Dennis Isong: How the Removal of Fuel Subsidy Removal Will Impact the Real Estate Market

Fuel subsidy has been a recurring issue in Nigeria for decades and its recent removal will have impacts across various sectors of the economy. One sector that is also susceptible to the effects is the real estate market which, in the next couple of years, will be hit with even more potential implications. The effects, positively and negatively, will manifest in property prices, rental demand, infrastructure development, and overall investor sentiment.

Impact on property prices

The cost of fuel directly affects transportation expenses, construction materials, and the general cost of living. As fuel subsidies are removed, transportation costs rise, leading to increased construction costs and higher prices for building materials. Consequently, developers may pass these additional costs onto potential homebuyers and investors.

Rental demand and affordability

Fuel subsidy reforms can indirectly impact rental demand and affordability in the real estate market. If fuel prices rise due to subsidy reduction, transportation costs for tenants may increase. This can lead to a decrease in disposable income and potentially reduce the ability of some individuals to afford higher rental rates. Consequently, landlords might face challenges in finding tenants, especially in areas where transportation costs are already a burden. The extent of this impact will depend on various factors like location, property type, and the overall state of the economy.

Infrastructure development

Fuel subsidy reforms can have a positive effect on infrastructure development which in turn can influence the real estate market.  As subsidies are removed, the government can redirect the funds toward infrastructure projects, such as road construction, public transportation systems, and urban development initiatives. Improved infrastructure can enhance connectivity, accessibility, and the overall desirability of certain areas for real estate investment. Consequently, property values in well-connected regions with robust infrastructure development might experience significant growth.

Investor sentiments and market stability

Investors pay close attention to economic policies and reforms because they can affect the profitability and risk of real estate investments. When fuel subsidies are reduced transparently and predictably, it boosts investor confidence and shows the government’s commitment to long-term stability. However, if subsidy changes happen suddenly or unpredictably, it creates uncertainty and cautious investor behaviour, which can cause market fluctuations.

Government policies and regulatory environment

The role of government policy and the regulatory environment cannot also be overlooked. Apart from direct impacts on fuel prices, government policies can also shape the overall investment climate and determine the attractiveness of the real estate sector. The government needs to create a favourable regulatory framework that encourages real estate investments, promotes transparency, and ensures stability. This includes clear land tenure systems, streamlined approval processes, and effective enforcement of property rights. Investors are more likely to participate in the real estate market when they have confidence in the legal and regulatory framework.

Sustainable development and energy efficiency

Fuel subsidy reforms can provide an opportunity for Nigeria to prioritise sustainable development and energy efficiency initiatives within the real estate sector. As the cost of fuel increases, there may be a greater incentive for developers and property owners to adopt energy-efficient technologies and practices. This can lead to the construction of more energy-efficient buildings, reducing long-term operational costs and environmental impact. The government can also incentivise sustainable development by introducing tax benefits or grants for eco-friendly construction and retrofitting projects.

Regional disparities and urbanisation

Nigeria is a diverse country with regional variations in real estate dynamics. Fuel subsidy reforms may have varying effects across different regions, depending on their level of urbanisation, infrastructure development, and economic activities. Urban centres with established transportation networks and high economic activities might be less affected by subsidy reductions compared to rural areas or less developed cities. As fuel costs rise, there could be a migration of businesses and individuals towards more urbanised areas, leading to increased demand for real estate in those regions.

Mitigating strategies for real estate stakeholder

Real estate stakeholders, including developers, investors, and property owners, can adopt strategies to mitigate the potential effects of fuel subsidy reforms. This includes conducting thorough market research to identify areas with strong growth potential, focusing on properties with proximity to public transportation hubs or planned infrastructure projects. Developers can also explore energy-efficient construction methods and renewable energy integration to reduce operational costs. Additionally, stakeholders should closely monitor government policies and engage in advocacy efforts to ensure a favourable business environment.

 

 

***
Feature Image: Dreamstime