ASSESSMENT OF THE SOURCE OF FINANCE FOR RESIDENTIAL PROPERTY DEVELOPMENT IN ABUJA

ASSESSMENT OF THE SOURCE OF FINANCE FOR RESIDENTIAL PROPERTY DEVELOPMENT IN ABUJA

ABSTRACT

Real estate investment has been observed to require huge initial capital outlay which can be obtained from various sources. It is often difficult to finance large scale investment in real estate solely from personal savings. Hence, the need for other sources of finance such as equity or self-financing, commercial banks, merchant banks, insurance companies, mortgage institutions among others. However, in the light of this study, particular attention was given to the assessment of the source of finance for residential property development in Abuja. . The development, prospects, challenges, successes and failures of these institutions form the background of the study. Questionnaires was used for data collection which was distributed to the research population using simple random techniques while data gathered through this means were analysis using tables, percentage and descriptive statistics.

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

Housing finance by its very nature is a capital intensive venture which if it is to be financed through personal financial resources will require slow and tedious accumulation of savings. However, since housing provides benefits over many years, long-term credit financing is a more logical option as it will spread the repayment burden. But this requires the availability of long-term funding, and for which must be institutional capacity, structure and mechanism that will allow a convenient and effective linkage between the savers/investors and the consumers of such funds.

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. Hines (1995) revealed that 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.

In Nigeria, housing is typically financed through a number of institutional sources: Budgetary appropriations, Commercial/Merchant Banks, Insurance Companies, State Housing Corporations and the Federal Mortgage Bank of Nigeria (FMBN): and now the newly established Mortgage Institutions all these constitute the formal institutions. Informal institutions such as thrift and credit societies, and money lenders who have contributed and are still contributing substantially to the finance of housing construction also persists.

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.

The first attempt towards addressing the problem of inadequate sources of mortgage finance was taken in 1928, with the establishment of Lagos Executive Development Board (L.E.D.B). The level of development then was affected by geographical limitation. The Nigerian Building Society (N.B.S) was established in 1956 by the colonial administration to provide mortgage finance assistance to Nigerians and it went into full operation in 1957. The impact on the society was minimal and it was later reconstituted. Its mortgage operations did not achieve much because of its limited financial resources and poor response to saving scheme. Colonial government built the Government Reserved Areas (G.R.A) for government functionaries. This failed to solve the general housing problem. In 1971, government extended credit facilities for housing by granting loans to building societies, housing corporations and various staff of the Housing Schemes.

Residential property development is an issue that only touches on the life of an individual, but also has the potential to contribute to national development (Agbola, 1998). In Nigeria, housing is a space within which a generation of families expresses its existence and preserves the history and identities of lineage. Families discover themselves according to their lifestyle and dictates of the cultural values of the society to which they belong. The family residential housing therefore is a symbol of social identity and community recognition.

The successful completion of any kind of development largely depends on the availability and affordability of the essential factors requisite for such property development (land, labour, building materials and finance). Finance being the most significant determines the availability and quality of other factors, as it is required to acquire land, reward labour and buy building materials. Thus, this study seeks to examine the availability of finance for the purpose of residential property development in Nasarawa town, having due regards to its affordability.

In 1973, the Federal Housing Scheme (F.H.S) Decree no. 40 was enacted, establishing the Federal Housing Authority (F.H.A) with the aim of achieving the target for housing delivery in the third national development plan. In 1977, the Nigerian Building Society was changed to Federal Mortgage Bank of Nigeria (FMBN) by decree No. 7 with paid up capital of N150 Million jointly owned by the Central Bank of Nigeria and the Federal Government of Nigeria. The mortgage institution decree No. 53 of 1989 formally elevated the FMBN to the status of apex mortgage bank for the country. It was this decree that gave it the authority and function of monitoring, controlling and regulating the activities of all Primary Mortgage Institutions throughout the country.

In view of the above explanations therefore, efforts shall be made in this project to conducts a comparative analysis of different source of finance for residential property development in Abuja.

