How the Modern Real Estate Sector Moguls in West Africa are attracting Investments All around

What Is The Real Business Of McDonald’s?

Most consumers will say Hamburgers. This is pretty obvious, but not all true. The real business of MacDonalds is beyond the Big Mac®, Chicken McNuggets®, World Famous Fries®, Sausage Burrito, etc. Macdonald’s runs a profitable business model similar to those employed by the major players in the business world. Most casual observers do not see the “behind the scenes” money spinners where the big bucks come from.

Most consumers see McDonald’s as a burger restaurant. In the business world, McDonald’s is considered a real estate company, a very big real estate enterprise. While the brand has sold over a billion hamburgers to customers around the world, 85% of its stores are owned by franchisees, who lease their lands and buildings from McDonald’s. While McDonald’s is, obviously, a franchise-based restaurant giant, the rent it collects from franchises is more than the amount it gets in franchise royalties. McDonald’s buys the land and building at most of its locations, adding real estate assets that keep growing in value to its portfolio.

Essentially, McDonald’s makes money by leveraging its product, fast food, to franchisees that have to lease properties owned by McDonald’s, often at large markups. McDonald’s has control over the land and long-term leases and can leverage its market position to negotiate favorable deals. In the real sense, McDonald’s is a real estate company.

As it is true of McDonald’s and in America, it is also true of Nigeria and Nigerian businesses. The “Big Boys with Big bucks Do real Estate”. Even if you see Night clubs, Hotel or Restaurant chains, Oil and Gas, or any other business, the boys with big bucks always do real estate as their go-to business of choice. They may start in any other industry, but when they want to play at the top level and create sustainable wealth, real estate is the choice vehicle for the financially astute investor with an eye for long-term growth and stability.

With an estimated population of over 200 million people who must live in houses, the Nigerian real estate market is a ready gold mine with so many untapped potentials for investors. Local and international investors can take advantage of the immense potential in real estate for residential, commercial, or luxury developments.

Nigeria has one of the largest real estate markets in Africa. Nigeria is a top choice for real estate investment in Africa due to its large consumer market. It is also one of the fastest-growing economies in Africa. In 2020, the GDP of the Nigerian real estate industry was ₦3.96 trillion, a 9.4% decline from the prior year’s ₦4.37 trillion (Augusto & Co). The potential of the Nigerian market draws investors from both the local and the international scene like a bee is drawn to a beautiful flower. That flower is the Nigerian real estate market, and for those who know how to navigate the market, the thorns in the roses are just a blip on a rosy industry and sector. Massive opportunities abound in the Nigerian real estate market, and savvy investors are not glossing over that. The country is either a greenfield or a minefield for investors depending on your understanding of the sector and how you play.

Foreign Investments

When we analyze major institutional acquisitions and disposals in real estate investment valued at $1.8 billion across Africa in the past two decades, it reveals that Nigeria has the largest real estate investments by country. The country has, within this period, attracted $523 million in investment into the sector, ranking ahead of Mozambique which was ranked second at $268 million, and Mauritius which was ranked third with a $256 million investment.

This investment is however understandable in a country of 200 million people where the housing demand-supply gap is well over 20 million units while annual housing output is between 50,000 and 100,000 units. The homeownership level in the country, according to experts, is about 25%. Nigeria has the lowest homeownership level even among its peers, with Kenya at 75% and South Africa at 56%.

Providing Housing

The government has relinquished its place as a major player in providing housing for its teeming population. It is primarily playing the role of a regulator in the real estate sector instead of a provider. With the absence of the government as the provider, many private developers with diverse models have appropriated the vacuum and are harnessing the opportunities in the Nigerian real estate sector.

As technology, economy, and other global events are reshaping the world, new players from the local and international scene are emerging and redefining the Nigeria real estate sector with a focus on luxury and “smart housing” that can rival developments in the big cities like Dubai, New York, Singapore, Paris, etc.

Opportunities

The Nigerian real estate market is estimated to grow at about 3 percent this year in 2022 (www.estateintel.com). This growth is due to a renewed focus on affordable housing, a large youth population undergoing rural-urban migration, and a good return on investment from private real estate developers. The economic value created by commercial real estate is significant, with the industry responsible for 10% of the GDP of Nigeria in 2021.

The chief driver of the pricing regime in the Nigerian real estate market is the imbalance in demand and supply. A 2020 report estimated that “the housing deficit in Nigeria is between 17 and 20 million housing units and increasing at the rate of 900,000 units per annum”. The potential cost of the housing deficit is Six Trillion Naira (14.5 billion dollars). The implication is that Nigeria needs to be producing 700,000 new homes every year to stem the housing deficit. But as it stands, Nigeria only develops less than 100,000 new homes every year.

This supply gap created by the housing deficit is further exacerbated by the present economic challenges, a growing youth population, and rural-urban migration. This need has attracted and is still attracting investors with big bucks into the real estate landscape, and they are cashing in on the supply gap.

Challenges

One of the biggest challenges to homeownership in Nigeria is access to finance. Access to finance is generally on the upward trend, even though it is expensive. While access to housing development finance has progressed significantly, mortgage finance has marginally improved compared to the market needs. Nigeria mainly operates a fixed interest rate for loans. Mortgage interest rates range from 6% to 20% per annum.

