Economic recession is defined as two consecutive quarters of negative growth in a country’s gross domestic product (GDP). The National Bureau of Economic Research defines an economic recession as a significant decline in the economic activity which is spread across the economy over a couple of months.
According to Reuters, The Nigeria economy slowed down in the first quarter of 2018. This was the first time this country went into recession after it pulled out of the recession a year ago when the non-oil struggled. The economy, however, grew by 1.95%in the first quarter as a result of getting a significant boost from the oil sector. This was a slight dip from the 2.11% year-on-year in the 2017’s final quarter. It had shrunk 0.91% in the same year’s first quarter.
Effects Of Economic Slump On Businesses
Recession effects can be manifested with an increase in unemployment. Most businesses reduce production since consumer spending is slowed. As a result, companies cut back on production leading to massive layoffs in these companies. In the same breath, during an economic slump, governments find themselves in the receiving end since they have to spend the money they do not have in bailing out businesses.
Economic Recession And How It Affects The Real Estate Business
Factors such as the economy, demographics, government policies and subsidies, and interest rates drive the Real estate business of any nation, including Nigeria. Looking into the health of an economy, for instance, it is determined by economic indicators like GDP, manufacturing activities, employment data, the prices of goods, and so much more. When the economy seems to be sluggish, the real estate business also tends to recede.
Nonetheless, the economy’s cyclicality has a different effect on various types of real estates. For instance, if an investor has a considerable percentage invested in hotels, he will get more affected by an economic slump than one who has invested in office buildings. Hotels are known to be sensitive to the economy because of the lease structure involved in the business. Renting a hotel room is a kind of a short –term lease, and customers can easily avoid it if the economy is not doing well.
Offices buildings, on the other hand, the tenants here have long-term leases which can’t be changed amidst an economic recession. Therefore one should be aware of the economic cycle at any given time and be mindful of the business sensitivity to the economic cycle at hand.
Property Finance during Economic Slump
While property financing in Nigeria seems attractive as you still keep the ownership of your business premises and the entire business, also these mortgages are not subject to rental fluctuations. This alone gives you a much stable environment for business planning. Most banking institutions during this harsh economic times, offer lower interest rates compared to unsecured loans. There are lower monthly costs, which can further be fixed to help you manage and forecast your finances.
On the contrary, it can be hard for some individuals to access this type of financing for their property simply because the banks require one to have a decent sized deposit. This also presents monies that could be used in different business operations. Another discouraging bit is that you become responsible for your property security, maintenance, and insurance. Lastly, in case, you lose value on the property; your capital reduces as well.
While it can be a good idea to think of the best practices to secure a loan for the property during times of economic recession in Nigeria, you need to approach the concept smartly. Understand the hurdles that the banking institutions may put in place to bar you from acquiring the loan. Be good at math to determine whether the interest rate is attractive or costly in the end too. Also scrutinize a deal to find out whether there are any hidden costs as during this time, everyone ones to get the most you anyone. Finally, be smart.
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