An Appraisal of Investor Confidence in the Nigerian Real Estate Sector
Chapter One
AIM AND OBJECTIVES
The aim of this study is to assess/appraise the level of confidence the average Nigerian investor has in the Nigerian real estate sector, with a view to improving real estate investment. In attaining the aforementioned aim, this study will achieve the following objectives:
- To identify the predominant types of investments/investors in Nigeria
- To identify their preference factors for other dominant investments in comparison with real estate
- To ascertain the behaviour/attitude of investors towards the Nigerian real estate sector.
- To determine the average amount of capital invested annually by the Government and the private sector in the Nigerian real estate sector
CHAPTER TWO
LITERATURE REVIEW
INTRODUCTION
This section of the study, is concerned with the various concepts related to the research topic. Areas such as types of investors, general investments and more specifically real estate investments, nature of Nigeria’s investment climate, behavioural characteristics of investor’s, will be discussed here based on past studies carried out by researchers.
CONCEPT OF REAL ESTATE/PROPERTY AND DEVELOPMENT
Real estate is the physical land and other natural and man-made improvements and attachments to the land. According to Ogedengbe and Adesopo (2003), ‘Real property refers to the interests, benefits and inherent right in the ownership of the physical land (real estate)’. They also defined development as being the application of capital, labour, managerial skill and entrepreneurial ability to land resources for the purpose of improving its productive capacity. Development of a piece of land involves a process which starts even before the actual construction of the site, even before the design of the project and continues after construction is completed till it is occupied. Development of real estate entails the improvement or construction of structures on bare land, or the rehabilitation of existing structures to increase its value.
REAL ESTATE INVESTMENT
Real Estate investment is the laying down of capital towards the construction of real estate with the expectation of getting series of income through rent or a lump sum from the sale thereafter. Investment generally is the giving up of a certain sum with the hope of making a profit in the future. Kalu (2013), opined that for an investor to invest in real estate, a huge capital outlay is needed which with the right entrepreneurial ingenuity will enable adequate return.
Kalu (2013), also stated that the decision to engage in real property investment is among the most difficult and critical decisions an investor has to make. This is not only because of the large capital outlay and long period it takes to develop, but also because real estate is a fixed asset which means it cannot easily be changed to another form i.e cash. Hence, once a real estate investment decision is taken, an error which may result if discovered, can hardly be remedied. Investment decisions in securities, share or real property are often made based on the expectation of future returns. There are other forms of investments namely; stocks/shares, bonds, valuable items (gold, art) and certificate of deposit (Kalu et al, 2013).
DIRECT AND INDIRECT INVESTMENT IN REAL ESTATE
Wong (2015) states that an investor in real estate can choose to invest in real estate either directly or indirectly. Furthermore, the author explains that direct investment enables the investor to own the property and the responsibility of managing it, he has the right to use and dispose at will. On the other hand, an indirect investment in real estate does not give the investor the right to own the property, but he is simply lending the money to the Property Company or individual who will invest directly in the property. A way of investing in real estate indirectly is by investing in Real Estate Investment Trusts (REITs). It involves working with a company that owns real estate investments, instead of buying your own. Investment in REITs can either be an ownership investment which gives you a share in real estate itself (in buying a share of a REIT means buying a physical asset) or a lending investment which is investing in the mortgage of the real estate.
There are various classes of direct real property investments. They are the residential, commercial, industrial, special and institutional properties. An investor will have to select the class of property that will meet target objectives as an investor. Investing directly in any of these types of real estate involves the physical structure which can be located and manage.
CHAPTER THREE
RESEARCH METHODS
INTRODUCTION
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This chapter of the study looks at various aspects of the study, with cognisance given to the research area, the methods and processes involved in sampling of the respondents to whom the questionnaires ate to be administered to, the nature of the questionnaires with respect to the aim and objectives of the research, and also the methods of data analysis to be adopted. All these details are to aid in determining the analysis of data collated from the respondents, and to ensure ease in the presentation of data.
RESEARCH DESIGN
In order to achieve the aim of this study, the research methods employed was qualitative in nature. A qualitative analysis gives a description of the various factors or determinants which drive or cause a shortfall in investor confidence within the Nigerian real estate sector. This tool focuses on the various data presented in the tables, and the n gives an in-depth look into the responses stated, in order to assess the average investor’s attitude or perception into all classes of the Nigerian real estate sector.
RESEARCH AREA
Lagos State was created on May 27, 1967 by virtue of a State Decree (Decree No. 14 of 1967), out of the former western region and Ikeja became its capital city. Prior to this, Lagos Municipality had been administered by the Federal Government through the Federal Ministry of Lagos Affairs as the regional authority, while the Lagos City Council (LCC) governed the City of Lagos (CIA World Fact Book, 2015).
The subsequent growth in commerce and the development of communications culminated in the founding of the Lagos Chambers of Commerce in 1987. The construction of the railway started in 1895 and harbor improvement followed (1908- 1917). The volume of trade has continued to grow over the years with Lagos State being known as one of Nigeria’s major financial, commercial and industrial nerve centres with over 2000 manufacturing industries and over 200 financial institutions (Banks, Insurance companies, and so on) including the nation’s Nigeria Stock Exchange. The state alone harbors 60% of the Federation’s total industrial investments and foreign trade while also attracting 65% of Nigeria’s commercial activities. However, Lagos State is not completely industrial-inclined, as there exists a vast potential of undeveloped land in Eti-Osa Local Government area of Lagos, Badagry, Epe, Ikeja and Ikorodu divisions (CIA World Fact Book, 2015).
CHAPTER FOUR
DATA ANALYSIS AND PRESENTATION
The presentation of data aids in simplifying the analysis of information retrieved from the respondents as regards the level of investor confidence towards the Nigerian real estate sector. The respondents selected were not strictly real estate investors, but rather versatile investors within the industry. Nominal and ordinal scales were used in the tables below, where ordinal scale ranks variables according to how frequently they were selected, while nominal scale simply presents data with the use of frequency distribution tables and their percentages.
CHAPTER FIVE
SUMMARY OF FINDINGS, RECOMMENDATION AND CONCLUSION
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.
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.
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.
References
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- CIA World Fact Book, (2015). Retrieved February 25, 2017 from http://www.ciaworldfactbook.com.
