Rental growth of commercial property in Nigeria.

According to Wiki, the term commercial property (also called commercial real estate, investment or income property) refers to buildings or land intended to generate a profit, either from capital or rental income.

Rental value is a key parameter for measuring real property performance. It is also a major cost for tenants and an important source of income for the landlord. Key property market participants such as investors and developers often use rental value as an indicator to appraise the viability of their real estate development and investment schemes.

On this basis, understanding the nature and basic features of rental movements provides a better comprehension of the dynamics of the commercial property market. Also, rental growth indices are often incorporated into discounted cash flow analysis for the appraisal of real property investments.

Thus, professionals in the real estate industry in Nigeria require better knowledge of commercial property rental dynamics as well as the key determinants that influence commercial property rents in the country.

However, the property market is one of the major segments 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.

Also, the commercial property market is defined by some fundamental concepts. These concepts provide the basis for the determination of commercial property rental values. Contributors 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.

Thus, 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 varies in the context of national, regional and local commercial property markets.

Real estate market performance in one geographic area is different from market performance in another area. Thus, local market analysis is required to accurately assess real estate investment performance, including rental trend analysis.

Read also: Neighbourhood Effects of Industrial Land Use on Property Value

Also, office market rents change in response to changes in economic conditions at the local, regional and national levels and are strongly affected in both the Central Business Districts (CBD) and the suburbs by vacancy rates.

It is believed that constructing real estate indices, including rental growth indices according to property type may be valid since each city has a unique economic base.

Office rents, vacancy rates, asset prices, user costs and reproduction cost all have economic relation.

The linkages between the rental market (tenants) and the asset market (investors) are through opportunity cost (user cost) of competing investments and replacement cost of real property.

It is inappropriate to assume a single structure for demand and supply relationships in all commercial property markets. Therefore, real estate cycles are clearly not uniform across markets.

Thus, there is need to identify leading rental growth indicators which are representative of the Nigerian economy and the commercial property markets in the country.

Real property is an important component of the wealth of nations. Real property also constitutes nearly one-half of the wealth in the world, and thus, in terms of value, represents the most significant investment class. Real property comprises 49% or $21.41 trillion of the world’s wealth ($44 trillion) whereas stocks and bonds comprise 25.5% and 18.8% respectively.

Real property has a number of characteristics which make it different from other investment assets including fixed location, heterogeneity, high unit value, illiquidity and the use of valuations to measure performance. Commercial property investments constitute a substantial proportion of real property investments worldwide.

The character and quality of commercial property also has an important influence on the technological and organizational flexibility of the work environment which in turn has a substantial impact on efficiency in many service sector industries.

The Nigerian economy is a developing economy and so is its property market. The Nigerian commercial property market in particular has remained relatively under-researched in the past five decades due to the absence of reliable and standard property market database. Most of the property market studies in Nigeria within this period have been focused on the residential property market with little empirical relevance to the commercial property market in the country.

In 1992, the Nigerian Institution of Estate Surveyors and Valuers (NIESV) sponsored a research on the valuation methods in Nigeria with special reference to the years purchase. This study also analysed yields on major classes of real properties in the country, including commercial properties with Lagos, Abuja and Abeokuta taking the first three spots.

On the average, commercial property yields in Nigeria are comparable to that obtainable elsewhere in the world. Generally, commercial property investments are associated with low yields globally. These low yields have been found to imply rental growth.

This rental growth expectation substantiates one of the important characteristics of commercial property investments which is income (rental) and capital growth.

Rental growth itself has been a major expectation of property investors from 1960 onwards after the appearance of the reverse-yield gap, due to the advent of inflation into the property markets woridwide.

The focus on commercial properties may be growing steadily but it may never get the same attention residential properties get when it comes to rental growth.

Read also: The Practice of Property Management