Dynamics of price uncertainty in property development business

The prices of building materials and labour (raw materials for building construction) soared every week between June 2023 and February 2024 after the removal of oil subsidy in Nigeria. From N5,200.00 in November 2023, the price of a 50 kilogramme bag of cement was N9,000.00 on February 19, 2024. It was alleged to be N15,000.00 in Abuja, FCT and in Kano. A tonne of 12mm iron rods (94 pieces) for reinforcement was N540,000.00 or N5,750.00 per unit in November 2023. A tonne of 16mm (54 pieces) was N570,000.00 or N11,000.00 per unit in November 2023. In February 2024, the price of a unit of 12mm iron rods soared to unprecedented N11,000.00 and that of 16mm to N16,000.00. These increases in the prices of building materials were alleged by suppliers to be due to increase in the cost of buying from manufacturers. The cement manufacturers claimed an increase in the cost of gas, cost of US dollars and bad roads caused the increase.

This rise in the costs of materials has also affected costs of labour, granite, soft sand and sharp sand due to positive correlation of prices of building materials. The labour cost for bricklaying moved from N4,000.00 to N6,000.00 due to high cost of transport and foods. The questions in the property development industry are: Should property developers, who have sold their property off-plan and collected money in full, that is who have sold their properties without physically building them on site (offer and acceptance), increase the prices of the properties due to increase in the cost of building materials and labour, claiming ‘Force Majeure’ (unforeseeable or unpredictable circumstances that prevent the developers from fulfilling their parts of the contract)? Two: should the off-plan buyers who are not paying instalmentally bear the brunt of the increase?

Business has been defined as a pool of risks. It is the risks that are involved in business operations that make them profitable and or worth venturing into. Nothing ventured, nothing gained. If the client or off-plan buyers have to bear the risk of off-plan property developers, then off-plan property development is no more a business but a rip-off! Whereas the margins on grocery sales are between five percent and 20 percent, those of construction contracts and real estate development are between 30 percent and 45 percent. There are so many uncertainties in real estate development because of the fact that it is a process involving the assemblage of different components within a long period. There are so many contractors and suppliers involved in building construction that makes individual decisions difficult. These are the excavators of foundation, the sand suppliers, granite suppliers, formwork suppliers, etc. Managing this long chain of contributors in the supply chain of real estate development requires a lot of skills.

In an off-plan property development, a ‘product-definite’, say two-bedroom flat or three bedroom bungalow or four bedroom terraced duplex, etc, is being offered for sale at a future price based on projections of the developers. Properties have a long gestation period and all property developers must take this fact into cognisance. If property developers are not deft in their property development process, especially in valuation of future values using present economic and political data to forecast value of assets, then they should be offering services of constructing for prospective buyers and on their behalf. Successful businesses are run on contract terms, both written and oral. In service contracts, in contrast to sales, there will be a clause that cost of construction will be determined by market dictates of cost of building materials. Both parties must try as much as possible to observe their obligations in order to derive their rights. While a contractor can ask for variation because he is offering service to a client, a property developer is selling products to customers.

There is likely going to be numerous litigations as aftermath of the persistent increase in the cost of building materials in Nigeria due to request for more money by off-plan developers occasioned by the fact that either their contingency provision is not enough to buffer these increases in prices or that they did not make provision for contingency, buffer, exigency or construction process risks insurance. A property developer selling off-plan developments must be experienced in the business to ensure he delivers as promised and that he does not soil his reputation. Information drives successful businesses and communication is the blood of business. Increase in the prices of building materials is a recurring decimal and has been consistent in the Nigerian building industry. In 1989, there was a strong economic crisis that made basic needs like foods and cement “beyond reach” of Nigerians. It climaxed with the SAP riot. There was inflation in 1986, 1987, 1988, 1989 and 2006.

Any property developer in Nigeria who is selling off-plan properties and who listened to the manifestos of the three strongest contenders for the position of presidency of Nigeria should have known that prices of materials would increase immediately if oil subsidy was removed. He either looks for a loan to buy materials in advance or include a clause in the offer letter that the price of the building will be determined after construction. Fixing a price for off-plan properties and changing the price at the middle of the construction process is inimical to the integrity of off-plan property business. It is like changing the rules of a game after it has started. Property developers cannot claim force majeure when the events are interest rate, foreign exchange rate, inflation rate, increase in costs of construction materials and labour because these can be predicted. A skilful property developer should know about the risk analytical tool called PESTLES.

PESTLES is the acronym for Political, Economic, Social, Technology, Legal, Environmental and Security risks. Political risk entails government policies that may affect real estate business especially when government is being changed. It may include the possibility of the government issuing an import licence to bring down the prices of building materials or the government banning importation of foreign materials. A good developer will not promise to use a material that he does not have in his warehouse and may go out of market. Economic risk includes issues like interest rate, foreign exchange rate, inflation rate and price increase of materials. Social risk occur when you engage people from different cultures for work and you are not sure whether they will come back to finish your job. Technology risk is about the tools being used for construction. If you plan to dredge a made up site, do you have the dredging machine and do you have the repairer at hand? Legal risk is about the legislation and laws affecting your business. Environment risk is about weather, topography and geology of the site. Security risk is about the impact of kidnappers, hoodlums and land-grabbers.

Property development as a business is very risky and pricing uncertainties require skills. An off-plan property developer should first be sound in pricing uncertainties and construction risk management before selling properties in the future at present money.

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