Investors Shun Residential Rental Developments Amid Opportunities in Nigeria
Despite sustained demand for affordable residential rental accommodation in urban centres across Nigeria, investment in this segment has remained relatively low in recent years. Demand continues to outstrip supply, worsening rental values in the available housing stock, while investors increasingly prioritise asset classes that offer quicker returns and faster capital recycling. This shift is largely driven by persistent structural challenges within the real estate sector, as reported by Victor Gbonegun.
Shift in Investment Priorities
Investors in Nigeria’s residential real estate market are increasingly turning away from rental housing, once considered a stable and predictable investment class, as changing market realities reshape priorities and returns. Instead of building homes for long-term rental income, many developers are now gravitating toward built-to-sell projects, short-let apartments, and vacation homes, which offer quicker returns, faster recovery of capital, and flexibility to reinvest.
The shift reflects deeper structural challenges within Nigeria’s housing market, particularly in the rental segment, that continue to discourage long-term investment despite rising demand. Yet, the irony remains as rental housing is one of the most needed components of Nigeria’s housing ecosystem, especially for low- and middle-income earners who cannot afford outright homeownership.
Historical Role and Current Underdevelopment
Residential rental housing, purpose-built units designed for lease rather than sale, has historically played a key role in providing affordable accommodation and reducing homelessness in urban centres. Ideally, such developments create a formal rental market, stabilise pricing, and improve living standards. In Nigeria, however, large-scale, professionally managed rental housing remains largely underdeveloped.
Over the years, the absence of structured rental systems has continued to constrain the sector, leaving millions dependent on informal arrangements. With a population exceeding 230 million as well as rapid urbanisation, demand for rental housing continues to surge. The Minister of Housing and Urban Development, Ahmed Dangiwa, recently noted that Nigeria is urbanising at about 3.8 per cent annually and is now over 50 per cent urbanised. By 2030, nearly 60 per cent of Nigerians are expected to live in cities.
This rapid urban expansion has led to the emergence of over 360 new urban agglomerations between 2015 and 2020, placing immense pressure on housing supply, infrastructure, and services. Despite this demand, supply remains grossly inadequate. Estimates show that Nigeria produces between 50,000 and 100,000 housing units yearly, far below the roughly one million units needed each year to close the deficit, which stands at over 15 million homes.
Why Investors Are Pulling Back
At the heart of the shift away from rental housing is a mismatch between investment realities and market conditions. Developers face rising construction costs driven by inflation, foreign exchange volatility, and dependence on imported materials. Land acquisition and registration processes are often bureaucratic and expensive, while access to affordable construction finance remains limited.
In addition, many urban locations lack essential infrastructure such as roads, water supply, and reliable electricity. As a result, developers must provide these services themselves, thus significantly increasing project costs and reducing profitability. Legal and regulatory challenges also discourage investment. Existing tenancy laws in many states are seen as unfavourable to landlords, while enforcement mechanisms remain weak.
Rental disputes often take years to resolve in courts, creating uncertainty and risk for property owners. Moreover, the prevalence of informal rental arrangements, where landlords and tenants operate without standard contracts, adds another layer of insecurity. This lack of structure undermines investor confidence and discourages institutional participation. For many developers, the economics simply do not favour rental housing.
“Each time a developer sells a completed unit instead of renting it, one more potential rental home is lost,” a Lagos-based developer noted. “But the reality is that selling allows you to recover your capital quickly and move on to the next project.”
Strong Demand, Weak Supply
The 2025 Nigerian residential market review by Diya, Fatimilehin & Co highlighted that an estimated five million new individuals require housing each year in Nigeria and at least one million additional homes are needed yearly to meet demand. Despite investors’ reluctance, demand for rental housing remains extremely strong.
Data from NOI Polls suggests that between 51 and 85 per cent of Nigerians live in rented accommodation, with higher figures recorded in urban areas. Homeownership levels remain low, estimated at 25 per cent, while mortgage penetration is below five per cent. As a result, renting remains the primary housing option for most Nigerians.
