Funding real estate endeavours in today’s Nigeria is becoming increasingly complex, especially for massive capital-intensive commercial projects. Likewise, small-scale construction undertakings are not left out of the conundrum. As the paucity of financing continues to plague the industry, real estate developers are struck by setbacks and a shortage of resources needed to drive development.
Amid volatile foreign exchange rates and financing dilemmas, there is also inflation which is a result of the weakening naira, and unfavourable economic policies, among other things. Where then do these factors leave the everyday property developer? Build at the convenience of the owners and their expense?
The Inflation Factor
Inflation is a concern for all businesses, but it is especially important for those that work in industries that rely on commodities. The real estate sector is particularly vulnerable to this issue because the cost of labour, logistics, and building materials is bound to rise with time. As the cost of construction increases, developers may be subjected to a loss of profit and a reduction in sales, which leaves them struggling to balance their budgets and keep up with demand.
Inflation also drives up interest rates on loans that developers use to buy land or build houses. This could mean that they have less money to spend on projects because they have to pay more interest, or they can’t even take out loans due to unfavourable interest rates.
Can A Real Estate Developer Hedge Against Inflation?
With growing inflation, the demand for real estate never really diminishes, especially in urban and dense neighbourhoods. This is not to say that there aren’t many unoccupied edifices scattered across Nigeria simply because they are unaffordable for the consumers who are also combating inflation.
That being said, can a developer hedge against inflation? Let’s find out.
#1 – Plan! Plan!! Plan!!!
You may not be able to predict exactly how much your next project will cost due to inflation rates changing so much over time—but what you can do is plan to hedge against those changes. A good real estate developer should always have contingency plans for each project at any given moment in time, allowing them to adapt as needed when things change unexpectedly. Materials, labour, and land costs are all increasing year after year.
This could mean having a buffered (well-indexed) budget that cushions the effect of rising costs. Alternatively, you can get into the market early for construction materials. Labor costs and a few other things will, of course, be variable, but it is less of a headache than experiencing too many changes altogether within a project’s life cycle.
For example, when building for a homeowner who prefers to make payments in instalments rather than outrightly, it is only ideal to have interest rates apply to such payment plans. Prices of commodities rarely stay the same for a week – these extra payments over the agreed period will often serve as a buffer.
#2 – Watch the Market Closely
This is particularly important for real estate developers who need to keep up with inflation by adjusting prices in order to stay competitive.
But how do you know what your market is willing to pay?
There are several ways to approach this – look at competition building comparable commercial or residential property, or perfect your numbers based on the inflation rate. The former might involve some guesswork, while the latter will be more accurate. The inflation rate tells you exactly how much prices are rising on a given day, and it’s updated from time to time!
If you know how much inflation is affecting the real estate industry, then it’s easy as pie to set your prices accordingly. You can adjust for inflation by factoring in things like interest rates, exchange rates, labour costs, and materials costs into the equation before setting your final price point.
Please note that these guidelines are general approaches. The Nigerian case is peculiar, as with any other state, and requires some ingenuity from every player in the real estate sector.
Written by Mr. Ugo Dozie Obi for Tilden Development Limited.