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Real estate properties will continue to rise in Nigeria – Experts

Amidst the lip service being paid by the government on provision of affordable houses, stakeholders have argued that property prices in real estate may continue to escalate due to rising cost of construction materials.

This might be worsened by the Land Use Charge (LUC) law made by Lagos State government, which other states may in no distant time start to emulate.

Nigerians are already crying that prices of building materials are skyrocketing and it is clear that location remains key determinant of real estate prices. However, many also believe that real estate is overpriced in Nigeria considering the facilities available to the property user. There is no proper appraisal system; you can decide to sell your property at any price, and anybody with some free cash will just pay for it.

Indeed, real estate is presently overpriced in Nigeria and the reasons are not far fetched. In the real estate world, demand and supply determine the cost. In Nigeria, however, it is the demand by those who have one way or the other made their money in questionable ways that determine the cost of properties. This became worse after September 11 when the West restrained the inflow of money that came to their banks for fear it could be from terrorists.

With nowhere to siphon money to, they resorted to paying for most of these properties at high prices. It can honestly be deduced that some houses in Nigeria are more expensive than those in U.S. The reason is that majority of Nigerian citizens are competing with pen robbers who have been robbing the country in the last 40 years.

A report had it that only about 10-15 per cent of the Nigerian population make N5 million a year (about $32,000), just a little above US minimum income, yet they’re building houses or buying lands worth N200 million and above. These people will build these houses and because they didn’t suffer to make the money, they furnish them to taste and then hike the prices so high that only those who made money the way they made theirs can afford them. With this, well-to-do individuals will not look in the direction of renting apartments. Rather, they build their own houses.

The amount of money spent on home ownership in the UK is the lowest it has been over the last 10 years while renting is the lowest since 2011. New research has found that prices of properties are continuously on the dunking side. They are dipping because they have the barometer to measure the percentage rise of anything whether commodity or properties.

The prices of property in certain cities are costly not because of the buildings but at times, the locations. In Nigeria, properties in Abuja, Lagos, and Port Harcourt are more expensive yet in those cities, there are still areas where properties prices are cheaper. Instances are Maitama, Asokoro, Garki, Wuse Zone II, while others include Gwarinpa, Bwari, and Lugbe. In Lagos, areas with most expensive properties include Banana Island, Lekki, Ikoyi, Maggodo, Eko City and Amuwo-Odofin, to mention a few. In Port Harcourt, we have the New and Old GRA, Rumuibekwe and the Cocain Village. Prices of properties in these locations are seen to be more costly compared to other areas in Nigeria.

There is a potential to get a high return from property anywhere in the world. It is a case of understanding the market, having the right contacts, doing the analysis and then being able to understand the cash flow in the properties sector for the medium to long-term. A friend bought half his current property portfolio in the global financial crisis (GFC) in Australia, and in one case made $1,000,000 profit in four months on a block of units purchased for $1,900,000. He bought two properties in the UK for £80,000 in 1993 and 1994 and they’ve both just been re-valued at £325,000,000. So even though the UK has supposedly had some major issues, both these properties have doubled every 10 years and have been positive in cash flow from day one. But even at that, cost of property seems to be lower compared to what happens in other major cities of the world.

A data from the American Office for National Statistics, hybrid estate agent, Emoov, looked at all of the components of household expenditure since 2007 across all the spendings associated with owning or renting a property and what percentage of total average weekly household expenditure they accounted for. The research found that the percentage allocated to paying weekly mortgage interest payments is the lowest they have been since 2007 with rent also seeing a decline to a six-year low. As a percentage of the total household expenditure, the amount of our household outgoings spent on mortgage interest payments has dropped to just 3.77 per cent from 7 per cent plus at the peak of the year reviewed.

Aside the above, other factors that help to inflate prices of property in Nigeria include cost of land. Cost of land in Nigeria is not stable. The interest of Omoniles, what they call royalty and cola nuts, increase costs of land. Collection of this document and that document from government departments aside taking time also cost a lot. The collection of Certificate of Occupancy (C of O) that takes time to come also is costly. These petty things, coupled with prices of building materials, make the property at finishing very costly. The cost of professionals like architects, surveyors, planners and other professionals linked to the building make the property cost high.

Interest rates, especially the rates on interbank exchanges and treasury bills, have as profound an effect on the value of income-producing real estate as on any investment vehicle. Because their influence on an individual’s ability to purchase residential properties (by increasing or decreasing the cost of mortgage capital) is so profound, many people incorrectly assume that the only deciding factor in real estate valuation is the current mortgage rate. However, mortgage rates are only one interest-related factor influencing property values. Because interest rates also affect capital flows, the supply and demand for capital and investors’ required rates of return on investment, interest rates drive property prices in a variety of ways. To understand how government-influenced interest rates, capital flows, and financing rates affect property values, you should have a basic understanding of the income approach to real estate values.

Although real estate values are influenced by the supply and demand for properties in a given locale and the replacement cost of developing new properties, the income approach is the most common valuation technique for investors. The income approach provided by appraisers of commercial properties and by underwriters and investors of real estate-backed investments is very similar to the discounted cash flow analysis conducted on equity and bond investments.

Interest rates can significantly affect the cost of financing and mortgage rates, which in turn affects property-level costs and thus influences values. However, supply and demand for capital and competing investments have the greatest impact on required rates of return (RROR) and investment values. As the Central Bank of America (Federal Reserve Board) has moved focus away from monetary policy and more toward managing interest rates as a way to stimulate the economy or stave off inflation, its policy has had a direct effect on the value of all investments.

As interbank exchange rates decrease, the cost of funds is reduced, and funds flow into the system; conversely, when rates rise, the availability of funds decreases. As for real estate, the changes in interbank lending rates either add or reduce the amount of capital available for investment. The amount of capital and the cost of capital affect demand but also supply – that is, the money available for real estate purchases and development. For example, when capital availability is tight, capital providers tend to lend less as a percentage of intrinsic value, or not as far up the “capital stack.” This means that loans are made at lower loan to value ratios, thus reducing leveraged cash flows and property values.

Credit: The Sun

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