AN APPRAISAL OF
INVESTOR CONFIDENCE IN THE NIGERIAN REAL ESTATE SECTOR
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The Nigerian Real Estate Sector has recorded steady
and consistent growth over the last four years becoming one of the greatest contributors
to the Nation’s rebased GDP from the non-oil sector – having contributed 8.03%
and 11% in 2013 and 2014 respectively (Ikekpeazu, 2004). The market which is
currently valued at approximately N6.5 Trillion is estimated to grow at an average
of 10% over the next few years. The major growth drivers in the sector have
been credited to: an increased inflow of foreign investment (especially from
South Africa, MEA and the United States); increased institutional investment
from local companies including PFAs and Mutual Funds; the growing population of
High Net worth Individuals; and the targeted intervention of the Federal
Government in the housing finance sector. This however indicates that a lot of
stakeholders and investor are confident about the structure of the Nigeria real
estate sector even with the dwindling economy of the nation (Olotuah, 2000).
Real estate investing involves the purchase,
ownership, management, rental and/or sale of real estate for profit.
Improvement of realty property as part of a real estate investment strategy is
generally considered to be a sub-specialty of real estate investing called real
estate development. Real estate is an asset form with limited liquidity
relative to other investments, it is also capital intensive (although capital
may be gained through mortgage leverage) and is highly cash flow dependent
(Agbola, 1998). If these factors are not well understood and managed by the
investor, real estate becomes a risky investment. The primary cause of
investment failure for real estate is that the investor goes into negative cash
flow for a period of time that is not sustainable, often forcing them to resell
the property at a loss or go into insolvency. A similar practice known as
flipping is another reason for failure as the nature of the investment is often
associated with short term profit with less effort.
The success of any investment activity
rests heavily on the availability of adequate finance in real estate investment
which more often than not is beyond individual investors’ current financial
resources. This financial insufficiency naturally turns investors to financial
institution for possible credit advancement. Mbanefo (2002) observed that the
importance of banks in our economy lies in their monopoly of the resources to provide loans for
industrial and commercial developments. The provision of this loan however,
carries the risk of default in repayment hence the need to take adequate,
reliable and appropriate security for the purpose of insulating default risk
associated with credit transactions in banks.
Real estate continues to be in
high demand indicative of investor’s confidence since it meets the need of the public
consumer. A hotel, commercial office, residential estate or retail park will
continue to perform well, whether on the basis of sales or rents as long as the
product meets the needs of the consumer on the basis of location, price and
quality. We are beginning to see the green shoots of recovery in investor
confidence across the Nigerian real estate sector. This is evident in the
number of hospitality & leisure, residential, retail and commercial office
transactions either in the early stages of development or in the planning.
Real
estate markets in most countries are not as organized or efficient as markets
for other, more liquid investment instruments. Individual properties are unique
to themselves and not directly interchangeable, which presents a major
challenge to an investor seeking to evaluate prices and investment
opportunities. For this reason, locating properties in which to invest can
involve substantial work and competition among investors to purchase individual
properties may be highly variable depending on knowledge of availability.
Information asymmetries are commonplace in real estate markets. This increases
transactional risk, but also provides many opportunities for investors to
obtain properties at bargain prices. Real estate entrepreneurs typically use a
variety of appraisal techniques to determine the value of properties prior to
purchase to boosting investor’s confidence (Agbola, 1998).
Investor’s
confidence in real estate is determined by an investment rating of a real
estate property which is the measures of the property’s risk-adjusted returns,
relative to a completely risk-free asset. Mathematically, a property’s
investment rating is the return a risk-free asset would have to yield to be
termed as good an investment as the property whose rating is being calculated.
The underlying drivers for property ratings are the dividends (net operating
income) and capital gains over a certain holding period, and their associated
risks or variances. A property’s investment rating is then a transformation of
the risk-adjusted averaged return to a single number that conveys the
property’s long-term potential to yield profits.
1.2 STATEMENT OF THE PROBLEM
The
Real Estate sector offers a great potential source of growth for Nigeria. Until
now, the understanding of its composition and growth has been somewhat limited
to its required use in Nigerian national accounts without considering the role
of investor. Currently, Nigeria is in the midst of a housing boom, primarily
due to the great demand created by a rising population. Nigeria’s housing
deficit is estimated to be 17 million as of August 2012 which has gave several
investors confidence of profitability in real estate in Nigeria. However, the
researcher seeks to provide an overview of the investor’s confidence in the
Nigerian real estate sector.
1.3 OBJECTIVES OF THE STUDY
The
following are the objectives of this study:
1. To
examine the level of investor’s confidence in the Nigerian real estate sector.
2. To
determine the factors that can enhance the investor’s confidence in the
Nigerian real estate sector.
3. To
determine the factors that can reduce the investor’s confidence in the Nigerian
real estate sector.
1.4 RESEARCH QUESTIONS
1. What
is the level of investor’s confidence in the Nigerian real estate sector?
2. What
are the factors that can enhance the investor’s confidence in the Nigerian real
estate sector?
3. What
are the factors that can reduce the investor’s confidence in the Nigerian real
estate sector?
1.6 SIGNIFICANCE OF THE STUDY
The
following are the significance of this study:
1. The
findings from this study will educate the general public on the activities of
the real estate agents in Nigeria pointing out for analysis factors that can
bring in more investors to the sector of the economy.
2. This
research will also serve as a resource base to other scholars and researchers
interested in carrying out further research in this field subsequently, if
applied will go to an extent to provide new explanation to the topic.
1.7 SCOPE/LIMITATIONS OF THE STUDY
This
study on the appraisal of investor’s confidence in the Nigerian real estate
sector will cover the prospects of investors in the Nigerian real estate
sector. It will also cover the factors that can boost investor’s confidence in
the Nigerian real estate sector.
LIMITATION OF STUDY
Financial constraint– Insufficient fund tends to impede the
efficiency of the researcher in sourcing for the relevant materials, literature
or information and in the process of data collection (internet, questionnaire
and interview).
Time constraint– The researcher will
simultaneously engage in this study with other academic work. This consequently
will cut down on the time devoted for the research work.
REFERENCES
Agbola, S. B. (1998): The Housing of Nigerians: A Review of Policy
Development and Implementation in the Housing Sector. Research Report 14, Development Policy
Centre, Ibadan, Nigeria; 79 – 86.
Ikekpeazu, F. (2004): New Trends in Low-cost Housing
delivery systems in Nigeria: An Overview of the public-private partnership approach. Housing Today, 1 (8), 30 – 36.
Olotuah, A. O. (2000): Demystifying
the Nigerian Urban Housing Question. Inaugural Lecture Series 53 delivered at
the Federal University of Technology, Akure, pp 22.
Nbanefo, R. (2002):The Partnership Principle: Key to Implementing the Habitat Agenda. Habitat
Debate, 3(1), 1, 4-5.