However, affordability is a major concern. Many renters spend between 40 and 60 per cent of their income on housing, far above global affordability benchmarks. In major cities such as Lagos, Abuja, and Port Harcourt, rents for two-bedroom apartments range from N1.5 million to over N2.5 million yearly, depending on location. Even in less urbanised areas, rents for single-room apartments have risen significantly, often exceeding N350,000 per year.
The situation is further complicated by the fact that about 75 per cent of existing housing stock is considered substandard, highlighting the urgent need for quality, affordable rental options. While some state governments are bridging the gap, much needs to be done. For instance, Lagos State recently delivered 11,000 homes over six years, averaging less than 2,000 per year and planned to complete over 14,000 by 2026. Also, the Federal Mortgage Bank of Nigeria (FMBN) reported delivering 2,465 housing units across several locations nationwide between May 2023 and November 2024.
Opportunities Still Exist
Despite these challenges, experts argued that the rental housing market still offers significant opportunities, particularly for long-term investors with access to patient capital. Rental properties can deliver average annual returns of around 7.5 per cent, depending on location and property type. In cities like Lagos and Abuja, vacancy rates remain relatively low, typically between three and eight per cent, indicating strong demand.
Key factors that drive rental value include reliable power supply, security, water systems, parking, and recreational facilities, features that are increasingly important to tenants. Demographically, young professionals and couples account for about 45 per cent of rental demand, followed by families at 35 per cent, while corporate and expatriate tenants make up the remaining 20 per cent. These groups require a mix of studio, two-bedroom, and three-bedroom apartments, particularly in well-connected urban locations.
Rent growth is also projected to remain strong, with annual increases ranging from 10 to 25 per cent in some submarkets.
Financing Constraints and Short-Term Capital
A major constraint is the cost and structure of financing. Interest rates on loans for real estate development often range between 25 and 28 per cent, with little or no moratorium. This makes it difficult for developers to hold assets long enough to generate returns through rental income. President of the International Real Estate Federation (FIABCI) Nigeria Chapter, Akin Opatola, explained that the sector suffers from a mismatch between short-term financing and long-term investment needs.
“The minimum a bank would give you now is about 25 to 28 per cent interest, and there is no moratorium. That doesn’t favour real estate, which is a long-term investment. Developers are using short-term funds for long-term projects,” he said. According to him, investors are under pressure to repay loans quickly, settle joint venture partners, and exit projects, leaving little room for long-term rental strategies.
“In other markets, developers can sell a portion of their units and retain the rest for rental income. But in Nigeria, most developers sell up to 80 per cent of their units outright because they cannot afford to wait. In contrast to other markets where long-term financing is available and developers enjoy a moratorium of two to three years, investors can adjust their strategy by selling only 20 to 30 per cent of units while retaining the rest for the rental market. That rental segment is often more profitable in the long term, but investors in this environment cannot afford to hold assets for that duration,” he said.
Opatola expressed concern over Nigeria’s low mortgage penetration rate, noting that stronger mortgage institutions would enable more citizens to access incremental home financing. He said, “These banks will help developers by providing funding to undertake more projects and, in turn, help address the housing shortage in Lagos and across the country. These are some of the issues the Minister of Housing is addressing under the Renewed Hope Agenda, and Lagos State is also making efforts in that direction. Some of the housing projects being developed by Lagos have not even been fully sold, even after commissioning, because the government is carrying out verification to ensure they reach the middle class and low-income groups. Otherwise, they tend to end up in the hands of deep-pocketed buyers.”
Policy Gaps and Institutional Weaknesses
Experts noted the absence of coordinated policy frameworks is a major barrier to growth in the rental sector. President of the Association of Housing Corporations of Nigeria (AHCN), Eno Obongha, noted that the lack of land banks, weak institutional coordination, and limited access to affordable building materials are hindering progress.
He emphasised the need for stronger collaboration between key institutions, including the Federal Mortgage Bank of Nigeria and Family Homes Funds Limited, as well as research bodies such as the Nigerian Building and Road Research Institute (NBRRI). “Without coordinated efforts, it will be difficult to scale up rental housing as a viable segment of the market,” he added.
