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:
- To examine the level of investor’s confidence in the Nigerian real estate sector.
- To determine the factors that can enhance the investor’s confidence in the Nigerian real estate sector.
- To determine the factors that can reduce the investor’s confidence in the Nigerian real estate sector.
1.4 RESEARCH QUESTIONS
- What is the level of investor’s confidence in the Nigerian real estate sector?
- What are the factors that can enhance the investor’s confidence in the Nigerian real estate sector?
- 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:
- 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.
- 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.