international standards, according to the World Bank.

GROWTH: Despite these issues, the market has grown considerably in recent years. In 2012, for example, Nigeria was the top investment destination in Africa in terms of hotel developments, according to CBO Capital. Similarly, according to the UK-based property consultancy Knight Frank, Nigeria’s prime residential, retail, office and industrial markets have been buoyant in recent years, particularly in major urban centres such as Lagos and Abuja. Recent activity in the market has been fuelled primarily by the private sector, including both local and foreign developers, and particularly oil companies, which have historically been a major source of demand in Nigeria.

OVERSIGHT & REGULATION: A number of federal, state and local institutions are involved in regulating the real estate industry. The Federal Ministry of Lands, Housing and Urban Development (FMLH), which was established in 2010, has a mandate to develop, implement and regulate the government’s long-term housing policy, which includes initiatives aimed at urban renewal and slum upgrading, among other key issues. The ministry is responsible for the ongoing redevelopment of Nigeria’s National Housing Policy (NHP) and National Urban Development Policy (NUDP), which, as of early 2013, were both under discussion in the National Assembly.

Mortgage financing has been largely driven by the Central Bank of Nigeria, in conjunction with the government’s dedicated direct foreign investment (DFI) for the housing sector, the Federal Mortgage Bank of Nigeria (FMBN). In addition to these federal bodies, a number of state-levels entities are involved in the provision of affordable housing locally, such as the Lagos State Development and Property Corporation and the Rivers State Housing and Property Development Authority, among others.

Nigeria’s regulatory framework is considered to be a hurdle for the long-term development of the real estate sector. In the World Bank’s 2013 “Doing Business” report, Nigeria was ranked 131st out of 185 economies around the world for overall ease of doing business. The country performed relatively well in terms of dealing with construction permits (88th in the world) and getting credit (23rd), though less so in getting electricity (178th), paying taxes (155th) and registering property (182nd). According to the World Bank registering property in Nigeria requires 13 steps, takes 86 days and costs 21% of the value of the property. The Land Use Act of 1978 granted the government control over all land in Nigeria. Consequently the authorities must approve property transactions before they are complete. This means that property owners must have the state’s permission to sell, buy or leave their own land, which adds time and hassle to these transactions. According to the World Bank, obtaining the government’s consent for transactions takes 61 days on average.

BY THE NUMBERS: While the real estate sector is considered a key component of the country’s rapidly expanding economy, and an important destination for capital inflows, by most metrics the formal stock of property developments is low, particularly in the residential segment. According to CBO Capital, more than 80% of the population currently lives in unplanned settlements and around 90% of houses are self-built. Additionally, the great majority of the population in urban areas – around 85% – rents their home, spending more than 40% of their income on accommodation on average. Commercial banking involvement in the sector is limited.

In addition to the cost of property registration, major expenses include construction and materials, land and, in many cases, infrastructure. Furthermore, infrastructure is rarely provided by the government and having to build sewage, road and water connections to new developments in suburban or rural areas can cost up to around 30% of total building expenses, according to estimates from CBO.

MARKETS: The country is home to three major property markets, namely Lagos, the commercial capital, with a population of 10m-17m, according to recent estimates; Abuja, Nigeria’s capital city since 1991; and Port Harcourt, which is a major regional centre for the oil and gas industry. Yields throughout the country are considerably higher than in most developed markets, particularly for high-end properties in prime locations. According to recent data from Knight Frank, developers in urban areas earn around $10,000 per month in rent for a four-bedroom house in a prime location, a yield of around 9% in Lagos and 8% in Abuja. For grade-A office space, meanwhile, yields average 10% in urban areas, while retail yields are 11% and industrial yields are 13%.

RESIDENTIAL HOUSING: Prime areas, such as Ikoyi, Victoria Island and Lekki in Lagos, are among the most expensive residential neighbourhoods in sub-Saharan Africa, with both rental and purchase prices topping those in many developed markets. Due to the high cost of construction and the country’s legislative environment, which favours tenants, many building owners require tenants to pay at least two years worth of rent up front. As a result of rapid expansion at the upper end of the market over the past decade, the high-end segment is currently somewhat oversupplied. As of early 2013 many buildings were not fully rented out, though property developers, owners and managers had yet to lower rental prices. According to a 2013 property report released by Broll, a two- or four-bedroom apartment in an upmarket building on Victoria Island or Ikoyi, for example, could be rented for between $50,000 and $100,000 on an annual basis. This is lower than peak levels seen before the global financial crisis. “Investment in luxury residential is declining as the rate of return is not as attractive as it was in the years preceding 2008 when rents offered higher yields and the cost of construction was lower than today,” Gbenga Olaniyan, CEO of consultancy Estate Links, told OBG.

