An Appraisal Of Investor Confidence In The Nigerian Real Estate Sector

Project and Seminar Material for Estate Management

An Appraisal Of Investor Confidence In The Nigerian Real Estate Sector


Abstract


The overall view of the Nigerian investment environment can be deemed non-profitable to the plain eye. It is only upon research that a better understanding of the country’s investment market can be appreciated by the layman and the professional (investment expert) alike. In attaining this understanding of the Nigerian investment market, this study aimed to appraise the level of investor confidence in the Nigerian real estate sector. In achieving this aim, the real estate sector was not focused on solely by the researcher, but rather it’s performance within the Nigerian investment market was measured against other sectors of the economy and the various investment classes they possess, based on the knowledge and experience of investment companies which are active in the market. As regards attaining the objectives of the research, the most prevalent type of investor within the market as indicated in table 4.3 is the risk adverse investor (41.5%). Table 4.4 also complemented this data by classifying the investors based on the level of coverage carried out by his investment firm. According to the table, 69.8% of the investors analysed were local investors, while 30.2% were international investors. In determining the current state of the Nigerian real estate sector, table 4.7 indicated that 26.5% of the respondents were of the opinion that the sector is performing fairly, while 22.6% equally stated that the sector is performing both poorly and good. The behaviour of the average investor towards the Nigerian real estate sector was also presented in table 4.6, where 57.6% stated that the sector formed a significant part of their portfolio, while 42.4% stated that it forms a moderate aspect of their investment portfolio. In essence further research as regards this research aim needs to be carried out, so as to identify those loopholes which deter the average investor from gearing their funds towards 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.


Chapter Five


Summary of Findings, Recommendation and Conclusion

5.1 Summary of Findings

Data collated from the investment companies proved vital to achieving the overall aim of this research. As regards attaining the objectives of the research, the most prevalent type of investor within the market as indicated in table 4.3 is the risk adverse investor (41.5%). Table 4.4 also complements this data by classifying the investor based on the level of coverage carried out by his investment firm. According to the table, 69.8% of the investors analysed are local investors, while 30.2% are international investors.

In determining the current state of the Nigerian real estate sector, table 4.7 indicated that 26.5% of the respondents are of the opinion that the sector is performing fairly, while 22.6% equally stated that the sector is performing both poorly and good. The behaviour of the average investor towards the Nigerian real estate sector was also presented in table 4.6, where 57.6% stated that the sector forms a significant part of their portfolio, while 42.4% stated that it forms a moderate aspect of their investment portfolio. This was based on the responses of 33 respondents, as the remaining 20 respondents stated that they are not certain of real estate forming a part of their portfolio or not being a part of their portfolio in the first instance.


5.2 Recommendation

Based on the response in table 4.7 where the highest percentage of respondents (26.5%) stated that the Nigerian real estate sector is performing fairly, while 22.6 stated that the sector is performing poorly, it s certain the notion and confidence in the Nigerian real estate sector has to be improved.

With a limited number of practical and tested solutions towards real estate problems such as housing, basic infrastructural provision, and planning, the provision of funding and a good maintenance culture towards existing and future developments will be key to an improved outlook and confidence towards the real estate sector.

Funding can be provided through various real estate investment tools under the Public- Private Partnership model. The use of Build-Operate Transfer approach, should be adopted by all tiers of Government in the improvement of the Nigerian real estate sector. Both parties should endeavour to provide a fairly equitable contribution towards any proposed real estate project and also ensure in the long-run that the private investor recovers his initial investment. In the event that the Government is not interested in managing the property overtime, the private investor may deem it fit to buy out the property and remodel it for profitability reasons if the need arises.

With regard to maintenance, the Government should always ensure that the private partner takes responsibility for maintenance irrespective of any prioer agreement. This is due to the common notion that Government usually fails in adequately managing completed projects in Nigeria.

Also in the provision of additional funds for injecting into the Nigerian real estate sector in order to boost the confidence and preference shown by investors towards the sector, the Government should ensure Foreign Direct Investments (FDI’s) are also geared towards the sector. Incentives such as a tax relief or tax haven should be granted to these foreign real estate investors for a limited period of time in order to entice them towards investing in the sector.

Finally and most importantly, regularisation by all parties and bodies involved in the sector should be ensured. This comes in the form of securitising real estate interests i.e

Real Estate Investment Trusts. This is a formidable effort already undertaken by mortgage banks and investment firms in the country, but it is still a long stretch from being perfected like other investment classes. Valuation standards should be improved by the Nigerian Institution of Estate Surveyors and Valuers along with a formidable real estate price index. These two solutions will enable the sector be taken more seriously by potential investors, hence more funds will be geared towards the sector.


5.3 Conclusion

Based on the ranking of the real estate sector in table 4.18; 8th with a mean of 3.01, it can be firmly stated that the level of confidence shown by the average investor towards the Nigerian real estate sector is very low/poor. Based on the performance of the market; increase in property supply coupled with a decrease in property demand, the level of preference shown towards the sector is expected to decline overtime unless notable steps are taken by both the Government and the private sector as indicated above. Basic infrastructure, most notably housing is a strong indicator of any country’s growth and development. This alone warrants the need for the Government to resolve the issues of infrastructure in the country, before focusing on other sectors of the economy. It is therefore the conclusion of this study, that though the Nigerian real estate sector is performing below par (based on the data collated form respondents), the necessary steps to the enhancement of this sector are laudable, but need to be embarked on as soon as possible.


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