The unstable value of the naira and related regulations, remain the biggest challenge plaguing real estate funding, Head of Real Estate Finance for West Africa at Stanbic IBTC, Adeniyi Adeleye, has said.
He said most property development projects are financed in dollars for the creation of sustainable and predictable funding environment for the assets.
Adeleye suggested that dual currency funding structures can bring stability to real estate deals in sub-Saharan Africa, as developers and retailers seek solutions to the volatility currently faced in domestic economies.
Dual currency structure refers to utilising a combination of hard and local currencies, while hedging the interest rate risk.
“These facilities would provide a natural hedge and create a win-win between developers and retailers.
“For example, a local currency facility can be accessed to hedge leases that are unlikely to be sustainable or easily adjusted in shock currency devaluation scenario, for defined periods. This way the exchange rate risk can be more effectively shared between retailers and developers by keeping lease exchange conversion rates constant for periods of volatility,” he said.
“This has exposed tenants to rental increases because their rents are indexed to dollars. The devaluation of currencies in countries like Nigeria and Ghana has been quite significant,” he said.
“Over time, these cost increases will inevitably be passed on to consumers, which will in turn create additional affordability challenges. The level of interest from property developers has not waned in spite of the strained environment.”
“In fact, most developers are positive about the long-term prospects of the economy and options available to them, largely because of the supply gaps in these markets. They are now challenged with trying to create robustness in their operating models to ensure they can continue to execute projects in the short-term,” Adeleye said.
He added: “It is now more about new solutions that are needed to improve the structuring of these deals, so developers can manage the challenges caused by policies aimed at shoring up dollars, the high local interest rates relative to dollar-based interest rates and weakening currencies.”