According to federal government estimates, Nigeria’s housing deficit has grown to around 15m-20m in recent years. “At present, the industry is still very much focused on the high-end market, which in reality only represents around 8m of Nigeria’s 170m-population,” Erejuwa Gbadebo, CEO of Broll, told OBG.

GOVERNMENT BACKING: To this end, the government has also introduced a number of new programmes in recent years. In May 2013 the minister of finance, Ngozi Okonjo-Iweala, announced that the federal government planned to build 200,000 new affordable housing units by 2018. The programme will be funded in part with a $300m loan from the World Bank. Additionally, in late May 2013 the National Council on Privatisation approved a plan to privatise the Federal Housing Authority (FHA), an independent parastatal organisation under the FMLH. Since it was established in 1973, the FHA has faced a number of challenges, including high operating losses, a lack of revenues and high legacy debt rates. The authority has built some 37,000 units at a rate of fewer than 1000 on an annual basis. The privatisation of the FHA is expected to make the entity a more efficient organisation, which should allow it to boost construction rates in the coming years.

A number of mega-projects will likely shake up residential markets, at least in the larger urban areas. In July 2006 the Lagos State government awarded a concession for the Eko Atlantic project to South Energyx Nigeria, and site works began on the project in 2008. Eko Atlantic encompasses the construction of a new neighbourhood situated on around 10m sq metres of reclaimed land off the south-western coast of Victoria Island. The $6bn project includes large-scale housing, office and retail components, and is expected to house 250,000 residents.

“Many residential units in Eko Atlantic will help fill a gap in the market for middle-income housing,” David Frame, the managing director of South Energyx Nigeria, told OBG. “Renters in Lagos will find units in the N300,000-500,000 ($1900-3150) range. Foreign developers are noticing this gap in the market and beginning to plan accordingly.”

MORTGAGE MARKET: The domestic mortgage industry is currently underdeveloped and credit is expensive, with interest rates averaging around 30%, according to a recent report published by the African Development Bank. Most estimates suggest that only around 20% of the population participates in the formal banking sector, with the remaining 80% dealing almost entirely in cash. With this in mind, much of the population is ineligible for loans of any kind, as it is impossible for financial institutions to confirm creditworthiness due to a lack of history.

The development of the residential market – and particularly the affordable housing segment – has been financed primarily by government entities, including the FMBN, and international organisations, such as the World Bank’s private sector development arm, the International Finance Corporation. Most residential purchases are made on a cash basis, often out of long-term savings. The high-end residential, office, hospitality and retail markets, meanwhile, are dominated by a few local developers, though foreign players have also become increasingly active in these areas in recent years as demand has grown.

“Finding initial financing is a real challenge,” said Bolaji Edwards, the founder and director of Canton Concourse, a serviced office development on Victoria Island in Lagos. “Banks are not interested in taking on any real property risk here. They will only lend after you have already secured enough funding to complete 70% of your project.”

LENDER PROGRESS: While the FMBN has officially been up and running since before Nigeria achieved independence in 1960, for much of this period its performance failed to match the ambitious goals set for it. In the early 2000s the federal government carried out a large-scale restructuring of the bank with the aim of expanding the country’s secondary mortgage market, strengthening the FMBN’s relationship with the capital markets and ensuring that the lender’s operations were in line with international banking standards. In the first quarter of 2012 the bank recorded a profit for the first time in 20 years, achieving earnings of N188m ($1.18m), and since then it has continued to operate in the black.

HOUSING FUND: The FMBN manages the National Housing Fund (NHF), which offers long-term, low-cost credit. The fund is financed by mandatory contributions from all Nigerians earning a monthly income of at least N3000 ($18.90). In late 2011 the FMBN launched the Informal Sector Cooperative Housing Scheme (ISCHS), which aims to tap into Nigeria’s large informal economy – estimated at around two-thirds the value of the formal economy – in an effort to ensure that the informal workforce both contributes to and is able to benefit from the NHF. According to CBO, between 1960 and 2009 fewer than 100,000 mortgage transactions took place in Nigeria, which works out to just over 2000 housing loans per year. The FMBN is responsible for the vast majority, at around 80% of this total.

