Money palaver in Real Estate

The major issue in real estate development and investment is finance. There is no iota of doubt that funding is an important factor in real estate development and investment. The complexity and to a large extent, its capital intensive nature demands proper and adequate funding to make it realizable. The terms and availability of the needed funds determine the trend of estate operation. Availability and easy accessibility of estate finance in sufficient quantity will definitely accelerate all forms of property development. Estate financing is concerned with the production of finance for building houses and office complexes which are basic necessities in a growing economy like Nigeria. Hence the benefits to be derived from a rise in estate financing in Nigeria are many. They include;
1. Increased rural and urban houses for the teaming Nigerian population.
2. The construction of industrial estate for the localization of industries and commerce.
3. An increase in employment for those in the construction industry.

The sourcing of funds for investment in real estate development poses a great deal of problem for the developer. This is largely due to economic instability and stringent measures imposed by most financial institutions. This is compounded by the fact that the interest rate structure has had an unfavourable impact on funding the development of real estate.

Since the financing of real estate development is a long term project, it has necessitated the high interest rate that is being charged on the funds provided for such development purposes. Six major real estate financing methods are used across the world namely; Joint Venture, Equity and Debt Financing, Sale-lease Back Financing, Advance Payment of key money and Sale of Securities.

Traditional funding of real estate is either by Equity funding (Equity funds), Loan Capital (Debt Funds) or a combination of both. The well established and tested methods of funding real estate are as follows;
1. Equity Capital
2. Loan Capital
3. Mortgage Funding
4. Debenture
5. Contractor Financing

Traditionally, real estate development was based on equity funds. Equity funds wholly generated and owned by one and to which there is no attachment. The chief source of equity funds is savings and these savings arise out of that part of income of individual or corporate organization. Equity funds sources could be private or public. Private equity may be drawn from individuals or corporate savings, that is, retained earnings, assets stripping, for cash or revenue reserves of companies over a period of time and accumulated savings of individual from employment and/or profits from business enterprises. Other sources of private equity funds apart from savings include funds from family sources, friends, Isusu system and thrift system. Public equity on the other hand is derived from invitation extended to the public to subscribe to the equities/ownership of a real estate company set up for that purpose. Some examples of this are capital issues, equity warrant issues, securitization and unitization.

After all said, mortgage institutions have generally impacted positively on real estate development. It has also shown that the availability of mortgage loans to would-be beneficiaries is a function of certain key variables, namely, availability of sufficient funds, stable interest rates and ability of beneficiaries to pay back. Developers are still willing to obtain loans under the mortgage finance scheme, despite the low income levels in the country, since housing is a basic necessity.

An effective monitoring system of mortgage institutions’ activities by the Federal Mortgage Bank of Nigeria would go a long way in doing away with the bottlenecks and improve housing development. Also, the problems of default would be minimized. Finally, it is worthy of note that there has not been enough funds channelled towards the financing of real estate development by all the organs expected to be done to meet the housing needs of the teeming Nigerian population.

Culled from the British Journal of Environmental Research