THE EFFECT OF INFLATION ON REAL ESTATE IN NIGERIA

In September 2024, Nigeria’s headline inflation rate increased for the first time in three months, from 32.2% to 32.7%, according to trading economics. Contributing factors include the naira’s depreciation and increased transportation expenses (27.2% vs. 25.7%) brought on by rises in petrol prices since early September.

WHAT IS INFLATION?

Inflation is a general increase in the price level of goods and services in an economy over time. It results in a decrease in the purchasing power of money, where the same amount of currency can buy fewer goods and services.

An economy experiences inflation when the average level of prices for goods and services rises steadily over time. According to the National Bureau of Statistics (NBS), inflation in Nigeria has been rising and reached 32.7% in 2024.

It is important to note that Inflation is not Appreciation.

Inflation refers to a general increase in prices across the economy, including real estate, due to economic factors. Appreciation, on the other hand, is an increase in property value due to specific factors such as location, upgrades, surrounding developments, and proximity to notable landmarks. 

Unlike inflation, appreciation is unique to individual properties, making them more desirable. 

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HOW DOES INFLATION AFFECT REAL ESTATE?

Inflation impacts real estate in several ways:

1. Increased construction costs: Rising inflation means higher costs for building materials, labor, and other expenses, making it expensive to develop new properties.
2. Decreased purchasing power: As inflation erodes consumers’ purchasing power, demand for housing may decrease, leading to slower sales and rentals. But this does not mean the value of the property will reduce.
3. Higher rental income: To keep pace with rising costs, landlords often raise rents to maintain their profit margins. This can result in higher rental income for property owners.
4. Rental income uncertainty: Inflation can lead to uncertain rental income, as tenants may struggle to pay increased rents.
5. Property value fluctuations: Inflation can cause property values to fluctuate, making it challenging to determine fair market prices.

Recent Trends in Nigeria’s Real Estate Sector

1. According to a report by the Nigerian Bureau of Statistics (NBS), the housing deficit in Nigeria stands at approximately 28 million units.
2. The Lagos State Government introduced the Lagos State Real Estate Regulatory Authority (LASRERA) to regulate the sector and protect investors.
3. The Nigerian government has initiated programs like the National Housing Programme (NHP) to provide affordable housing.

WHAT CAN REAL ESTATE INVESTORS DO?

To mitigate the effects of inflation investors need to do the following;

1. Diversify your investment portfolio: Invest in various real estate assets such as residential homes, commercial properties, and land banking real estate sector.
2. Invest in Cash flow properties: These properties have potential for appreciation and generate steady income for the investor.
3. Partner with reputable developers: Work with experienced developers who understand inflation and can help you achieve your real estate goals.

Conclusion

Inflation’s impact on Nigeria’s real estate sector is undeniable. However, with careful planning, diversification, and a long-term perspective, investors can navigate these challenges.