Impact of Falling Currency Values on Real Estate

It’s no longer news. The CBN devalued the Naira. It officially exchanges for N360/$ while the black market exchanges at N410/$
Players in real estate need to react to this development with the right strategies to ensure they remain profitable.
What is the likely impact of the devaluation?

Developers and Property Owners

Let’s look back to history for some clues. The last devaluation was in 2016. The real estate market witnessed an unusual phenomenon were house prices were going down or remained relatively stable, while land prices were increasing.
Land is a local product while houses have imported components that are affected by foreign exchange. You would actually expect it to be the other way around.
The reality of the economy was that earning power of the buyer had been eroded, and property developers could not afford to increase prices beyond what buyers could afford. Some sold at a loss or breakeven just to survive.
Value of Land on the other hand is driven by location and level of infrastructure development.
The developers with property on land within very strategic locations and having reasonably good infrastructure were able to still make profit due to strong demand.

Any new development in these times should consider this as a factor. Another strategy is to avoid the imported components in the house, i.e. the finishes.
Some developers did this by selling shell only units. This way the risk of Naira devaluation is limited and transferred to the buyer who has the flexibility of finishing to his or her taste.
Devaluation of the Naira is not bad for the real estate sector if local capacity to produce/ manufacture building materials improves significantly.
Unfortunately this is not likely to be the case in Nigeria. The more local content a developer can incorporate into his building, the better the buffer against the impact of devaluation.
Assuming you are just embarking on a new project, increasing local content could help. What about the developer who is already halfway through a project, has already made
commitments to buyers and is yet to buy most of the imported components?
A luxury development that will rely heavily on imported components would also have difficulty adopting this strategy.
Re-negotiation and increased prices might be the only way for the Developer to survive.
However, this should be done with caution, as it could lead to bad blood and lawsuits.
For developers selling off plan and allowing buyers to spread payments, it is advisable that contracts of sale make provisions for price fluctuations within certain limits and peculiar circumstances.


Local and Foreign Investors

For foreign investors, currency devaluation means they get more Naira for their dollars, and this gives them an edge.
The developer that has the skill set to attract foreign investors has an advantage here and could turn the situation into an advantage.
Let’s not forget that if the global economy is in recession, currency devaluation will have less of an advantage for foreign investors.
With the likelihood of most countries experiencing a recession because of the Corona virus pandemic, adopting this strategy might pose some challenges.
For the Local investor who has earned and invested in Naira, his actual return on investment is at risk.
If an initial return of 25% was expected from the sale of the property, the investor must now mark up the selling price by the percentage devaluation, plus inflation to still achieve the 25% return.
This also the same if the focus was rental income. In some circumstances this might not be possible because buyers and renters are not able to pay more.
The investor who planned to sell might have to adopt a longer term approach by looking at a combination of rental income and value appreciation overtime.
If a long term approach is not possible because of loan repayments falling due, the best option might be a downward review of expected profits to aid prompt liquidation of the property.

Rounding up

These are just a few pointers to help industry players come up with appropriate strategies.
While trying times are definitely ahead with the devaluation and looming recession in the economy, it is still possible to make money in every market provided one knows how to take the right position.

Key Points to take away

1. Location is still a key factor. Properties in strategic locations are less likely to suffer the effects of devaluation.


2. Properties with Higher Local content are impacted less by currency devaluation. While this is hard in because we are highly import dependent, creative developers can find means of maximising local content


3. Smaller housing units (1 bed, 2 bed apartments) are better suited at this time, due to their lower cost and affordability for most buyers and renters whose earning power has been eroded


4. We foresee a move towards payment of monthly rents rather than yearly rents, which is the current norm. This will be in line with the reality that fewer people can afford to make upfront payments.