Analysts explain why real estate always moves behind economy

Analysts explain why real estate always moves behind economy

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As an economic indicator, real estate is regarded as a laggard. This is because when an economy is going into recession, real estate will be among the last to enter into recession and if the economy is exiting recession, real estate will also be among the last to come out.

This was amply reflected in the 15-month economic recession in Nigeria of between 2016 and early part of 2017. Of all the sectors of the economy, real estate was the last to start feeling the impact of the recession. In the same vein, when the economy exited recession in the second quarter of 2017, real estate remained in negative growth territory till the first quarter of 2019.

The 0.93 percent growth that pulled the sector out of recession after 12 straight quarters has been attributed to a number of factors including seeming clarity in investment climate after the March 2019 general elections as well as increase in oil price.

Analysts explain that real estate is always trailing the economy in either boom or recession, because as a sector it requires two factors of production that are hard to come by and these are capital and human resources, otherwise known as labour.

“If you are allocating resources, especially capital, you do so to an area that will give you immediate or quick return, which real estate does not give,” Femi Akintunde, CEO, Alpha Mead Group, explains to BusinessDay in an interview.

Looking at the enterprise management system requires to drive real estate industry, it will be discovered that it is intense and a bit complicated in the midst of other factors, meaning that as a country, Nigeria has to look at how well it has fared in developing those resources enough to support the real estate industry.

Akintunde is of the view that what has helped to bring the real estate sector out of recession was the little respite the economy got in terms of increase in oil price, which has contributed to the recovery and growth of the economy. The economy grew by 2.01 percent in the first quarter of 2019.

But there is a challenge here; 2.01 percent economic growth in a country where population is projected to grow at 2.5 percent per annum means that the country has an unproductive population and therefore consuming more than it is producing. That growth, according to Akintunde, is not sustainable.

Real estate also trails the economy in boom or recession because it is not a trade. Paul Onwuanibe, CEO, Landmark Group, explains that real estate “is a long-term game and when you are in it you have to look at cycles rather than any moment in time.

“When you are planning any real estate development, you have to do so in seven to 10-year cycle. Usually, when the demand side is strong, that is when the supply side is weak and vice versa. When you plan, you cannot put both the demand and supply side into your cycle,” he says.
Building or developing real estate does not come out easy or cheap. When a developer conceives an idea to develop a project, it probably takes one whole year for him to go to the drawing board. From the drawing board to the regulatory environment will take another one year.

By the time the developer goes into the supply chain and to build, it takes about two years, making it four years down the line, and by the time he delivers the project, it will be about five to six years. This is why the developer does not have to wait for when there is an economic boom for him to build and deliver to the marketplace.

Overall, the real estate sector has come to reality and as such there is a lot of adjustment in terms of rentals and even sales, as developers are now giving more flexible terms knowing the hardship in the economy. It is believed that the past three years were years of readjustment for the sector.

Many players in the sector have counted their losses and are now taking into consideration what the market really demands; not building just because they have the money to do so.

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