DETERMINANTS OF VACANCY RATE IN COMMERCIAL PROPERTIES IN MINNA, NIGERIA

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

The basis for the existence and growth of urban areas is found in the gregarious nature of mankind and also in the cultural, economic and political advantages that stem from the agglomeration or clustering together of people (Barlowe, 2009).

From the standpoint of intensity of use, rent-paying capacity and land values, the areas occupied by central business districts in urban areas represent some of the most valuable lands (Lean & Goodall, 2011; Barlowe, 2009 and Harvey, 2010).

In cities where the business has retained its attractiveness, economic strength and viability, the business is almost always found close to the hub of the city’s traffic and transportation system and at locations both accessible and convenient to large numbers of people.

This develops a possibility for high volumes of retail and other commercial activities, which in turn enhances intensive land use practices, high rents and high land values (Lean & Goodall, 2011; Barlowe, 2009; Harvey, 2010 & Ighalo, 2010).

In other words, sites closer to the main business area often offer greatest opportunities for profitable use and these locations have the highest site values and command the highest rents. Thus, due to the business opportunities available to firms at the area, there is reasonable bidding and counter-bidding between firms and operators for the choice of locations.

This process often leads in commercial land use patterns in which office and retail spaces are allocated in concordance with the rent-paying capacities of the various operators. This pattern is rarely stable as new adjustments are always done, including rental adjustments.

The primary basis of most office rental studies as summarized by Sivitanides (2013) is that, rent differences in the commercial property market are engineered by excess demand or excess supply, as measured by the deviation of the prevailing vacancy rate from a “natural” or “structural” vacancy rate.

In addition, the results of evidence from previous empirical studies suggests that vacancy rate is a crucial determinant of office rental performance in cities (Hekman, 2013; Shilling et al., 2009; Glascock et al., 2011; Wurtzebach et al., 2011; Sivitanides, 2013; Hui & Yu, 2014; Boon & Higgins, 2007 & McCartney, 2012).

It is on this premise that this study examines the determinants of vacancy rate in commercial properties in Minna, Nigeria. According to Boon and Higgins (2007), rental value is a vital parameter for measuring real property performance. It is also a key cost for tenants and an important source of income for the landlord.

Major commercial property market partakers such as investors and developers mostly use rental value as an indicator to ascertain the viability of their real estate development and investment schemes.

Based on this, knowledge of the nature and basic features of vacancy rate provides a better understanding of the fluctuations of the commercial property market. Also, indices of rental growth are mostly integrated into discounted cash flow analysis for the evaluation of real property investments (Boon and Higgins, 2007).

Thus, Nigeria real estate industry professionals needs better knowledge of commercial property rental changes as well as vacancy rate which is the key determinants that influence commercial property rents in the country.

However, the property market is one of the major aspects of the investment market. The commercial property market is an important sector of the property market. Investors in the commercial property market expect return on their investments in the form of rent (Barlowe, 2009; Hargitay and Yu, 2010; Boon and Higgins, 2007).

Also, the commercial property market is characterized by some fundamental concepts. These concepts provide the premise for the determination of commercial property rental values. Those that Contributed to the early conceptualization of rent theory believed that rent is a differential caused mainly by distance and cost of transportation and attributed differences in rent-earning capacity of land to differences in location and transport cost.

Archer and Ling (2013) formed a three market framework, demonstrating the correlation between the space market, the property market and the capital market. Therefore, in the commercial property market, rental value is a function of demand and supply factors. The composition of the individual characteristics of these demand and supply factors differs in the context of national, regional and local commercial property markets.

1.2. STATEMENT OF PROBLEM

Although numerous studies have examined the market for residential real estate, only a handful has looked at the commercial office market. The lack of attention generally given the vacancy rate variable in the past studies of commercial market is surprising given the high degree of both theoretical and empirical attention this issue has received in the residential real estate literature.

In the residential market, the vacancy rate has been viewed as pivotal to explaining the price of housing services. This study envisages commercial market in which the building vacancy rate is the key factor in the determination of rents.

1.3 AIMS AND OBJECTIVES OF THE STUDY

The major aim of the study is to examine determinants of vacancy rate in commercial properties in Minna, Nigeria. Other specific objectives of the study include;

1. 1. To assess the rental values of commercial properties in Nigeria.

1. 1. To examine the determinants of vacancy rate in commercial properties.

1. 1. To examine the impact of vacancy rate on commercial properties in Minna

1. 1. To examine the income returns from commercial properties in Minna.

1. 1. To examine the relationship between  vacancy rate and commercial properties

1. 1. To identify the level of rents for commercial properties in the study area.

1.4 RESEARCH QUESTIONS

1. 1. What are the rental values of commercial properties in Nigeria?

1. 1. What are the determinants of vacancy rate in commercial properties?

1. 1. What is the impact of vacancy rate on commercial properties in Minna?

1. 1. What are the income returns from commercial properties in Minna?

1. 1. What is the relationship between   vacancy rate and commercial properties?

1. 1. What is the level of rents for commercial properties in the study area?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: There is no significant impact of vacancy rate on commercial properties in Minna

H1: There is a significant impact of vacancy rate on commercial properties in Minna

Hypothesis 2

H0: There is no significant relationship between   vacancy rate and commercial properties

H1: There is a significant relationship between   vacancy rate and commercial properties

1.6 SIGNIFICANCE OF THE STUDY

The outcome of this study will be of immense value to several interest groups namely, the academia, financial institutions, investors/investment analysts and public authorities. The work will not only enrich the scanty literature available on this topic but will also serve as a good reference to scholars who may develop interest to further research on this topic or similar topics.

The work will be of great benefit to the financial institutions, investors and investment analysts hence the content of the study is adequate and suffices for a good viability appraisal to those whose investment objectives are financial and purely for income appreciation.

Finally, the research will be greatly treasured by all levels of government. It will help the government in understanding the dynamics of the commercial market and its impact on rent. The findings and recommendations in this work will help the government in both policy formulation and execution on housing.

1.7 SCOPE AND LIMITATION OF THE STUDY

The study is restricted to determinants of vacancy rate in commercial properties in Minna, Nigeria.

LIMITATION OF THE 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.

1. 1. DEFINITION OF TERMS

Rent: is the regular payment made for the use of land or buildings that belongs to someone else. The Economist defined rent as “the revenue from land resources that is equal 7 to the value of its marginal services rendered in a productive process”. In summary therefore, the word rent is that fixed periodic payment made by a tenant to his landlord for the exclusive possession and use of leased property.

Properties: According to the High Court, the Court of Appeal and the Supreme Court, property is the right to possession, enjoyment and disposition of all rights and things subject to ownership. Property is therefore a legal right expressing the relationship between a person, the owner and his possession of the thing owned. A

Commercial Property: According to Malys (2012), this refers to buildings or land intended to generate a profit, either from capital gain or rental income. It includes office buildings, industrial property, medical centers, hotels, malls, retail stores, farm land, multifamily housing buildings, warehouses, and garages. In many states, residential property containing more than a certain number of units qualifies as commercial property for borrowing and tax purposes.