In many key areas of Lagos, one can easily spot an ongoing construction project every 5 kilometers. Given the extensive construction activity in Lagos, one might naturally expect that the housing deficit would have been significantly reduced, if not eliminated altogether. However, this is far from the reality.

Lagos boasts one of Africa’s most vibrant and active housing markets. According to reports and insights from the Real Estate Developers Association of Nigeria (REDAN), approximately 300,000 new housing units are constructed annually across Nigeria, with Lagos spearheading over 10% of these new projects.

Despite this substantial construction volume compared to the rest of the country, Lagos still grapples with a significant housing supply shortfall. What are the underlying factors contributing to this persistent housing deficit in Lagos?

Several factors converge to create this situation. First and foremost, rapid population growth fueled by rural-urban migration places immense pressure on the housing supply. Lagos is a magnet for people seeking economic opportunities, leading to an ever-expanding urban population.

Additionally, infrastructure challenges play a role. The city’s infrastructure struggles to keep pace with its population growth, affecting the development and accessibility of housing.

Land speculation is another factor. Real estate speculation drives up land prices, making it financially challenging for developers to provide affordable housing solutions.

Financial constraints also contribute. Many potential homeowners struggle to secure mortgages or obtain the necessary financing to purchase homes, constraining the demand for available housing.

Lastly, the regulatory and funding landscape in Nigeria, particularly in Lagos, faces considerable weaknesses. This makes it challenging to streamline and facilitate the construction and distribution of housing units.

In summation, a complex interplay of factors, including population growth, infrastructure limitations, land speculation, financial hurdles, and regulatory constraints, collectively contribute to the persistent housing deficit that Lagos continues to grapple with.

Lagos is reputably the most stretched housing market in Nigeria with more than 10% of the country’s 210 million estimated population. Since 1967 when the national government created what we now know as Lagos State, the city has experienced exponential population growth.

People from rural areas and other regions of Nigeria migrate to Lagos daily in search of better economic opportunities. This migration has continuously increased the demand for housing, worsening the supply deficit.

Over the years, the demand for affordable housing in Lagos has consistently outpaced the rate of construction by a wide margin, leading to a shortage of affordable housing supply that has continued to widen.

Lagos today, is a densely populated city with limited land for new construction especially within the metropolis.

As the city expands, available land becomes more scarcer and expensive, making it challenging for developers to build enough housing units to meet the teeming demand for affordable housing.

Additionally, inadequate infrastructure, such as roads, water supply, and sanitation, hinder new housing developments.

Developers exhibit reluctance to invest in areas characterized by inadequate infrastructure, which in turn restricts the growth of affordable housing options. In recent years, inflation in construction material and labor costs has surged, significantly driving up the expenses associated with constructing affordable housing units.

These heightened costs often get transferred to potential buyers or renters, rendering formal housing less attainable for those in Lagos who have limited access to affordable mortgage financing. Consequently, this situation has led to the proliferation of numerous informal settlements or slums in Lagos, underscoring the gravity of the housing crisis.

It is indeed acknowledged that the substantial cost components, particularly land costs, involved in projects in Lagos make it impractical to develop affordable housing in many parts of the city. However, extending beyond the evident cost and regulatory hurdles, a clear disparity exists between the demand for housing and its supply in Lagos.

In summary, developers’ reluctance due to poor infrastructure, soaring construction costs, and the resultant affordability issues, compounded by a demand-supply mismatch, all contribute to the enduring housing challenges faced by Lagos.

The prevailing focus on “high-end” real estate projects in Lagos, despite a predominantly “affordability-driven” market, is exacerbating the housing deficit. Two primary issues compound this situation: the inadequate pace of housing development relative to demand and the pricing of completed developments beyond the means of most of the population.

Lagos primarily constitutes an “affordable market” since the majority of its residents are low to middle-income earners in need of housing options within their financial reach. Yet, a significant proportion of properties being constructed in Lagos fall into the high-end category, with price tags often reaching hundreds of millions of naira or millions of dollars.

What motivates the decision to prioritize luxury projects when the demand predominantly lies within the affordable to middle-income segment?

One crucial factor is the pursuit of higher yields and rapid capital appreciation by typical investors. High-end properties tend to offer more substantial profit margins, serve as long-term investments, and are generally considered more stable during economic downturns.

For some developers, prestige and branding play a pivotal role. Building luxury properties can enhance a developer’s reputation and brand image, attracting attention, media coverage, and industry recognition, which can benefit their overall business.

Nevertheless, a sole focus on the luxury market is exacerbating the housing affordability problem. Developers can adopt a more diversified approach, including both high-end and low-end properties, to balance their portfolios. This strategy helps mitigate risks, reduces reliance on a single market segment, and taps into the high demand associated with mid-scale to affordable markets.

A significant anomaly is evident in the sell-rent dynamics of properties listed in Lagos. As of July 2023, more than 50% of residential projects on platforms like BuyLetLive are for sale, while less than 40% are available for rent. While it could be argued that rental transactions close faster and are therefore frequently delisted, trend analysis indicates a persistent imbalance, with far more properties listed for sale compared to those available for rent.

This mismatch is particularly noteworthy because over 80% of individuals searching for housing in Lagos are seeking rental properties rather than purchasing, given their inability to afford buying. Essentially, over 50% of developments in Lagos are geared toward sales, while a significant 80% of prospective tenants are in search of rental properties. This presents a clear paradox in the Lagos housing market, emphasizing the pressing need for a more balanced approach to cater to the diverse housing needs of the population.

Looking at these numbers, we can infer a few things.

The first is a need for intensified joint efforts by the government and the private sector to close the housing gap.

Secondly, with an infant mortgage system’s success, there is a supply of high-end projects that 90% of the population can not afford, as the market is predominantly a lease market by population requirement.

In a market where more than 95% of renters still pay their rent annually, rent remittance is naturally inconvenient in Lagos, and it becomes much more uncomfortable when the annual amount is very high like we have in Africa’s megacity.

Research we conducted in 2022, showed that some households in Lagos are spending as much as 70% of their annual basic income on rent.

For context, the globally acceptable threshold is 30%. The rationale for selling instead of renting provide developers with immediate and substantial profits.

When a house is sold, developers receive a lump sum payment, which can be reinvested into new projects or used to expand their business.

Developers usually see greater potential for ROI when selling properties rather than renting them out. Depending on market conditions, property values appreciate over time, allowing developers to sell at a higher price than their initial investment.

Renting out properties involves ongoing responsibilities, such as property management, maintenance, and dealing with tenants, which most developers are not willing to involve themselves with.

Selling the property transfers these responsibilities to the new homeowners, reducing the long-term risks associated with rental properties.

It is understandable that securing financing for construction projects is a lot easier for developers who plan to sell their houses, especially considering the fact that patient capital is difficult to come by in this part of the world.

Lenders are naturally more willing to provide loans for projects with clear exit strategies, such as selling completed properties.

The glaring mismatch in the market calls for alarm, posing a potential long-term impact on the market in general and specifically hampering the prospect of achieving housing sufficiency.

Our recommendation for solving this problem is to maintain balance.

For developers, maintaining a balanced portfolio of projects across different classifications is a risk management strategy that can prove useful in the long term.

The mismatch in the volume of sales properties compared to rental properties in the market poses a significant impact on the real estate market in Lagos and will further deepen the emergence of shared apartments as people devise alternative ways to meet their housing needs.
It is critical to have a balance, and this is particularly true for a city like Lagos where some residents are spending as much as 70% of their income on rent.