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FOREIGN EXCHANGE AND ITS IMPACT ON THE REAL ESTATE INDUSTRY IN NIGERIA, GHANA & KENYA.
Foreign exchange also known as forex, is the conversion of one country’s currency into another. (investopedia)
Often times, a currency’s value can be pegged or compared to another country’s currency, such as the U.S. dollar, or even to a basket of currencies. This in turn gives rise to an exchange rate which is the difference in price between one currency and another (currencytransfer).
The value of any particular currency is determined by market forces related to trade, investment, tourism, and geopolitical risk.
Foreign exchange has a lot of impact on businesses, companies and countries at large. When exchange rates change, the prices of imported goods will change in value, including domestic products that rely on imported parts and raw materials. Exchange rates also impact investment performance, interest rates, and inflation, this eventually extends to influence the job market and real estate sector.
Every day we get questions from investors on if and why they should invest in Nigeria given the devaluation of the naira against the dollar. These concerns are valid hence the need to share the evaluation of the Nigerian property market and also compare with other African countries. For this, we’ll be looking at some of the most expensive real estate locations in Nigeria (Ikoyi, Lagos), Ghana (Cantonment, Accra) and Kenya (Westlands, Nairobi) as case study.
It is important to view the price appreciation of a property in terms of the foreign exchange rate. Even though the price of a property can increase in its local currency, the extent of the currency’s foreign exchange rate can cause an opposite effect on the dollar value.
As of 2022, the average sales price of a 2 bedroom in Cantonments was Ghc 2,903,679.94, increasing to Ghc 3,903,101.7 in 2023, representing a 35.65% annual increase in sales price. However, when these prices are converted to dollars in their corresponding years, it shows a -14.65% decrease.
This shows that even though the property increased in value based on the local currency, it actually reduced in value based on the dollar exchange rate. Therefore, if an investor was to convert his Ghanaian cedis to dollars, he would make loss because the sales price for a 2 bedroom in dollar value for 2023 is lesser than that of 2022. This is so because of Ghana’s extreme currency devaluation in the last year which was over 60%.
This is also applicable to the Westlands. The average sales price of a 2 bedroom in Westlands as of 2022 was KES 16,565,995.66, increasing to KES 18,700,000 in 2023. This represents a 12.88% annual increase in sales price (estate intel). However, when these values are converted to dollars, it results in a -3.30% decrease in sales price. Just as in Cantonments, an investor would make a loss if he converted his dollar to buy the property, then sold it after a year in order to convert the local currency back to dollars. This negative return is also a result of Kenya’s shilling devaluation of the dollar.
Ikoyi on the other hand has a different story in terms of foreign exchange stability. The average sales price of a 2 bedroom in Ikoyi as of 2022 was ₦132,500,000, increasing to ₦200,000,000 in 2023. This represents a 50.94% annual increase in sales price. If you convert these values to dollars (in parallel/black market rates), it results in a 16.53% increase in sales price. Even though the naira currency has been devalued against the dollar, it still gives a positive return. This shows that the property’s value increased at a higher rate than the currency’s devaluation.
Nigerian parallel rates were used because it is the most widely used rate in the country. Other countries mostly use the Central Bank’s rate. It should be noted, however, that Nigeria’s parallel rate (market-determined exchange rate) is about 50% higher than the Central Bank of Nigeria’s rate at ₦755/ US$.
It should be noted that most properties in Ikoyi and Cantonments are priced in dollars, however, the difference between the both is that the rate of currency devaluation in Ghana is higher than the rate at which the property’s value increases in a year. Considering all these, Ikoyi ranks highest in Foreign Exchange stability.
If you are still wondering whether to invest in Nigeria, now you know better.
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Writer: Sheila Chinaza AZUKA, Head, Investment Advisory.