1.2       Statement of the Problem

Over the years, the government had been the major player in the area of housing delivery in Nigeria, by providing direct finance for previous housing schemes. This was embedded in the housing policy of past administrations but today, the dwindling nature of revenue accruing to the government, coupled with gross mismanagement and misappropriation of public funds and revenue has prohibited the ability of the government to continue to play her role as before (Nubi, 2000). The problem of housing has become an everyday discussion in all quarters of the public and private services of the developing countries of Africa. It has become increasingly glaring that most of the urban population live in dehumanizing housing environment while those that have access to average housing do so at abnormal cost. According to Onibokun (1986), Nubi (1991), rent in major cities of Nigeria is about 60% of an average workers disposable income. According to Abiodun (1999), National Housing Fund collected about billion naira from the Mandatory Saving Scheme. Out of N300 million loan approved by FMBN, only N100million was advanced. The problem in this case is not availability of fund but stringent measures to prevent default. Hence, the housing problems persist.

1.3       Aim and Objectives of the Study

The aim of the study is to assess the source of finance for residential property development in Abuja.

Objectives:

The objectives are:

1. To assess the various sources of finance available for estate development.
2. To assess how private estate developers obtain mortgage facility from financial institutions.
3. To examine the factors militating against the availability of funds for housing development.
4. To seek ways of enhancing the present level of housing financing for residential property development

1.4       Research Questions

1. What is the concept of source housing finance?
2. What are the various sources of finance available for estate development?
3. To what extent does residential property developer obtain mortgage facility from financial institutions?
4. Examine the factors militating against the availability of funds for residential property development?
5. What are the possible ways of enhancing the present level of housing financing for residential property development in Abuja?

1.5       Significance of the Study

A study of this nature will be beneficial to a wide range of stakeholders in Nigeria. Recommendations made in this study will enable the government take a serious look at the current Housing policy in Nigerian, its effectiveness, alternative strategy and alternative sources and the need for re-engineering.

Also, corporate bodies and developers can use the information derived herein to further their work on source of finance for residential property development. Furthermore, this study is expected to give rise to further studies which will enhance knowledge in areas of the sources of finance for residential property development.

1.6       Scope and Limitation of the Study

This is limited to the study of the source of finance for residential property development in Abuja with focus on both the traditional method of financing and the modern method of financing residential property development in Nigeria.

This research focuses on the source of available finance for residential property development in Nigeria and the need for re-engineering. It does not consider operations of finance nor does it consider management of such fund.

Lastly, this work studies and suggested approaches for improving housing finance in Nigeria.

Limitation

In the course of carrying out this research work, several challenges were encountered. Some of these challenges are:

1. Administering and gathering of questionnaires in real estate development firms was not an easy feat.
   1. The entire project was very capital intensive, gathering information on sources of project financing.
   1. Organizations are not ready and willing to review the source or sources of their project financing.

1.7       Operational Definition of Terms

Finance: According toInvestopadia online dictionary Finance is the science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities.

PUBLIC ESTATE: Are land and building owned and directly managed by public authorities and those rights of control which public authorities exercise over the estate of the private owners.

ESTATE: Udechukwu (2006) defined estate as “A legal entity denoting the character and quality of right that an individual or individuals possessed on a property.

HOUSING ESTATE: In the word of Essien G.A (2012) in his Lecture Note “An Approach to Property Development II (Vol. 3)”. “Is an area of land on which many houses are built either by private enterprise or by a public authority”.

DEVELOPMENT: Is the process of generating latent values in land or creating benefits there from by incurring on it costs in the form of labour, capital or management skill (Umeh, 1983).

PUBLIC DEVELOPER: Nathaniel (1979) cited that public developer deal directly  with government involvement in the provision of housing, public properties (Estate) are therefore owned, controlled and managed by Federal, State, Local Government and other public bodies which are set up and functioned under state and their aims is usually based on political, social and economic ground.

1.8       Historical Background Of The Study Area

The name “Abuja” was derived from Abu Ja, a brother to Muhammadu Makau, the last Hausa ruler of Zaria. Makau had left Zaria after being defeated by the Fulani and settled in the area now known as Abuja. In 1825 his brother Abu Ja succeeded him as the 62^nd King of Zaria.

The full name of Abu Ja was Abubakar (shortened to “Abu”) and the name Ja was given to him because he was light in complexion (in Hausa “Ja” means red or fair). He became known as “Abu Ja”, “Abu the fair one” (other sources claim that the name “Ja” was derived from the last name of his father which was “Jatau”). Abu Ja then built a new capital for his Kingdom and called it “Abuja.”

