COMMERCIAL REAL ESTATE RISK IN NIGERIA: ISSUES FOR
INVESTORS
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
Commercial
real estate investment, like life itself, comes with its own associated risks
and these risks are events that could bring harm or loss to an investment. A
risk is that probable event that could lead to depreciation of the value of
property or outright loss of investment (Clayton, 2007). The existence of such
factors should not discourage an investor from investing but rather use the
knowledge of commercial real estate risk analysis and management that the
researcher is examining to help secure an investment. The primary commercial risk
in real estate investment in Nigeria is the possibility of falling into the
hands of fraudsters. Fraudsters sometimes attempt to sell a property that does
not belong to them. This is another source of issues for investors but could be
eliminated by engaging the services of professionals to help investigate the
title to the property that is being sought for purchase and to ensure that all
the documents needed from the seller are prepared, signed and collected
(Fisher, 2005).
Another
possible commercial real estate risk investors may face as a real estate
investor in Nigeria is government or political risk. Because of the wide
ranging power of the executive arm of government and fluidity of functions, the
government could acquire private land but the land so acquired must be for
public purposes. Unfortunately, there are several instances where government
has acquired private land for “public purposes” and “development control” only
to turn around and allocate to other individuals to use for their own private
projects. Some have experienced their Certificate of Occupancy revoked by a new
government due to the fact that the owner does not belong to the same political
party. This kind of policy inconsistency is a major discouragement to
investors. However, be that as it may, whenever investors are planning to
purchase a land in an area, engage professionals (e.g. Surveyors) to confirm
whether or not the land is under acquisition by government or could or could
not be sold (Black, 1986).
At
other times, after government has acquired family lands and compensated the
appropriate families, some of the traditional land owners still go ahead to
sell portions of those lands to the unsuspecting public. Many people purchase
such lands and begin to build without government building approvals. The implication
of this, as many have painfully learnt, is that when government decides to take
possession and pull down the structures on such lands, such a purchaser will
not be compensated by government. It is also important to note that some areas
have already been acquired or building developments in such areas already
restricted (Syz, 2008). For instance, land under the power cables should not be
built upon. Many are flaunting this law but should the government decide to
enforce such regulations, several people would be affected.
There
are also financial risks involved in commercial real estate investment. If an
investor decide to use a bank loan to buy a property, there is need for the
awareness that what we call mortgages in Nigeria, is technically a commercial loan.
Ideally, a real estate/home loan should be a single-digit interest loan, but
what Nigeria currently have are double – digit commercial loans. Although, the
government established a National Housing Fund (NHF) single – digit – interest
loan that could advance a contributor up to N25m, many have not been able to
access the loan due to bureaucratic bottlenecks and red tape. Some who have
accessed the loan have had to apply for a bridging loan at commercial
double-digit interest rates in order not to miss their desirable property.
Despite
its inherent risks, commercial real estate presents a compelling opportunity
for investors. Not only does the sector provide many long-term investment
benefits, including healthy income returns and a hedge against inflation, but
fundamental factors such as the improvement of the risk/return characteristics
of the overall mixed asset portfolio. The case for investing in commercial real
estate looks particularly attractive when viewed in the context of the current
market environment, although it is not without risk. Perhaps the most obvious
reasons why commercial real estate merits inclusion in a management portfolio
are derived from both cyclical and noncyclical factors – specifically, the
favorable long term outlook for real estate demand, from both users and
investors, property cash flows and real estate’s potential inflation hedging
characteristics. The liquidity of commercial real estate provides investors the
most efficient means to obtain exposure to property markets globally. The
ability to trade daily not only provides a useful tool for investors to create
tactical allocations to the sector and global regions, but it also provides a
means to efficiently re-balance allocations as market conditions change.
1.2 STATEMENT OF THE PROBLEM
It
is very important for investors in commercial real estate to first ascertain
the risk factors of an investment asset as good as possible before committing
investment funds to such investment. Investors’ informed decisions with respect
to the risk and develop strategies of real estate investments in order to
ensure profitability. Commercial real estate investment is usually rental
properties intended to generate a return from rental income or capital
appreciation. Commercial property types are office, retail, multi-family,
industrial and hotel, self-storage, seniors housing and health care among
others. Investments in these real estate assets are associated with multiple
risk complexities which includes: investment illiquidity, asset value volatility,
asset valuation inaccuracies, leverage-amplifying negative performance during
falling markets, limited/ imperfect benchmarks to gauge closed-end fund
performance, combination of a large lot size (capital intensive investments)
and high transaction costs. However, the researcher will provide an overview of
commercial real estate risks in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The
following are the objectives of this study:
1. To
examine commercial real estate risks in Nigeria.
2. To
identify the issues investors may have in commercial real estate sector in
Nigeria.
3. To
determine the challenges of commercial real estate sector in Nigeria.
1.4 RESEARCH QUESTIONS
1. What
are the risks involved commercial real estate in Nigeria?
2. What
are the issues investors may have in commercial real estate sector in Nigeria?
3. What
are the challenges of commercial real estate sector in Nigeria?
1.6 SIGNIFICANCE OF THE STUDY
The
following are the significance of this study:
1. The
results of this study will enlighten investors from all over the world on the
risks that may be encountered while investing in commercial real estate in
Nigeria.
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
The
scope of this study on commercial real estate risks in Nigeria will cover all
the risks investors are exposed to in the Commercial real estate sector in
Nigeria with a view of providing a guide against the risks.
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
Black,
D., Success and Failure of Futures Contracts: Theory and Empirical Evidence,
Monograph Series in Finance and Economics, Monograph 1986-1. New York
University, 1986.
Clayton,
J. “Commercial Real Estate Derivatives: They‟re
Here… Well, Almost.” PREA Quarterly, Winter 2007), pp. 68-71.
Fisher,
J. D., ‟New Strategies for Commercial Real
Estate Investment and Risk Management‟, Journal
of Portfolio Management, Vol. 32, 2005, pp. 154-161.
Syz.
Juerg M. Property Derivatives. (Wiley: Chichester, 2008).