Nigeria’s Economic Recession Creates Opportunities in Real Estate

EXCLUSIVE INTERVIEW with Obinna Onunkwo, Managing Partner of Purple Capital Partners Limited, is a seasoned securities specialist with over 15 years of experience in investment management. He talks to Capital Markets in Africa about challenges and opportunities in Nigerian real estate markets.

The perfect storm is brewed with the combination of an acute shortage of dollar inflows, the spectre of currency devaluation, increasing inflation and rising interest rates. How are developers and investors facing these challenges as well as assessing potential opportunities?

Obinna: To mitigate the effects of these harsh economic conditions, developers have to focus more on domestic solutions. Indigenous manufacturers, retailers, and consultants are the smarter economic choice as foreign alternatives become even less affordable. A greater reliance on these domestic players will increase their capacity and output which should, in turn, benefit the economy.

Cashflows are also being denominated in Naira, these help in providing more clarity in terms of pricing and valuation. While interest rates remain high, access to finance remains challenging for many developers.

Banks and other investors are more stringent with funds, meaning projects will have to be more ironclad in terms of delivery and revenues.

Trading economics estimate the amount of FDI into Nigeria in Q2 2016 at 673.95 USD million, the third-lowest amount in the past decade.

Africa retail market has revolutionised over the years and has seen a considerable growth. Please tell us how the Nigeria retail sector has evolved over the last ten years as well as what is the outlook going forward?

Obinna: Formal retail has been on the rise with significant entrants increasing the amount of lettable area in the country, with Lagos at the forefront of this growth. Consumers are more aware of international standards and have begun to demand the same from local developments. Though Nigeria’s recent descent into recession has affected citizen’s spending power, more and more people are able to shop in these formal retail environments. This is due to shift in tastes and awareness and the emergence of a new Nigerian middle class empowered by the telecommunications and financial services boom experienced in the past decade. In 2015, 17.6% of Nigeria’s Adult population were considered middle class. An increase of 6.1% in previous years. An income group estimated between NGN500,000 per annum and NGN 5,000,000.

Since the entry of the Perianas group with their Palms development, over 25 similar grade projects have been conceived in Nigeria at different stages of the development pipeline illustrating further the large demand around the country.

To mitigate the effects of these harsh economic conditions, developers are having to focus more on domestic solutions

Local brands have grown due to the exit of many international retailers finding Nigeria’s operating environment too risky as evidenced by the recent completion of our flagship retail project the Maryland Mall, which currently holds about 80% local brands.

The amount of FDI going towards retail has increased over the past decade from 12% average in 2007 to 17% in 2013.

The internet has also had a huge impact on retail in Nigeria. The rise of online platforms like Jumia and Konga has tapped into the market of over 46% of the total population of the country currently online. This emphasizes the effect that technology has on the Nigerian retail space.

Comparing to developed and emerging markets, Nigerian capital market remains small and underutilized despite the stock market being a great avenue for mobilising public funds. Can we expect this ¬financing avenue to evolve in the short term for financing real estate and can you highlight as well as suggest any initiatives towards this?

Obinna: The Nigerian Capital Market regulated by SEC has been used for real estate financing, providing access to a larger pool of investors and longer term capital through Real Estate Investment Trusts (REITs). Union homes, Skye Shelter Fund and UPDC have successfully done this but REITS are yet to become a sustainable and common place in Nigeria. However, whilst REITs enjoy a tax-exempt status of at least 90% of its income investors in Nigeria, the tax and investment laws are ambiguous and geared towards more conventional asset classes.

The Return on investment on REITs is relatively low when compared to risk-free government securities, thus making investments in real estate assets unattractive to investors. Equally, the cost of transferring assets from the sponsor to the REIT has hitherto been onerous, constraining the ability of the REIT to generate competitive returns.

With the introduction of the Declaration of Trust Structure (DoT), there has been a significant reduction in the charges incurred by REITs when transferring the assets from the sponsor to the REIT and better legislation on taxation will ensure adequate financing of real estate via the Nigeria capital market.

Where do you think the biggest opportunities lie in terms of the asset class in the market right now – in terms of both cities and sectors?

Obinna: When it comes to Nigerian retail property there is a substantial gap between current capacity and potential demand. In Lagos specifically, We anticipate that it will take the next 20 or 30 years to narrow the variance, so we will continue to focus our efforts in this particular sector and location. AT Kearney estimates that formal retail only makes up 1% of the total retail in Nigeria. Looking more broadly at Nigeria as a whole, it makes up more than half of West Africa’s economy and has the continent’s largest GDP. Taking this into account, the Nigerian Retail sector is a key growth sector, but we do see opportunities in other national sectors, such as infrastructure.

Looking forward, what opportunities do you see for Purple Capital in five years’ time?

Obinna: We are looking to expand our foot print in the Commercial Retail Space as well as in Financial Services. We plan to roll out additional neighbourhood Malls following the same concept as our successful Maryland Mall as we see that it’s a sustainable model that combines the retail and entertainment experience, and caters to the lower/mid-level income families.

Thank you very much for granting this interview

This interview is featured in the March 2017 edition of INTO AFRICA Magazine, Africa’s Lions: Trust in Fundamentals.

Obinna Onunkwo‘s Profile
Obinna Onunkwo, Managing Partner of Purple Capital Partners Limited, is a seasoned securities specialist with over 15 years of experience in investment management. He has a rich background in investment banking, asset management, equities research and trading and has over the years played active roles as the lead fund manager in corporate actions. He began his career as a pioneer member of the Guardian Express Bank Plc Team. He thereafter proceeded to Spring Capital Markets Limited where he was the pioneer Head of the Asset Management Unit.

Obinna has an Executive MBA from Lagos Business School and a degree in Economics from the University of Port-Harcourt. As a Founding director and managing director of Alternative Capital Partners Limited (ACAP), Obinna drove the operational success of the business, facilitating the first ever acquisition and merger of two mutual funds from a bank Obinna also sits on the Board of Law Union and Rock Insurance Plc and serves as the Chairman of its Enterprise and Risk Management Committee.

Currently, he serves as Founding Managing Partner and Director at Purple Capital Partners Limited. He has driven the company’s growth in the private equity, financial services, and real estate sectors, resulting in the initiation of “purplemoney”, a CBN Licensed retail lending microfinance institution which he spearheads, as well as the development and finance of the Maryland Mall a Commercial Retail Development and Redworth Terra.