VZCZCXRO6543
RR RUEHMA RUEHPA
DE RUEHOS #0114/01 0701500
ZNR UUUUU ZZH
R 111500Z MAR 09
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 0580
INFO RUEHUJA/AMEMBASSY ABUJA 0197
RUEHOR/AMEMBASSY GABORONE 0062
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC

UNCLAS SECTION 01 OF 03 LAGOS 000114 
 
SENSITIVE 
SIPDIS 
 
FOR GABORONE PASS PDROUIN 
STATE PASS USAID FOR NFREEMAN, GBERTOLIN 
STATE PASS EXIM FOR JRICHTER, KJACKSON 
STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS 
STATE PASS TDA FOR LFITTS, PMARIN 
DOC FOR 3317/ITA/OA/KBURRESS 
DOC FOR 3310/USFC/OIO/ANESA/DHARRIS 
DOC FOR USPTO-PAUL SALMON 
TREASURY FOR RHALL, DPETERS 
 
E.O. 12958: N/A 
TAGS: ECON EIND EINV NI
 
SUBJECT: NIGERIA: REAL ESTATE DEVELOPMENT PLOWS AHEAD, WHILE HEDGING 
FOR MORE RISKS FROM ECONOMIC SLOW DOWN 
 
¶1. (SBU) Summary: Given Nigeria's housing shortage crisis of 16 
million units, demand for real estate development has not waned in 
this economic downturn.  CityScape, a Nigerian real estate firm, is 
developing 6 projects in Lagos and Ogun States, 2 in Rivers State, 
and 1 in Abuja, and is showing no sign of slowing down. The 
depreciation of the naira has yet to affect construction costs; 
however, developers are hedging for more risks. More companies are 
looking to enter the Nigerian real estate market.  There appears to 
be a bubble in rental and land prices that seems not to be the case 
in construction projects. End Summary. 
 
Demand High Despite Economic Downturn 
------------------------------------- 
 
¶2. (SBU) Scott Morey, Chief Operating Officer of CityScape, a real 
estate development company, told EconOff March 5, that, with an 
estimated 16 million unit housing shortage in Nigeria, 2 million of 
which are in Lagos alone, and a middle market consumer base of 20 
million people, demand for real estate is and will be largely 
unaffected by the economic downturn. (Note: All figures are 
estimates provided by government and private sources. End Note) 
CityScape considers individuals earning Naira 5 million to 7 million 
per annum (USD40,000 - 60,000) belong in the low-income housing 
category; those earning Naira 7 million and above per annum are 
viewed to be in the middle market. According to Morey, real estate 
developers are small in scale of operations, and no developer has 
been able to build over 1,000 homes in a one year period. In 2007, 
development reportedly started for 35,000 housing units. Hence, 
demand will always exceed supply, Morey argued. 
 
¶3. (SBU) CityScape is currently developing two real estate projects 
in Port Harcourt, four in Lagos, two in Ogun State, and one in 
Abuja. (Note: Each project contains from 600 to 1,000 residential 
units. End note) Pre-sales were copleted for almost all projects 
before they even broke ground, Morey intimated. In some cases, a 
secondary market emerged where buyers re-sell or swap individual or 
blocs of housing units at higher prices.  The demand for housing has 
not declined along with the worsening financial and economic 
environment, Morey observed, and the biggest challenge for real 
estate developers is on-time delivery, not dwindling demand. 
 
Housing Development Surging in Lagos State 
------------------------------------------ 
 
¶4. (SBU) CityScape is developing two projects in Ogun State and four 
in Lagos, all concentrated in the suburban sprawl on the Lekki 
Peninsula.  While real estate development is springing up along the 
Lekki Expressway, the arterial road connecting Victoria Island to 
Lekki, CityScape's strategy is to develop large estates as new 
mixed-used commercial and residential hubs further away from the 
main road. (Comment: CityScape's strategy dovetails with Lagos State 
Government's master plan to create satellite cities and mix-used 
residential and commercial hubs to alleviate traffic and human 
congestion on Victoria and Ikoyi Islands. End comment) CityScape 
recently obtained a 7.5 percent transfer tax exemption and became 
the first company to receive a license to grant title to buyers from 
Lagos State Government for a 355 hectare project it is developing in 
Lekki.  These concessions, Morey contended, are evidence of the 
state government's keenness in encouraging more real estate 
development. 
 