Abuja was mainly built in the 1980s and it officially became Nigeria’s capital on December 12, 1991, replacing Lagos. The Abuja Federal Capital Territory, while smaller than other states within Nigeria, is two and half times the size of Lagos city, the former capital. This territory was formed with the express purpose of supporting Abuja city, encircling it within a womb of nature. Abuja has an Area size of 713km²

The site for the new capital was chosen because of its central location (viewed as neutral both ethnically and religiously, where culture and religion meet), easy accessibility, pleasant climate, low population density, and the availability of land for future expansion.

Not only was a city designed, but an entire environment. Part of the provisions of the Master Plan is the development of adequate recreational and Green areas within the city. Abuja is surrounded by abundant hills, highlands, savanna grassland, and tropical rain forests.

The master plan of Abuja ad the Federal Capital Territory (FCT) was developed by international planning associates (IPA), a consortium made up of three American firms: Planning Research Corporation; Wallace, Roberts and Todd; and Archisystems, a division of the Hughes Organization.

The master plan included a regional site selection ad master plan for the new and detailed design of the Central Area, which accommodates the national government center, cultural institutions, and the Central Business districts.

Outside The central Area, residential mini-cities with populations of 150,000 to 250,000 are organized around local business and the employment centres.

More detailed design of the central areas of the capital, particularly it monumental core, was accomplished by Kenzo Tange, a renowned Japanese architect, along with his team of city planners at Kenzo Tange and Urtec Company.

Places of Interest in Abuja

Abuja National Mosque: The national mosque of the country declared a national monument belonging to all Nigerians. Its outstanding golden dome and minarets dominate Abuja’s skyline.

National Christian Centre: The symbol of unity of Christendom in Nigeria. The centre’s magnificent edifice was designed by an Italian firm.

Millennium Park: Abuja’s most popular and largest green area is the Millennium Park. Designed by world renowned architect Manfredi Nicoletti, it was officially inaugurated by Queen Elizabeth II in 2003.

National Stadium: Built in 2003 and this ultra-modern complex has a seated capacity of 60,000. It is used by the Nigerian National Football Team.

The problems associated with the capital being in Lagos, such as population pressures, political and ethnic divisions, led to the search for a new capital in 1976. Abuja was selected from among 33 possible sites. Physically located in the centre of the country and viewed as neutral both ethnically and religiously, it is where culture and religion meet.

The criteria used for selection included: centrality, healthy, climate, land availability and use, water supply, multi-access possibilities, security, existence of resources, drainage, good soil, physical planning convenience and ethic accord.

The Emir of Abuja at the time, Alhaji Suleiman Barau, was asked to meet with his Emirate Council to approve contributing four of the five districts to Abuja to become the new capital. The council was divided as some districts considered it too much of a sacrifice; but at the end, they approved the request from the Federal Government.

Thus, the Abuja in Niger State contributed 80% of the land of the territory, Plateau State (now Nassarawa State) contributed 16% of the South east territory and Kwara State (Now Kogi State) contributed about 4% of the south-west territory.

Abuja Districts

According to the 1979 master plan, Abuja’s territory has to be developed in four phases on an area of about 250 square kilometres, and each phase has to be further sub-divided into districts.

The phase 1 development has almost been completed and includes the Central Business District (the three Arms Zone Presidency, National Assembly and Supreme Court), the Maitama, Wuse, Garki and Asokoro, residential and business districts.

There are also 5 districts in Phase 2, and some of them have works at various stages of completion. They are Kado, Durumi, Gudu, Utako (which infrastructural facilities have been completed) and Jabi. Phase 3 districts are Mabuchi, Katampe, Wuye and Gwarimpa. There are also 5 suburban districts, which are Nyanya, Karu, Gwagwalada, Kubwa, and Jikwoyi. Along the Airport Road there are clusters of satellite settlements, namely Lugbe, Chika, Kuchigworo and Pyakassa.

Other satellite settlements are Idu (the main industrial zone), Mpape, Karimu, Gwagwa, Dei-Dei (hosting the international Livestock market and also International Building materials market).

Construction service companies and enterprises continues at a fast pace in Abuja and new places open weekly, Phase 2, currently under development, involves the integration of the surrounding Katampe, Mabushi, Utako, Wuye, Durumi, Gudu, Jabbi, Duste and Gaduwa areas into the city. Phase 3 and 4 are also under development, however, there are works at various stages of implementation in Karmo, and Idu districts (Phase 3), and the Gwarimpa Districts, where many of the construction companies “Life Camps” are located, has already been developed.