Powerful Effects of Naira Depreciation on Building Costs
The construction sector in Nigeria has been subjected to unparalleled pressure in the past few years. The continued decline of the value of the naira has had a greater impact on costs. The cost of cement, rebar, roofing sheets, electric fittings, and plumbing materials. Even imported finishing materials. This is why investors, developers, and contractors now have to pay much more money to finish the same projects as before. And even more for potential homeowners. This has led to a slowdown in many housing developments. And some have come to a complete halt because of rising expenses.
This effect doesn’t just happen to large-scale developers. One homeowner is typically having trouble with changing labor needs, escalating material costs, and financing as well when building a single home. The knowledge of the impact of the naira on construction has therefore become a necessity to everyone. Those who want to purchase or invest in the Nigerian real estate business.
Why a Weaker Naira Raises Construction Costs
Devaluation of a currency means a decline in the value of the currency. This is compared to other currencies like the U.S. dollar. Several construction materials are produced in Nigeria. But the industry still relies on imports. Thus, the fluctuations in the exchange rate are directly impacting construction costs.
Machinery, production equipment, chemicals used in industry, spare parts, and specialized raw materials are imported by the manufacturers. The more these components have to be replaced, the more costly it is when the exchange rate weakens. The extra costs are then passed down by manufacturers to distributors. To the retailers, contractors, and, finally, home buyers.
This relationship is evident in the case of steel products. Despite local steel manufacture, manufacturers still depend on the import of billets, equipment, and steel industrial inputs. For this reason, whenever exchange rates drop, there is a price increase for reinforcement bars.
With roofing materials there are similar issues. Metal roofing sheets, stone-coated roofing systems, and high-quality metal roofing materials often feature imports or manufacturing ingredients. As a result, suppliers have often changed the prices after big currency changes.
The cost of electrical installations is a notable increase. Imported technology is used extensively in cables. Also in switchgear, circuit breakers, lighting, smart home devices, solar inverters, batteries, and transformers. All the exchange rate changes have a direct impact on procurement costs.
There is also significant inflation for the finishing materials. Tiles and sanitary wares. The kitchen wares, elevators, air-conditioning systems, imported paints, doors, and decorative wares are now selling at much higher prices. Which is more than a few years ago.
Other cost factors in construction include fuel costs. Diesel is an essential part of the operation for heavy equipment machinery. For concrete mixing, excavation, lifting, and transporting. Frequently, fuel prices rise along with exchange rate pressures. This leads to a ramp-up in logistical costs throughout the construction industry.
Another big expenditure is transportation. The cost of transporting cement and other building materials such as granite, sand, blocks, reinforcement steel, and roofing materials across Nigeria has become costlier. Those extra logistics costs will always add on to project budgets.
There has been an upward revision of labor costs as well. The skilled artisans have to pay higher expenses as the inflation rate spills out. Mostly into transportation, accommodation, food and household requirements. These skilled masons, carpenters, electricians, plumbers, and welders are therefore paid more by contractors to stay.
Financial institutions have been taking a conservative approach to economic uncertainty. The premium on lending pushes up the rate of cost of construction financing for developers. This makes it much harder to secure funding for many projects. And therefore delays are common.
All these pressures have contributed to the fact that residential projects that used to spend a paltry ₦50 million now cost a lot more without any increase in project size or specifications.
How Developers and Homeowners Are Responding
Project budgets are becoming more and more scrutinized. Most of the time prior to the start of development. The use of fixed-price contracts has decreased as materials are subject to high rates of fluctuation. Rather, most contractors will have price adjustment provisions that cover future price changes.
Nowadays, some builders stagger building periods. They don’t do all their estate work at once but rather work in stages to better manage cash flow. This approach can save up short-term cash flow but could lengthen project delivery times.
The concept of value engineering has gained more importance in the real estate industry. Alternative materials which are suitable for maintaining the structural integrity and reducing overall costs are assessed by architects and quantity surveyors. These replacements should however, always meet Nigeria building standards.
The issue of local sourcing has been highlighted. When quality standards allow, developers are more and more buying locally made doors. They buy windows, furniture, paving stones, paints and blocks. The need for imports can be mitigated.
However, certain imported products cannot be avoided. Elevators, special mechanical systems, high-tech electrical equipment, smart building technologies, and high-quality finishing materials may not have local alternatives.
The expectations of prospective homeowners have also been changed. Others wait to add luxury finishes until after they’ve moved into their homes. Others spend the time and money necessary to finish the structure first and then add the luxury finishes over time once they have the money.
In spite of the high initial investment, alternative energy systems are still sought after. Installing solar energy systems can lessen the reliance on costly diesel generators. And unreliable public power sources in the long run. While the initial investment is still high, the cost-saving that can be achieved over a number of years is often worth it.
Bulk buying is another viable solution that has been developed. Early purchase of cement, reinforcement steel, roofing sheets, and finishing materials may prevent further price hikes for the developer. This is possible but does need adequate storage and initial capital investment.
What It Means for Nigeria’s Property Market
As the naira keeps depreciating, it has an impact on all the markets in the Nigerian property market. As the construction cost goes up, residential property prices automatically go up. Since the developer will need to offset the cost of the construction in the property price. Thus, there is a tendency for newly built houses to have an upward price tendency.
The market for renting goods is also slow to react. When property owners decide to increase rental fees due to increased construction and maintenance expenses. They may look at their rental rates again to ensure that they are still profitable. Market demand is the final determinant of rent yields achievable. But the costs of operation are becoming a more important factor in pricing decisions.
There is a real challenge for affordable housing development in particular. It’s difficult for developers to make construction affordable for middle- and low-income buyers. In many projects, innovative financing models or government support is needed for them to be commercially viable.
Efficient project planning is a concern of investors. The need to minimize risks in construction has been made possible by comprehensive feasibility studies. By accurate quantity surveying, reliable procurement strategies, and experienced project management.
When the government policies are strong for strengthening local manufacturing. There will be a gradual decline in dependence on construction materials imports. Greater self-sufficiency in steel, glass, ceramics, electrical, and finishing goods production would enhance the resilience of supply chains and lessen foreign exchange risk.
Transportation costs would also be reduced nationally with improvements in infrastructure. Although there are exchange rate difficulties, material distribution costs can be lowered. Which is through more efficient material distribution systems. Also through better roads, expanded rail networks, and improved ports.
The depreciation of the naira is shaping the economic landscape of the construction industry in Nigeria. The market is now more expensive and more volatile. Majorly for all of the stakeholders. Starting from the first owner of a house until the big multinational developers came to play. However, if the challenges can be minimized, they can be achieved through careful planning. Also, with strategic material selection, disciplined budgeting, and increased local quality product usage. Anyone looking to construct, renovate, or invest in Nigeria’s real estate market cannot afford to not understand the correlation of currency fluctuations and construction prices. It is an important component in good financial planning.
