It’s been over 10 weeks since the first case of Corona Virus was announced in Wuhan, China and concerns around the virus have evolved from that of the health of the global population but also the health of its capital markets. The benchmark index for Hong Kong Stock Exchange has been down over 2% year-to-date, and brent crude oil prices have also fallen 11% over the same period to $59.17 (21st February) on fears of weakened industrial demand amidst a prolonged fight against the deadly virus.
Considering that Nigeria and many other African countries have economies whose performance have strong ties to commodities, such as oil, there have been many discussions on how the virus might affect the continent. Nigeria, whose 2020 budget was tied to a $57 oil price at an unrealistic production level of 2.18 million bpd certainly has a lot to worry about. But as real estate lovers here at Estate Intel, we are curious about the effects it will have on the property market. In China the effects are already clear as the house price growth has reportedly slowed to an 8 month low. During the SARS Pandemic in 2002 and 2003, house prices in Hong Kong declined by over 8% over a 7 month period according to data published by their Rating and Valuation Department.
We wanted to take it a step further and evaluate how it might affect the Nigerian real estate market and have listed a few demand and supply-side perspectives that we will review in this brief note. They include:
- Demand: Global Business Tourism
- Demand: The effects of weakened oil prices on the demand for office and residential space in oil-driven economies
- Supply: Construction Materials
Before we delve in, we thought some initial context on pricing mechanisms for real estate and other asset classes might be useful to our audience.
While the pricing mechanism for assets like equities and bonds are transaction/market-based, real estate assets have a pricing mechanism that is appraisal based. This essentially means that because publicly traded equities or stocks can be bought in small units (e.g. GTB or GUARANTY:NL is currently ₦28.4) and they are transacted, traded and change ownership in large volumes (often multiple times daily) making it easy for changes in market sentiment and confidence to reflect in pricing very quickly.
With property, it usually has to be valued by a valuer as transaction volumes are not as frequent due to its indivisible nature and high price. Appraisal methods typically involve valuers using historical appraisals or valuations and in other cases comparable properties with values which were arrived at in previous periods that had different economic backdrops. As a result, property prices do not always react to the changes in expectations about the economic environment as fast as they should. This is even more so in a market regarded as not transparent where data is not readily available, keep this in mind.
Global Business Tourism
For this topic, we can take a page from the Ebola playbook, a similarly massive global medical pandemic that significantly affected the African continent just a few years ago. Ebola made its Nigeria debut in July 2014 after a sick traveller from Monrovia, Liberia arrived by air. This made the Western World become very cautious of the West and Central African region in the months that followed. It had an effect on the hospitality industry in Lagos because its largest driver is international business travel and conferences, which account for over 89% of all activity according to the W Hospitality Group. Between 2013 and 2015, occupancy rates in hotels fell from 62% to 45%, proving that small shocks have the power to really move the needle. This was worsened by the commencement of a larger economic slowdown in the Nigerian economy during the period. The effects Ebola had on the Nigerian real estate space were largely limited because more direct impacts on asset values and pricing will take much longer largely because of the pricing mechanism we discussed above.
Unlike Ebola, the Corona Virus has no affiliation with the African continent and demand from business travellers in Nigeria is not expected to significantly reduce as a result of it. Confirmed cases in Africa are currently only limited to Egypt, so if this remains the same, hotel occupations and residential rents will go largely unscathed.
The effects of weakened oil prices on the demand for office and residential space in oil-driven economies
Historic data has proven that prolonged periods of depressed oil prices will not just affect the Nigerian economy, but also affect the Nigerian real estate market. Prior to the commodity price crisis of 2015/2016 that saw oil prices go below $30 in early 2016, the largest corporate occupier and demand driver for luxury residential property came from the oil industry. This changed significantly and led an even greater amount of vacancies in an already saturated market. Within the office sector, the oil sector was previously the largest demand driver of space over the same period, however, large pockets of demand from the tech, professional and financial services space took up the gap.
At this stage, it is unlikely that the virus will push oil prices to the same depressed levels seen during 2016, but we are conscious of the effects that low oil prices can have on the market.
On this final (less fleshed out) point, the construction industry in Nigeria does have some important ties to China. Many property developers and vendors source for sanitary ware, doors, HVAC and many other fixtures and fittings from China and changes in the business environment there may affect the affect speed and pricing, especially if buyers are driven to other potentially more expensive markets.
How do you think the Corona Virus will affect the Nigerian real estate market? Is there anything we’ve missed out or misunderstood? Let us know on Linkedin!
You can also use our Analytics Dashboards to track the Nigerian Hospitality Industry powered by the W Hospitality Group to get a better understanding of the space. Email email@example.com or click the blue button on the bottom right corner to speak with a member of our team right now.