As of May 2013 the FMBN had disbursed mortgage loans worth around N100.5bn ($633m) under the NHF programme, which has resulted in the construction of around 56,000 houses. In an effort to boost these numbers, in early 2013 the bank announced that it planned to raise its capital base from around N5bn ($31.5m) to N200bn ($1.26bn). In addition to requesting considerable increases in federal investment, the FMBN is working to expand participation in the NHF programme, which had around 3.77m contributors as of May 2013.

RETAIL SPACE: Despite accounting for a relatively small percentage of the real estate market at large, the retail segment is currently considered to be a key growth area (see analysis). “There is a real shortage of high-end retail space in Lagos and this supply deficit is creating significant interest in upscale real estate developments,” Harris Aib Igiehon, managing director of local architecture company Harris Aib Associates, told OBG.

According to CBO data, the country is currently home to less than 200,000 sq metres of formal retail space. This figure has jumped considerably in recent years, mostly as a result of the completion of a handful of large-scale, Western-style mall projects in key urban areas, including the Palms Shopping Centre and Ikeja City Mall in Lagos and the Grand Towers Mall in Abuja, among others (see Retail chapter). As the middle class continues to grow in the coming years, demand for international-standard retail space is expected to continue to rise.

OFFICE SPACE: Increasing economic activity has resulted in rising demand for office space in recent years. In general, the grade-A segment is driven by demand from foreign firms, which have moved into Nigeria en masse over the past decade. With developers focusing primarily on high-end residential and retail space, the office segment is currently under-supplied. Consequently, prime office rents in Lagos and Abuja are among the highest in the world. In Lagos most of the grade-A space is concentrated on Victoria Island and Ikoyi, where rents range from $600-850 per sq metre, though in some centrally located buildings prime space has been priced at more than $1000 per sq metre.

Buildings that offer grade-A space in Lagos include Churchgate II Towers, Eko Towers, Mansard Place, Mulliner Towers, Victoria Plaza, Maersk House and FF Towers, among others. In Abuja prime office space prices are determined primarily based on buildings’ proximity to government ministries, and key commercial neighbourhoods include the central business district, Maitama and Wuse 2.

HOSPITALITY & INDUSTRY: Other areas of the real estate market that have benefitted from increased demand in recent years include the hospitality segment and the industrial sector. According to CBO, Nigeria is currently home to around 30,000 hotel rooms in total, far below what the market ought to support. Lagos, Abuja and Port Harcourt have seen a steady stream of new hotel projects in recent years. In mid-2013 the US-based Intercontinental Hotel Group opened a 358-room property on Victoria Island, which followed an announcement the previous year by Hilton Worldwide, another US-based firm, of a partnership with Nigeria’s Transcorp to develop eight new luxury hotels in Nigeria before the end of 2020. The majority of the new Hilton properties will be located in Lagos and Abuja. As of late 2012 around 7000 new rooms were under construction, according to CBO data.

Finally, the industrial real estate segment has also grown, primarily as a result of investments made by major multinational firms, including Procter & Gamble, GlaxoSmithKline and Nestlé.

BACKING: Based on the success of international funds, several foreign private equity firms have also played a key role in the sector in recent years. Actis, a global pan-emerging markets private equity investor that has been operating in Nigeria since 2006, has financed a handful of large-scale retail, office and housing developments throughout the country. Other private equity firms involved in the sector include Aureos Capital, a UK-based firm that was recently purchased by Dubai-based Abraaj Capital, the largest private equity player in the Middle East; Novare Equity Partners, a South Africa-based firm; and local players African Capital Alliance and Alitheia Capital.

In October 2012 the government launched a $1bn sovereign wealth fund, which will likely focus invest outside Nigeria, but could also include some local real estate holdings. “There are not enough real estate investors and developers here,” said Michael Chu’di Ejekam, a director at Actis. “Considering the potential for growth in Nigeria, we expect to see many new players testing the waters in coming years.”

OUTLOOK: Developing real estate in Nigeria remains a challenging process. Downside risks include a lack of legislative clarity on property and land rights; the high cost of construction and financing; and rising labour expenses, among others. That said, according to most local developers, the potential returns far outweigh these hazards.

Indeed, Nigeria’s growing population, rising income and urbanisation, and recent and upcoming legislative improvements all bode well for future growth in the property markets. The nation’s strong economic fundamentals have resulted in rising interest from foreign developers in recent years, which in turn has had a positive impact on the industry’s practices and standards. Consequently, the sector is expected to mature considerably over the coming decade.