COMMERCIAL REAL ESTATE RISK IN NIGERIA: ISSUES FOR INVESTORS
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COMMERCIAL REAL ESTATE RISK IN NIGERIA: ISSUES FOR INVESTORS
CHAPITRE ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Commercial real estate investment, like life, carries its own set of hazards, which are events that can cause injury or loss to an investment. A risk is a likely event that could result in a decrease in the value of property or an outright loss of investment (Clayton, 2007).
The presence of such elements should not prevent an investor from investing, but rather leverage the researcher’s understanding of commercial real estate risk analysis and management to help secure an investment.
The chance of falling into the clutches of fraudsters is the biggest commercial risk in real estate investment in Nigeria. Fraudsters will occasionally try to sell property that does not belong to them.
This is another source of concern for investors, but it can be avoided by hiring professionals to investigate the title to the property being sought for purchase and to ensure that all documents required from the seller are prepared, signed, and collected (Fisher, 2005).
Another potential commercial real estate risk that investors in Nigeria may encounter is government or political risk. Because of the executive branch’s broad powers and the fluidity of activities, the government may buy private land, but the land must be used for public reasons.
Unfortunately, there have been countless cases when the government has purchased private land for “public purposes” and “development control” only to turn around and give it to other people to utilise for their own private enterprises. Some have had their Certificate of Occupancy revoked by a new government because the owner does not share the same political party.
Such policy inconsistency is a huge deterrent to investment. However, whenever investors seek to purchase land in an area, they should consult with professionals (e.g., surveyors) to confirm whether or not the land is under government acquisition or could or could not be sold (Black, 1986).
At times, even after the government has purchased family property and compensated the relevant relatives, some traditional landowners continue to sell portions of those lands to the unwary public. Many people buy such property and begin construction without obtaining government building permits.
The implication of this, as many have sadly discovered, is that if the government decides to take possession of such property and demolish the structures on them, the purchaser will not be paid by the government.
It is also worth noting that some places have already been bought or development in such regions has been restricted (Syz, 2008). For example, land beneath electricity lines should not be developed. Many people are breaking the law, but if the government decides to enforce such restrictions, many people would suffer.
Commercial real estate investment entails financial concerns as well. If an investor decides to use a bank loan to purchase a home, he or she should be aware that what we call mortgages in Nigeria are essentially commercial loans. A real estate/home loan should ideally have a single-digit interest rate, but Nigeria now has double-digit commercial loans.
Despite the fact that the government established a National Housing Fund (NHF) single-digit rate loan that may advance a contributor up to N25m, many people have been unable to secure the credit due to bureaucratic bottlenecks and red tape.
Some of those who have used the loan have had to apply for a bridging loan at commercial double-digit interest rates in order to avoid missing out on a coveted property.
Despite its inherent hazards, commercial real estate offers investors a tempting opportunity. Not only does the sector give several long-term investment benefits, such as healthy income returns and inflation protection, but it also improves the risk/return characteristics of the total mixed asset portfolio.
When evaluated in the context of the current market situation, the case for investing in commercial real estate appears particularly appealing, while it is not without risk. The most obvious reasons for including commercial real estate in a management portfolio stem from both cyclical and noncyclical factors,
specifically the favourable 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 with the most economical way to gain exposure to global property markets. The ability to trade on a daily basis not only offers investors with a handy tool for creating tactical allocations to sectors and global regions, but it also gives a mechanism to efficiently rebalance allocations as market conditions change.
1.2 STATEMENT OF THE PROBLEM
It is critical for commercial real estate investors to establish the risk aspects of an investment asset as thoroughly as possible before committing investment funds to such an investment. Investors must make informed decisions about risk and build real estate investing strategies to assure profitability.
Commercial real estate investment often consists of rental properties that are intended to provide a return through rental revenue or capital appreciation. Commercial property categories include, among others, office, retail, multi-family, industrial, and hotel, self-storage, seniors living, and health care.
Investments in these real estate assets are associated with a number of risk complexities, including: investment illiquidity, asset value volatility, inaccuracies in asset valuation, leverage-amplifying negative performance during falling markets,
limited/imperfect benchmarks to gauge closed-end fund performance, a large lot size (capital intensive investments), and high transaction costs. The researcher will, however, present an outline of commercial real estate concerns in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The following are the study’s objectives:
1. To investigate the risks associated with commercial real estate in Nigeria.
2. To identify potential challenges that investors may face in Nigeria’s commercial real estate sector.
3. To identify the difficulties confronting Nigeria’s commercial real estate market.
1.4 RESEARCH QUESTIONS
1. What are the dangers of commercial real estate in Nigeria?
2. What are the potential challenges for investors in Nigeria’s commercial real estate sector?
3. What are the challenges of Nigeria’s commercial real estate sector?
1.6 SIGNIFICANCE OF THE STUDY
The following are the study’s implications:
1. The findings of this study will inform investors from all over the world about the hazards associated with investing in commercial real estate in Nigeria.
2. This research will also serve as a resource base for other academics and researchers interested in conducting additional research in this sector in the future, and if implemented, will go so far as to provide new explanations for the topic.
1.7 SCOPE AND LIMITATIONS OF THE STUDY
The scope of this study on commercial real estate risks in Nigeria will include all of the dangers that investors face in the commercial real estate sector in Nigeria, with the goal of offering a risk advisory.
STUDY LIMITATIONS
Financial constraint- A lack of funds tends to restrict the researcher’s efficiency in locating relevant materials, literature, or information, as well as in the data collection procedure (internet, questionnaire, and interview).
Time constraint- The researcher will conduct this investigation alongside other academic activities. As a result, the amount of time spent on research will be reduced.
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