NIGERIA: REAL ESTATE DEVELOPMENT PLOWS AHEAD, WHILE HEDGING

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E.O. 12958: N/A
TAGS: ECON EIND EINV NI

SUBJECT: NIGERIA: REAL ESTATE DEVELOPMENT PLOWS AHEAD, WHILE HEDGING
FOR MORE RISKS FROM ECONOMIC SLOW DOWN


1. (SBU) Summary: Given Nigeria's housing shortage crisis of 16
million units, demand for real estate development has not waned in
this economic downturn. CityScape, a Nigerian real estate firm, is
developing 6 projects in Lagos and Ogun States, 2 in Rivers State,
and 1 in Abuja, and is showing no sign of slowing down. The
depreciation of the naira has yet to affect construction costs;
however, developers are hedging for more risks. More companies are
looking to enter the Nigerian real estate market. There appears to
be a bubble in rental and land prices that seems not to be the case
in construction projects. End Summary.

Demand High Despite Economic Downturn
--------------


2. (SBU) Scott Morey, Chief Operating Officer of CityScape, a real
estate development company, told EconOff March 5, that, with an
estimated 16 million unit housing shortage in Nigeria, 2 million of
which are in Lagos alone, and a middle market consumer base of 20
million people, demand for real estate is and will be largely
unaffected by the economic downturn. (Note: All figures are
estimates provided by government and private sources. End Note)
CityScape considers individuals earning Naira 5 million to 7 million
per annum (USD40,000 - 60,000) belong in the low-income housing
category; those earning Naira 7 million and above per annum are
viewed to be in the middle market. According to Morey, real estate
developers are small in scale of operations, and no developer has
been able to build over 1,000 homes in a one year period. In 2007,
development reportedly started for 35,000 housing units. Hence,
demand will always exceed supply, Morey argued.


3. (SBU) CityScape is currently developing two real estate projects
in Port Harcourt, four in Lagos, two in Ogun State, and one in
Abuja. (Note: Each project contains from 600 to 1,000 residential
units. End note) Pre-sales were copleted for almost all projects
before they even broke ground, Morey intimated. In some cases, a
secondary market emerged where buyers re-sell or swap individual or
blocs of housing units at higher prices. The demand for housing has
not declined along with the worsening financial and economic
environment, Morey observed, and the biggest challenge for real
estate developers is on-time delivery, not dwindling demand.

Housing Development Surging in Lagos State
--------------


4. (SBU) CityScape is developing two projects in Ogun State and four
in Lagos, all concentrated in the suburban sprawl on the Lekki
Peninsula. While real estate development is springing up along the
Lekki Expressway, the arterial road connecting Victoria Island to
Lekki, CityScape's strategy is to develop large estates as new
mixed-used commercial and residential hubs further away from the
main road. (Comment: CityScape's strategy dovetails with Lagos State
Government's master plan to create satellite cities and mix-used
residential and commercial hubs to alleviate traffic and human
congestion on Victoria and Ikoyi Islands. End comment) CityScape
recently obtained a 7.5 percent transfer tax exemption and became
the first company to receive a license to grant title to buyers from
Lagos State Government for a 355 hectare project it is developing in
Lekki. These concessions, Morey contended, are evidence of the
state government's keenness in encouraging more real estate
development.

Houses Figure in Port Harcourt's "Rebranding"
--------------


5. (SBU) CityScape is developing a 25-hectare, 1,100 unit real
estate project in partnership with the Rivers State Government
(RISG) as part of the RISG's plan to re-brand the city to bring back
businesses and residents. (Note: RISG plans to build a USD1 billion
ring road for Port Harcourt as part of the re-branding/development
scheme. End Note) The project was conceived 1.5 year ago; CityScape
broke ground in November 2008; and it is expected to be completed in

2011. CityScape plans to develop a second low-income, 500 unit
housing project in Port Harcourt. On the viability of the two
projects, Morey believes oil expatriates and Nigerians who moved out

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of the state in recent years due to deteriorating security
conditions will buy the homes as lodging for their travel and will
eventually move back to settle.

Developers Hedging for More Risk
--------------


6. (SBU) According to Morey, construction lending is riskier than
mortgages and interest rates for construction range between 18
percent and 21 percent. Prior to the financial crisis and economic
downturn, buyers had to make 10 percent payment at the time of
contract and 10 percent at closing. Starting in the first quarter
2009, developers are hedging for more risk by asking buyers to make
20 percent payment at the time of contract. Another problem feeding
the market risk for real estate development, Morey shared, is the
inconsistency in underwriting standards employed by different local
banks.

Construction Costs Not Yet Hit by Naira's Fall
-------------- -


7. (SBU) Naira depreciation has yet to affect the costs of
construction materials for CityScape, so the business is still
profitable at this point in time, Morey revealed. Morey claimed
that, while cement prices have risen in Nigeria in the last two
years, global cement prices have been relatively consistent. Large
developers such as CityScape normally pay 50 percent in advance for
raw materials, including sand, cement, steel, and granite, that they
source into Nigeria. This standard business practice has largely
buffered them from the weakening Naira. However, a continuing
weakening of the naira will hit construction costs at some point,
Morey projected. As a result, CityScape is looking to source their
goods and materials from non-dollar denominated destinations such as
South Africa.

Developers: Coming to Nigeria in Downturn
--------------


8. (SBU) There has been a significant influx of real estate
developers from Europe, East Asia, and South Asia in the past six
months, Morey said. Real estate giant Hines is looking to enter the
market with a long-term strategy, and so are companies from Korea
and South Africa. Whether they came to Nigeria because of the large
market potential or because of the global economic situation is
unclear, Morey opined.

Bubbles in Land, Rental, Not Housing
--------------


9. (SBU) Rental prices for property in Victoria and Ikoyi Islands
and land prices are overvalued, but the cost of construction is not,
according to Morey. The money that left the Nigerian stock market
following its decline in April 2008 went to land investment,
inflating its prices. Morey believes the bubble in land value will
burst in the near term future.

Shadow Costs to Doing Business
--------------


10. (SBU) Extortion rackets perpetrated by "professional area boys"
have significantly increased business costs for developers such as
CityScape, Morey confided. (Note: "Area boys" is a local term for
unemployed youths earning money through gang activities. End note)
Morey said these areas boys are older and more professional, and
they extort money by offering 'security services' for projects. They
drive new Range Rovers and flaunt their wealth openly. This is a
well-known phenomenon among developers, traditional rulers, and
government authorities. However, government authorities and
traditional rulers are turning a blind eye to the issue.


11. (SBU) Comment: Nigeria's severe housing shortage is eclipsing
difficulties of the financial crisis and economic downturn. The
continuing depreciation of the naira will hurt lucrative businesses
such as real estate developers. A worsening of the economic

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environment will affect people's ability to buy houses and obtain
mortgages, and the suppliers' ability to supply them. Reducing
Nigeria's housing shortage was already critical prior to the
economic downturn: the situation will only become more precarious in
the future. End comment.


12. (U) This cable has been cleared with Embassy Abuja.

BLAIR