The Impact of Infrastructural Development On Real Estate Values

The real estate industry has increasingly become relevant to our economy. However in recent times, the prices of real estate goods and services have risen rapidly with home prices increasing sharply in comparison to prices of goods and services in other industries. At the same time, housing demand has posed economic and social challenges, arousing continental and universal concerns. This article addresses the impact of infrastructural development on Real estate values.

Nigeria suffers from a housing deficit of over 17 million units for his teeming population and the poor state of infrastructure in the country even worsens the plight of the masses. At the moment there is a rising cost in building materials which has adverse effect on the construction industry.

In every country, infrastructural development impacts on sectors such as power, works, housing and transport. Until recently, the weakening of the Naira against major currencies has resulted in inflation and increasing levels of interest rates that seem to have adverse effects on the real estate sector

Property developers and buyers are faced with challenges in meeting finance costs due to high interest rates. As the population growth rate increases, the government and private sector players have attempted to meet the infrastructure needs of the residents. Albeit, there is still a lot that needs to be done in the aspect of infrastructural development.

Infrastructural development has a direct impact on real estate values. Land prices in areas such as Lagos Island where large infrastructure projects are taking place have increased rapidly as property sellers anticipate the demand for more land.

Concept of Infrastructure

Infrastructure network is the very socio-economic climate created by the institutions (public or private) that serves as conduits of trade and investment. The role of infrastructure in the context of integration is transformative, through enhancing change of resources into outputs or enhancing trade by removing barriers. Therefore an improvement in a country’s infrastructure is one of the key factors affecting the long term growth of such a country. The linkages between infrastructure and economic growth are varied and complex. Infrastructure does not only affect production and consumption directly, it also creates many direct and indirect externalities.

Hence, one of the determinants of property values is infrastructural facilities; it leads to appreciation of property values and its absence affects neighbourhood prices adversely.

Infrastructure development is a key driver of increased productivity and economic growth across the African continent, leading to improved living standards, poverty reduction and the attainment of the Millennium Development Goals (MDGs).

The following components of infrastructure impacts on real estate value;

1. Transport Networks

Several studies suggest that the characteristics of the local neighbourhood, transport system and environment quality are vital in the determination of residential property prices.

However, the development of a transport network can lead to a reduction in property values especially if it leads to easier accessibility to the properties near the transport network

2. Social Amenities

A residential property user may be prepared to pay a high value for a property depending on his consideration for basic facilities such as accessibility to water and electricity. There is a wide range of economic and social facilities crucial to creating an enabling environment for economic growth and enhancing quality of life. They include housing, electricity, pipe-borne water, drainage, waste disposal, roads, sewage, health, education, telecommunications and institutional structures like police stations, fire-fighting stations, banks and post office.

Real estate has no value if it has no utility, if it is not scarce and if it is not effectively demanded. Real estate has significance only as it satisfies man’s needs and desires. It is this man’s collective desire for property that gives rise to value.

Thus, the ability of a property to satisfy man’s needs and desires together with its degree of scarcity and utility compared with others makes man to ascribe value to it. Real estate is a heterogeneous good that is comprised of a bundle of unique characteristics reflecting not only its location, but equally affected by other amenities such as the quality of neighborhood and infrastructure.

3. Industrial Development

Industrial sites cause several negative externalities, such as noise, air, water and oil pollution, congestion and obstruction of view hence reducing value of residential property value. The adverse effect diminishes with distance resulting to increased property values in their direct vicinity.

The negative externalities linked to water supply and quality problems in a given neighborhood, adversely affects property values. Infrastructural projects produce significant environmental and social costs known to cause significant negative impacts such as noise and air pollution, compulsory acquisitions of land and impacts on local bio diversity.

It is important to note that environmental attributes would affect real estate values. The vital environmental considerations would include open space, nuisances, hazards emanating from nearby facilities such as shopping centres, factories, and schools; adequacy of public utilities such as streetlights, sewers and electricity; general maintenance; street pattern, width, and maintenance.

4. Educational Facilities

As much as the influence of public and private schools on state and local development may not be directly ascertained there are a few studies arguing that school quality has a direct and positive influence on residential property values.

Studies by Barrow and Rouse (2012); Black (2010); Figlio and Lucas (2010) indicate that homes in high-performing school districts sell for higher prices than homes in low-performing school districts holding all other factors constant.

5. Commercial Developments

On the other hand, income levels, profitability of business, inflation and interest rates are also important factors in determining general level of value at any given point in time. Households, who have the same tastes and income, tend to live within the same area. Therefore, the factors such as the size of households, their age, income and education levels and the availability and cost of mortgage financing have to be incorporated in affecting the types of housing and the values.

High-income residents will seek out a part of city that may offer leisure facilities, parks, amenities and the most convenient form of transportation and infrastructure. This also indicates that the proximate and relevant influences on the property are related to the same influences operating on other properties in the neighborhood. Also social considerations in neighborhood analysis involve characteristics of neighborhood occupants and it may affect real estate values.

Residents are attracted to a location because of status, physical environment, and availability of services, affordability, and convenience. However, residential groups generally socialize with those of a similar educational, cultural or social level.

Bottom line: There are several factors that cause fluctuations on the real estate prices. The factors that would lead to high pricing of the real estate include improved transport networks, improved social amenities, more industries, expanded educational institutions and more commercial centres. These factors are some of the key drivers of demand in real estate property that cause an increase in the pricing of real estate.