‘Increased borrowing costs made it difficult for developers to finance construction projects’

Dr Kunle Awolaja, a Fellow of the Nigerian Institution of Estate Surveyors and Valuers, is the President, African Real Estate Society (AFRES). The astute professional, in this interview with DAYO AYEYEMI, spoke on reasons for the slowdown in construction activities in Nigeria at this period of the year. He also gave some useful suggestions to get the sector out of the woods.

We are in the last quarter of the year, yet construction activities are not picking up the way they should. What are the issues?

The slowdown in construction activities this season in Nigeria can be attributed to several economic and structural challenges.

Inflation in Nigeria, currently at a high rate, has significantly increased the cost of construction materials such as cement and steel. Transportation costs have also risen due to the removal of fuel subsidies, making projects more expensive to execute.

Increased borrowing costs, following recent hikes in the Monetary Policy Rate, have made it more difficult for developers and investors to finance construction projects.

Fluctuating exchange rates and inconsistent fiscal policies have created uncertainty, discouraging both local and foreign investment in construction.

Delays and increased costs in importing raw materials have hampered progress on many projects. Even locally sourced materials are affected by foreign exchange fluctuations.

The high inflation rate has reduced disposable income, making it harder for individuals and businesses to invest in property and infrastructure.

Lastly, the ongoing security challenges in some regions have made construction projects riskier, further deterring investments in affected areas.

 

Is that what is affecting the pace of existing and ongoing construction projects?

The slow pace of ongoing construction projects in Nigeria, especially those that were expected to be completed by now, is influenced by several interrelated factors, beyond harsh weather. These include Inflation and material costs: The high cost of construction materials, driven by inflation and currency depreciation, has increased the financial burden on contractors. Many projects face delays as contractors struggle to manage escalating budgets.

Government projects, often reliant on timely budget releases, are experiencing delays due to funding gaps. Private developers are also facing difficulties accessing loans because of high interest rates.

Logistical issues: Supply chain disruptions have caused delays in delivering critical building materials. This problem is compounded by higher transportation costs due to fuel price increases.

Many projects are experiencing workforce shortages or reduced productivity, partly due to harsh economic conditions that affect workers’ availability and performance.

Inconsistent government policies and a lack of enforcement of contractual obligations have hindered project timelines. This is especially relevant for public projects tied to capital budgets.

In some regions, insecurity has disrupted work, as contractors and workers may face risks that slow down or completely halt activities.

 

What can be done to rescue the situation?

While government efforts to increase infrastructure spending in the 2024 budget could stimulate the sector in the future, the current challenges require targeted economic and structural reforms to restore momentum in construction activities.

The combined effects of these challenges create delays, affecting not only new projects but also those nearing completion. Addressing these issues requires targeted interventions, including economic stabilisation measures, better project funding mechanisms, and infrastructure policy reforms.

 

Let’s look at the soaring cement prices. What will be the implications on the housing sector?

The soaring prices of cement in Nigeria have significant economic and social implications, particularly given the essential role of cement in construction and infrastructure development. The rising price of cement increases the cost of building projects, affecting both public infrastructure and private real estate. This could delay or halt construction projects, particularly for smaller developers and individuals.

Cement price increases can lead to higher costs for housing and infrastructure projects, which may further exacerbate inflation, especially in sectors closely tied to construction.

Reduced profit margins: Contractors and real estate developers face shrinking profit margins as they absorb higher costs or pass them on to consumers, potentially reducing demand.

High cement prices can limit the government’s ability to deliver on infrastructure promises, particularly in areas like roads, bridges, and affordable housing.

Impact on housing affordability: Rising cement prices make home construction more expensive, worsening the housing deficit and pushing affordable housing further out of reach for many Nigerians.

Delayed or canceled construction projects can lead to job losses in the construction sector, which employs a significant number of unskilled and semi-skilled workers.

To cut costs, some builders may use less cement or lower-quality alternatives, potentially compromising building safety.

 

What are the underlying causes of cement price hikes?

The number one cause is the production costs. High energy costs, especially following fuel subsidy removal, have driven up production and transportation costs.

Rising demand, driven by urbanisation and infrastructure projects, coupled with limited production capacity, can push prices higher.  Exchange rate issues: A weak naira makes imported production inputs more expensive, contributing to price increases.

 

How can the impact be mitigated?

There is need to boost local production by encouraging the expansion of existing cement factories and the entry of new players into the market to increase supply and foster competition.

Government intervention: Regulate prices temporarily or offer subsidies on production inputs to stabilize costs.

Alternative materials: Promote the use of alternative building materials such as stabilized earth bricks and recycled materials to reduce dependency on cement.

Energy efficiency: Support initiatives to lower production costs by encouraging manufacturers to adopt more energy-efficient technologies. The rise in cement prices has far-reaching implications for Nigeria’s economy, housing market, and infrastructure development. A coordinated effort involving government policies, industry collaboration, and innovative building practices is essential to mitigate these effects and ensure sustainable growth in the construction sector.

 

What can you say about the incessant demolitions of houses in Lagos and Abuja?

The ongoing demolitions of houses in Abuja and Lagos have indeed raised concerns among real estate investors. These actions can discourage investment due to perceived risks associated with regulatory uncertainty and property rights.

Demolitions often signal instability in property laws and enforcement. Investors may fear that similar actions could affect their projects, leading to losses.

Demolitions create financial losses for property owners and investors. They also disrupt ongoing projects, contributing to sector-wide slowdowns.

When properties are demolished, it raises questions about the due diligence process in acquiring land and complying with zoning laws, which could deter new investments.

 

What can be done to encourage investors at this particular period?

Government should streamline land titles and zoning approvals: Governments should make the process of acquiring land titles and approvals more transparent and efficient to reassure investors.

Policy stability: Authorities need to communicate and enforce consistent policies regarding land use and development to build trust among investors.

Compensation mechanisms: For demolished properties, fair and timely compensation can reduce the financial burden on affected parties and demonstrate government accountability.

Public-Private Partnerships: Collaboration between governments and the private sector can help identify and address issues that lead to demolitions, fostering a safer investment climate.

 

How do we stop demolition of buildings?

Government should strengthen urban planning.  Authorities need to enforce zoning laws from the outset, preventing illegal structures from being built in the first place.

Regular audits: Conduct regular checks on properties under development to ensure compliance with zoning laws and environmental standards.

Mediation and negotiation: Before demolitions, governments should explore options such as rezoning or compensating displaced homeowners to reduce social and economic impacts.

The judiciary should establish clear mechanisms for property dispute resolution to protect investors and property owners.

Stopping demolitions entirely may not be feasible if structures violate zoning laws or pose safety risks. However, improving transparency, ensuring fair treatment, and enforcing consistent policies can mitigate the negative impacts on real estate investments while protecting urban development goals. A collaborative approach between governments, investors, and communities will foster a more stable and attractive investment environment.

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