CRITICAL STUDY OF REAL ESTATE RETURNS IN NIGERIA
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CRITICAL STUDY OF REAL ESTATE RETURNS IN NIGERIA
Introduction
Background to the Study/ Statement of Research Problem
Investors want a rate of return that encourages them to take risks (Khomassi and Shah, 2014). One of the most profitable investments is real estate. Land and structures, including commercial, residential, leisure, and industrial properties, are examples of real estate that can be held in the investment portfolios of individuals, corporations, or governments.
An assessment of institutional buys and dispositions in real estate investment totaling 1.8 billion USD across Africa over the previous two decades reveals that Nigeria has the most real estate investments by country (Uroko, 2021). Retail got the most attention among the other categories of real estate, attracting 687 million USD in investment and earning 8.6-10%.
The office space market has a 485 million USD investment value and a yield of 7.2-10.4%. Nigeria is the most popular investment destination, with 140 million USD committed, while Lagos is the most popular city, with 140 million USD invested.
A 480 million USD investment in the leisure sector has been undertaken, with a 7.5-7.6 percent yield. An investment in industrial real estate is worth 58 million USD, with a yield of 7.5-9.6%.
There appears to be a popular perception that humans are unsatisfied until they have invested in real estate, either directly or indirectly. This is due to the fact that real estate has various distinguishing qualities that set it apart from other asset classes.
Real estate investment, for example, has been demonstrated to be a hedge against actual inflation (Bond and Seiler, 1998; Quan and Titman, 1999; Dabara, 2014), while more recent research has shown that this is not universal.
The profits on investment in real estate justify the ability to do so. Another distinguishing element of real estate is the high rate of return it offers investors when compared to other types of investments. Residential real estate has been a good investment in a range of advanced economies since the late 1800s,
according to Jordà, Knoll, Kuvshinov, Schularick, and Taylor (2019). The authors calculate a geometric (arithmetic) average real net return on housing of 6.6% (7.1%) per year, which is close to the performance of stocks, which has produced considerable returns for the duration of the twentieth century.
The increased pace of real estate investment has had a positive impact on Nigeria’s GDP. According to the National Bureau of Statistics, the real estate industry grew by 1.77 percent to 6.52 percent in the first quarter of 2021, up from -4.75 percent in the same period in the previous year.
While other businesses were impacted by the Coronavirus pandemic, Nigeria’s real estate market recovered fast. Despite the economic challenges posed by the Coronavirus pandemic, the country’s economy is doing well (Uroko, 2021). This means that chances abound in the Nigerian real estate market, and savvy investors are not passing them up.
Several research on real estate returns have been undertaken. Several studies around the world look explicitly at statistics on real estate returns (Lu and Mei, 1999; Tse, Chiang, and Raftery, 1999; and Lizieri, Baum, and Scott, 2000).
Lu and Mei (1999), for example, study eleven developing market nations. During the Asian crisis, East Asian markets in particular experienced large negative excess returns.
Real estate returns in East Asian markets were explored in further research by Webb, Chau, and Li (1997) and Tse, Chiang, and Raftery (1999). Pagliari et al. (1997) discover that returns in various real estate property markets are not constant among nations studied.
The majority of previous research has demonstrated that real estate investment produces considerable returns (Favilukis, Ludvigson, and Van Nieuwerburgh, 2017; Ghent, Torous, and Valkanov, 2019; Giglio et al., 2021).
However, understanding of its longer-term track record is limited, particularly when compared to knowledge of prior bond and equities returns (Jorion and Goetzmann, 1999; Dimson, Marsh, and Staunton, 2002).
While property has been discovered to be a less profitable long-term investment than previously anticipated (Chambers, Spaenjers, and Steiner, 2021), no attempt has been made to quantify how infallible real estate investment returns are, particularly for young investors.
Nigeria is a country where the bulk of the population is made up of young people who aspire to better their future. These young people are caught in the middle of deciding how to provide for a brighter tomorrow. Given the return on investment in real estate, it is important to understand how reliable it is.
In light of this, the current study seeks to bridge the gap by using Nigerian adolescents as a case study.
objectives of The study
The primary goal of this research is to arrive at a statistically sound conclusion about the real returns of real estate investing and to validate (or refute) the assumption that real estate investing in Nigeria is a “infallible” long-term financial plan or venture for a young Nigerian looking to plan his or her future.
The precise goals are as follows:
investigate the projected real return on real estate investments in Nigeria; investigate the assumed real return on real estate
investments in Nigeria; investigate the key hazards of real estate investments in Nigeria
Determine the infallibility of real estate for young Nigerians by investigating how these risks are minimised or avoided.
Research Questions
The following research questions will be addressed by this study:
What is the expected and assumed real return on Nigerian real estate investments?
What are the primary dangers of Nigerian real estate investments, and how may they be mitigated?
What is the reliability of real estate investing for young Nigerians?
Literature Review
This chapter is divided into five primary sections. The first section introduces the factors that influence real estate returns. The part focused on the notions of real return and the determinants of individual property returns as demonstrated by earlier research. The second portion digs into the market for real estate investments.
The section discusses real estate characteristics, important participants in real estate investing, and property investment instruments. The following section provides a historical overview of Nigerian real estate investment.
The fourth segment examines empirical studies on real estate investment performance. The final section summarises and closes by stating why the current investigation is necessary.
Real estate return determinants
In the past, researchers looked into the factors that influence real estate returns. According to Chen and Mills (2006), GDP, interest rates, loan interest rates, consumer price index (inflation), production services,
and unemployment are all factors that influence real estate returns. According to De Wit and Van Dijk (2003), the selling price is connected to GDP, inflation, and unemployment.
The unemployment rate does not correlate with rental rates, although GDP does. Frappa and Mesonnier (2010) discover substantial evidence that inflation targeting has a large positive influence on actual house price increase and the house price-to-rent ratio in their analysis. According to Huizinga (1993), inflation reduces relative pricing stability, which increases investment uncertainty.
Feldstein and Summers (1979) confirm that rising inflation leads to higher artificial individual income taxes. Pai and Geltner (2007) investigated the NCREIF dataset to see if they could discover characteristics influencing long-run real estate investment returns. They discover that real estate attributes including asset size, property type, and market tier can be utilised to explain returns.
Real estate returns have been studied in terms of market efficiency, distribution, predictability, macroeconomic variables that may help explain variances in returns, and measuring methodologies. There has also been research into the returns of specific categories of property (for example, office buildings, overseas real estate, and toxic sites).
Some studies have tried to develop tools or approaches for better understanding real estate returns and markets. However, there is a scarcity of knowledge about the infallibility of real estate investing for the younger generation.
In the literature, there has been some success in projecting real estate returns (Tuluca, Seiler, Myer, and Webb, 2000; Cooper, Downs, and Patterson, 2000).
According to Mei and Liu (1994), real estate excess returns are easier to forecast than returns on other assets. Tuluca et al. (1998) created a model that accurately predicted unsecuritized real estate returns, but they called into doubt prior claims that real estate returns could predict unsecuritized real estate returns.
Cooper et al. (2000) investigate the asymmetric information structure of real estate markets and suggest that predictability of real estate returns is more likely a result of portfolio rebalancing rather than adverse selection. Individual property returns have a non-normal distribution, according to several research (Young, 1994; Young and Graff, 1995).
According to Mei and Saunders (1997), financial institutions’ real estate investments are based on previous real estate results rather than predicted future gains.
Clayton (1998) employs data from the condominium housing market in his research of market efficiency. The efficiency of the real estate market and its pricing are linked.
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