Even though there are immense benefits in investing in real estate, there are also massive drawbacks. One of the main ones is the lack of liquidity or housing finance. However, lack of liquidity is not a concern for those with big bucks. Those who say challenges are the breakfasts of champions were referring to the big boys. When it comes to liquidity, the big players in the real estate industry are as deep and wide as the ocean. They can harness opportunities and also attract foreign investment on a large scale.

Another pressing challenge is land tenure; land tenure is mostly customary and tenancy. “The urban population in Nigeria is expected to grow to 300 million inhabitants by 2050”. Most of the urban poor live in informal settlements that lack proper planning, development, and basic amenities. Without an overhaul of the land use policy, there will always be challenges for developers seeking land for large-scale developments.

For Those Who Know How To Play The Game, The Nigeria Real Estate Market Is A Goldmine, And There Is No Way But Up.

Benefits

Across the world, and in Nigeria, Real Estate is a critical industry. It plays a leading role in attracting investment and realignment of the economy for steady growth and development. With massive investment in real estate, the big boys also enhance their portfolios and lower volatility through diversification. Real estate investments also help to enhance the development index of the nation.

Investors are concerned about their return on investment (ROI). No investment can give steady and predictable returns like real estate. Real estate also provides long-term financial security, tax benefits, and a hedge against inflation. These are some reasons astute investors and entrepreneurs choose real estate as their vehicle of choice to achieve long-term financial stability and growth. Whether you invest for cash flow or appreciation, the benefits of real estate investment are invaluable. Your investment can serve as a source of leverage to help you source capital for further acquisition or diversifying and expanding your business empire.

Residential or Commercial

Whether to invest in commercial or residential properties is an age-long debate. An easy way to see the best option in this dichotomy is to check where the big boys invest their funds. When we look at the figures, it shows more investment in residential developments than in commercial. The reasons are not far-fetched. Residential investments have a low cost of entry, and a larger pool of renters and buyers, and they also tend to perform better during an economic crisis.

As for commercial properties, they enjoy longer leases and higher returns, and it is easier to increase the value of the property without incurring any additional cost.

Before you pick between commercial or residential real estate developments, you will do well to check the ease of analysis of the investment and the ability to secure financing for the chosen development. And finally, always talk to real estate and finance professionals before going into a real estate investment.

For most investors, residential developments carry the day. Instead of putting all their money in one commercial property in a one-off, high-risk/high-return investment, most investors prefer to purchase several residential properties in different areas; over some time, thus diversifying their real estate investment and spreading the risk.

Real estate, commercial or residential development, remains the asset of choice for investment. Developers understand that discerning buyers want to be impressed with comfort and security at the very best. And if they can deliver according to buyers’ needs, there is a ready market for their offering.

Foreign Direct Investment

Investors, whether local or foreign, are constantly on the lookout for promising markets. These investors show a preference for countries with optimum risk-adjusted returns, high business confidence, and investment attractiveness. The myriad of investment and expert analysis they perform ensure a good return on and security of investment before they commit pen to paper or funds to any investment. Making strategic choices investment is an agglomeration of quantitative and qualitative market analysis using various tools.

Africa’s most populous nation is considered a top choice for real estate investment. Nigeria is the largest consumer market for real estate in Africa. The Nigerian economy is also one of the fastest-growing economies in Africa. Aside from the growing population, Nigeria has become a haven for commercial and residential real estate investments due to its urbanization and influx of business multiple opportunities.

The main commercial cities Lagos, Abuja, and Port Harcourt have experienced a continuous increase in asking price over the last five years with surging demand for ordinary residential accommodation and luxury homes from investors and high-income individuals.

New Sheriffs In Town

We have established that government alone cannot meet the housing needs of the populace. Waiting on the government to remedy the situation is futile. The government is encumbered by the paucity of funds and many other sectors jostling for the meager available funds.

Apart from the immense benefits of investing in real estate, the government has come up with some initiatives to encourage private developers to bridge the gap in the housing deficit. Programs such as Public -Private-partnerships, Infrastructure concessions, tax incentives, and single-digit mortgage financing are some of the efforts by the government to encourage real estate developers.

Big guys with big bucks have learned to perform on different scales, push boundaries, and shape a new future. Though costs have gone haywire, no thanks to the exchange rate and economic tumbles, first-grade developers have become attuned to broader possibilities and are more available to roll in unison with their target client base, to achieve fair transactions and long-term considerations. Discerning high net worth consumers who do not mind spending top grand have created a ready market for luxury apartment developers. Naira’s volatility and general economic upheavals can unnerve investors, but professional developers have learned how to creatively administer financial and real estate solutions, ensuring stable returns and hence solidifying positioning. These are the new sheriffs in town.

One Way – Up

Despite a range of pressing challenges, Nigeria’s real estate sector will continue expanding in the future, albeit at a slower pace than over the past decade, except the economy rebounds from the present state. The way forward for local and foreign investors looking to invest in the market would be through developments in the residential, commercial, and industrial sub-sector. There will always be a need for shelter, so residential marketing will still thrive. Developers who take a wait-and-see approach to the changes in the real estate sector often fail in the long run. There is a need for property developers to shield their business against the effect of the Covid pandemic, present, and future economic challenges.

One sure bet for developers in this period is the construction of functional spaces that would accommodate the desires of the prospective clients who prioritize luxury, security, and even work-from-home needs. Either way, real estate does not falter long term. It soars against adversity and at its worst, breaks even in value.

For Those Who Know How To Play The Game, The Nigeria Real Estate Market Is A Goldmine, And There Is No Way But Up.

Contributor/Written by: Kenneth Ogbebor

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