How the real estate market is putting Nigerian banks under pressure

A couple of weeks ago, several Nigerian banks published the names of their loan defaulters and the amounts they owe in national newspapers, in a bid to coerce the loan defaulters into settling their debts. This move tagged the ‘name and shame’ initiative, was created by the Central Bank of Nigeria, to recoup the huge amount of money owned to several banks across the country. Among the debtors are key players in the oil and gas industry, former ministers and many other influential members of the society.  In a latest move to recover its money back, banks have put debtors’ properties used as collateral up for sale. However, the sale of these collateral assets may not be successful due to the recent slowdown in the economy.

The Nigerian real estate market has been experiencing its own share of difficulties. From May 29, 2015, which marked the beginning of President Muhammadu Buhari led administration, it was clear that there would be changes. The uncertainty of the new governmental policies affected demand in the real estate market, particularly high end properties.

According to the Nigerian Real Estate Hub, there was a drop in the demand for high end properties just before the elections and despite picking up slightly after the elections, it seems the demand has further declined. This fall in the request for high end properties due to a persistent price increase has led to a  real estate bubble.  Initially, with an increase in the prices of properties, it is still affordable for a lot of buyers, but when there is a slow economic growth, without a corresponding increase in income, the demand for properties reduces significantly. At this rate, the estate agents will have to reduce the prices of the properties, to entice more buyers

Analysts have said that Nigeria’s growth has slowed down to 2.35 percent this year, from 6.54 percent in the last year. To further clarify this, the CEO of Financial Derivatives Company Limited, Bismarck Rewane, said that, as at July, 2015, the supply of high end houses far outweighs its demand, causing vacancy rates to rise to 54 percent, a contrast to the 48 percent recorded in June.

With the real estate market facing a supply glut, sales of the debtors’ collateral assets may be prolonged and estate agents may have to sell at lower prices. The resultant effect of this on the economy is that – if banks are not able to recover the loans given out, they may stop accepting landed property as collateral and change the terms of loan accessibility. If bank loans are not accessible, a lot of Nigerian entrepreneurs will be affected and a lot of small and medium scale businesses may be forced to shut down.

According to Remi Bello, the president of  the Lagos state Chamber, Commerce and Industry (LCCI), “The private sector is the engine of growth in any dynamic economy.  Entrepreneurs have a very strategic role to play in wealth creation and generation of employment. We should not discourage investors from taking risks and should refrain from actions that could undermine the spirit of enterprise in the Nigerian economy,” he cautioned.

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