To navigate the challenges posed by surging inflation, real estate developers are adopting innovative funding approaches that allow them to share risks with their financial backers.
These developers favor equity partners over traditional bank loans because they believe it’s more attractive to have partners invest money and share both profits and risks, rather than borrowing at high costs without the lender sharing any risks.
Credit facilities for housing projects have become increasingly unsustainable due to rising interest rates. The Central Bank of Nigeria (CBN) has responded to inflation by raising interest rates from 11.5 percent in January to 18.5 percent in July. As a result, commercial bank loan interest rates now range from 28 percent to 30 percent, following the recent increase in the Monetary Policy Rate (MPR).
In addition, Nigeria has experienced six consecutive months of soaring inflation, reaching 24.08 percent in July, the highest since September 2005. This has had a detrimental impact on building material prices.
Given these circumstances, obtaining loans from banks is no longer feasible due to high inflation and interest rates, as well as the mismatch between short-term loans and long-term projects.
Grace Ibhakhomu, CEO of Lifecard Investment and a property developer, advocates for co-ownership and lists alternative funding sources like private equity finance, crowdfunding, bonds, co-funding, and partnerships with interested parties. However, she acknowledges that these sources may have their challenges but are generally considered less stringent than bank loans.
Developers also face eligibility requirements and bureaucracy when seeking real estate development loans, as exemplified by the now-unsustainable Estate Development Loan (EDL) from the Federal Mortgage Bank of Nigeria (FMBN).
Anthony Adekunle, an estate developer, shared his negative experience with the EDL, citing excessive paperwork and insider abuse that led to minimal return on investment.
On the other hand, John Beecroft, CEO of Tetramanor Limited, suggests that crowdfunding can be a viable option. He emphasizes the importance of setting up a project profile online, utilizing social media and personal networks to raise funds, and ensuring clear loan terms between parties.
Beecroft also recalls an incident where a bank initially offered a 17 percent interest rate but later increased it to 27 percent, making it unfeasible for their project. They considered foreign equity investors as an alternative.
In addition to high-interest rates, rising material costs, particularly for cement, have become a major concern for developers. Ayo Ibaru, CEO of Northcourt Real Estate, highlights a 70 percent increase in the prices of paints, reinforcement, sanitary fittings, sand, roofing sheets, tiles, and granite. He notes that these rising costs, along with expensive urban land acquisition, pose challenges for both public and private sector housing developers. As a result, low-income tenants may increasingly move to low-income areas as rents and inflation rise.
