To sustain their business and see reasonable margin in the midst of soaring inflation, real estate developers are adopting funding models that enable them to share their risks with the sources.
The developers believe that equity partners rather than loans from the banks are one of the attractive ways to work with, explaining that it is better if partners bring in money and share both profits and risks than borrowing and paying at a high cost, while the lender is not sharing any risk with them.
Increasingly, credit facilities for housing projects are becoming unsustainable with an ever-increasing interest rate. In its response to rising inflation and an attempt to mop up liquidity in the financial system, the Central Bank of Nigeria (CBN) has resorted to raising interest rate, increasing it from 11.5 percent in January to 18.5 percent as at July this year.
This explains why, at the moment, interest rate on commercial bank loans hovers between 28 per cent and 30 percent and this follows the recent increase in Monetary Policy Rate (MPR).
Similarly, inflation in Nigeria has soared for six straight months, peaking at 24.08 percent in July this year. This is said to be the highest since September 2005 and it has had very negative impact on building materials prices.
“Getting loans from the banks is no longer sustainable given the rate of inflation and high interest rate the lending institutions charge. Added to this is the mismatch between the loan and the project cycle. While the loans are usually short-term, the projects are long term,” Grace Ibhakhomu, CEO, Lifecard Investment and property developer, said.
Ibhakhomu who champions co-ownership as a way of owning a home or any piece of property, listed private equity finance, crowdfunding, bonds, co-funding or partnerships with interested parties as some of the risk-sharing alternative funding sources being adopted by the developers.
She pointed out, however, that these sources may not be as friendly, yet considered less stringent than bank loans.
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Besides the high-interest rate, developers also complain of eligibility requirements on real estate developments, noting that the requirements also constitute a disincentive to take up such facilities.
“We used to have Estate Development Loan (EDL) given by the federal mortgage Bank of Nigeria (FMBN), but too much bureaucracy and insider abuse made that too unsustainable,” Anthony Adekunle, an estate developer, said.
He recalled how he got his finger burnt after taking the EDL for an affordable housing scheme in Mainland Lagos and recorded almost zero return on investment (RoI). He blamed it all on too much paper work that would take for-ever to complete.
On the contrary, John Beecroft, CEO, Tetramanor Limited, a Lagos-based property development firm, was quoted as saying that “if you seek funds via crowdfunding, you would typically set up a profile of your project on your website, then use social media and various networks of business, family and friends to raise the money.
“Family and friends can also offer credit on a flexible, long-term and low-cost (or free) basis. But ensure that the terms of any loan are clearly understood by both parties.”
He revealed that last year, his company made a proposal to a bank and they were preparing to get them funds at about 17 per cent. The company started documentation, but by the time the bank was ready to release the fund, the interest rate had reached 27 percent.
“We had to pull out because it was totally unreasonable. You can’t fund a project at 27 percent. The interest for one year will wipe off your profit,” he said, adding, “we had to seek an alternative by opting for foreign equity investors in one of our projects; it could be difficult with the requirements but it is worth looking into and exploring.”
Besides the high interest rate, rising input material cost is another source of headache for developers. Ayo Ibaru, Northcourt Real Estate CEO, noted in a recent report that in the past 15 months, the increase in the price of cement has affected other components.
The prices of paints, reinforcement and sanitary fittings, sand, roofing sheet, tiles and granite, he noted, has gone up by an estimated 70 percent, citing a recent survey which says that a 50kg bag of cement previously sold at N3,500 last year, is being sold from N4,700.
“High cost of building and of urban land acquisition has been established as challenges public and private sector housing developers face. As house rents and inflation continue to rise amidst rising costs of living, an increasing number of low-income tenants will likely relocate to low-income areas,” Ibaru said.