SUBSIDY REMOVAL: THE IMPLICATIONS ON THE REAL ESTATE SECTOR & ECONOMY.
Subsidy simply refers to a sum of money granted by the state or public body to help an industry or business keep the price of a commodity or service low. The subsidy on fuel namely Premium Motor Spirit (PMS) in Nigeria was removed on the 11th of May 2016.
In a press release signed by the Minister of State, Petroleum Resources Ibe Kachikwu, the removal was done “with the belief that in the long term improved supply and competition will drive down the prices”. This simply means that the benefit the Nigerian citizens enjoy from government subsidizing fuel will no longer be received.
Subsidies on food and fuel are common in most third world countries. They appeal to the government because of their administrative ease but also create distortions and are not well targeted. While these steps can serve as temporary stop-gap measures, Nigeria should prepare to replace subsidy with more social safety net instruments. Razia Khan (Chief Economist for Africa, Standard Chartered Bank) said “if you look at the reason for fuel subsidy and its economic effects, the subsidy is very regressive because it is cost on the whole economy. It takes resources away especially from the poor and rewards those who consume more fuel”.
Hence, with the removal of fuel subsidy, Nigeria government will have more funds to channel into other sectors of the economy most especially infrastructure and agriculture. The Federal government spends more than 70% of the country’s earnings trying to subsidize crude oil and the absence of this will mean more money at their disposal to channel into other sectors and providing the basic social amenities – transportation, good roads, effective railway, housing to mention a few. Real estate has the link between how much is in the hand of the government and how much is put into housing.
The negative effect on the subsidy removal in the real estate sector is that the cost of building materials (cement, iron rod, granite) has drastically increased. Real estate being capital intensive, investors are usually compelled to make a downward review of their budget. The low chain investors like the sand sellers, block molders etc have complained of the increase in the cost of materials – a truck of sand that was sold at N40, 000 per trip, now sells at N45, 000.
Nigeria’s anhelous economy has not been favourable and this is not far-fetched. Crude Oil is the major source of the nation’s revenue. Presently, in the global market, the price of Crude oil per barrel is USD 49.48 and this has drastically affected our economic output. The high-end real estate market is struggling a bit at the moment but the middle-class investors who do not necessarily depend on financial institutions for loans are doing well.
A lot of people are offloading their properties at give-away prices and forceful foreclosures are occurring. Property owners want to sell off their assets to get money to settle outstanding loans. However, analysts predict a turnaround within the next few years; hence this is a good time to buy. In the words of Winston Churchill, “never let a good crisis to go to waste”.
Written by Sylvia Utulu, firstname.lastname@example.org.
This article incorporates public domain materials, discussions from real estate investors and the writer’s opinion.