The term “Naira float” refers to a situation where the exchange rate of the Nigerian currency, the Naira (NGN), is determined by the forces of supply and demand in the foreign exchange market. In operating a floating exchange rate system, the value of a currency is not fixed to any specific value but oscillates in response to various economic factors. Under this exchange rate system, the exchange rate of the Naira against other currencies, such as the U.S. Dollar or the Euro, can fluctuate based on certain relevant factors such as inflation rates, foreign investments, trade flows, interest rate differentials, as well as overall market sentiments. Simply put, this means that the Naira’s value can either appreciate or depreciate against other currencies as a result of the interaction between these factors in the foreign exchange market. Prior to June 2016, the Central Bank of Nigeria (CBN) functionally operated a fixed exchange rate system, where the Naira’s exchange rate against the U.S Dollar was pegged at a specific amount. However, following a number of economic challenges, the CBN eventually adopted and implemented the current floating exchange rate policy. Which is more flexible as it allows for the Naira’s price to be determined by market forces.
With a focus on residential real estate and the Nigerian Naira, It’s important to note that the real estate market is influenced by multiple factors, a floating exchange rate being one of those factors. The exchange rate system of the Naira can influence residential real estate in a number of ways that will potentially shape the dynamics of the real estate sector. Here are a few key points to consider in this regard:
- Foreign Investment: A floating exchange rate can serve as an attraction for foreign investors to home-based real estate investments. In a situation where the Naira weakens against other currencies, foreign buyers may find real estate to be more affordable, which could potentially increase demand, thereby driving up property prices.
- Diaspora Investments: A floating exchange rate can encourage Nigerians living in the diaspora to make investments in residential properties. If the Naira depreciates, diaspora investors become at a more financial advantage to own Nigerian real estate. This could lead to an increase of interest in residential property, for investors, as well as for potential homeowners.
- Capital Inflows/Outflows: Free flow of capital in and out of the country is enabled in a floating exchange rate system. It enables potential real estate opportunities for investors and developers alike. As well as access to foreign funding and possibility of expansion of their projects.
- Tourism and Short-term Rentals: The Naira could weaken in a free floating exchange rate system, which can result in Nigeria becoming an attractive tourist destination for international visitors. This, in turn, can create opportunities for residential real estate investors to engage in short-term rentals, such as vacation homes or Airbnb properties and shortlets, which will cater to the influx of tourists and increase in property demand. It will equally boost rental yields and provide income-generating opportunities for property owners.
- Infrastructural Developments: The floating exchange rate can influence the cost of imported construction materials required for residential real estate development. A weaker Naira may increase the cost of imported materials, which can incentivize domestic production and support local industries. If local suppliers can provide construction materials at more competitive prices, it may positively impact the affordability and availability of residential properties.
It is worthy of note that while a floating exchange rate is potentially advantageous for residential real estate, factors such as local economic conditions, housing supply and demand dynamics, government policies, and interest rates, equally collectively shape the overall residential real estate market.