Houses Figure in Port Harcourt's "Rebranding" 
--------------------------------------------- 
 
¶5. (SBU) CityScape is developing a 25-hectare, 1,100 unit real 
estate project in partnership with the Rivers State Government 
(RISG) as part of the RISG's plan to re-brand the city to bring back 
businesses and residents.  (Note: RISG plans to build a USD1 billion 
ring road for Port Harcourt as part of the re-branding/development 
scheme. End Note) The project was conceived 1.5 year ago; CityScape 
broke ground in November 2008; and it is expected to be completed in 
¶2011. CityScape plans to develop a second low-income, 500 unit 
housing project in Port Harcourt. On the viability of the two 
projects, Morey believes oil expatriates and Nigerians who moved out 
 
LAGOS 00000114  002 OF 003 
 
 
of the state in recent years due to deteriorating security 
conditions will buy the homes as lodging for their travel and will 
eventually move back to settle. 
 
Developers Hedging for More Risk 
-------------------------------- 
 
¶6. (SBU) According to Morey, construction lending is riskier than 
mortgages and interest rates for construction range between 18 
percent and 21 percent. Prior to the financial crisis and economic 
downturn, buyers had to make 10 percent payment at the time of 
contract and 10 percent at closing.  Starting in the first quarter 
2009, developers are hedging for more risk by asking buyers to make 
20 percent payment at the time of contract.  Another problem feeding 
the market risk for real estate development, Morey shared, is the 
inconsistency in underwriting standards employed by different local 
banks. 
 
Construction Costs Not Yet Hit by Naira's Fall 
--------------------------------------------- - 
 
¶7. (SBU) Naira depreciation has yet to affect the costs of 
construction materials for CityScape, so the business is still 
profitable at this point in time, Morey revealed. Morey claimed 
that, while cement prices have risen in Nigeria in the last two 
years, global cement prices have been relatively consistent. Large 
developers such as CityScape normally pay 50 percent in advance for 
raw materials, including sand, cement, steel, and granite, that they 
source into Nigeria.  This standard business practice has largely 
buffered them from the weakening Naira.  However, a continuing 
weakening of the naira will hit construction costs at some point, 
Morey projected.  As a result, CityScape is looking to source their 
goods and materials from non-dollar denominated destinations such as 
South Africa. 
 
Developers: Coming to Nigeria in Downturn 
----------------------------------------- 
 
¶8. (SBU) There has been a significant influx of real estate 
developers from Europe, East Asia, and South Asia in the past six 
months, Morey said.  Real estate giant Hines is looking to enter the 
market with a long-term strategy, and so are companies from Korea 
and South Africa.  Whether they came to Nigeria because of the large 
market potential or because of the global economic situation is 
unclear, Morey opined. 
 
Bubbles in Land, Rental, Not Housing 
------------------------------------ 
 
¶9. (SBU) Rental prices for property in Victoria and Ikoyi Islands 
and land prices are overvalued, but the cost of construction is not, 
according to Morey.  The money that left the Nigerian stock market 
following its decline in April 2008 went to land investment, 
inflating its prices.  Morey believes the bubble in land value will 
burst in the near term future. 
 
Shadow Costs to Doing Business 
------------------------------ 
 
¶10. (SBU) Extortion rackets perpetrated by "professional area boys" 
have significantly increased business costs for developers such as 
CityScape, Morey confided. (Note: "Area boys" is a local term for 
unemployed youths earning money through gang activities. End note) 
Morey said these areas boys are older and more professional, and 
they extort money by offering 'security services' for projects. They 
drive new Range Rovers and flaunt their wealth openly. This is a 
well-known phenomenon among developers, traditional rulers, and 
government authorities.  However, government authorities and 
traditional rulers are turning a blind eye to the issue. 
 
¶11. (SBU) Comment: Nigeria's severe housing shortage is eclipsing 
difficulties of the financial crisis and economic downturn.  The 
continuing depreciation of the naira will hurt lucrative businesses 
such as real estate developers. A worsening of the economic 
 
LAGOS 00000114  003 OF 003 
 
 
environment will affect people's ability to buy houses and obtain 
mortgages, and the suppliers' ability to supply them. Reducing 
Nigeria's housing shortage was already critical prior to the 
economic downturn: the situation will only become more precarious in 
the future. End comment. 
 
¶12. (U) This cable has been cleared with Embassy Abuja. 
 
BLAIR