THE IMPACT OF ECONOMIC INSTABILITY ON REAL ESTATE FINANCE IN NIGERIA

THE IMPACT OF ECONOMIC INSTABILITY ON REAL ESTATE FINANCE IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND TO THE STUDY

The stability of the financial system enables business firms and household to store value and transfer a financial asset without fear of loss. This contributes to economic growth and development in the real estate (Amoo et al., 2019; Patel, 2018). The rising economic instability in Nigeria is as a result of conflict and violence, weak institutions, slower growth rate, non-inclusive economic growth, widespread corruption and the global pandemic (COVID – 19) which have ravaged the world and crippled world economic, financial and health system (World Bank, 2019) have in a great deal affected real east finance in Nigeria and the world at large.

The current economic instability has been interpreted in many ways, chief of which is that it signals the end of capitalism or free market economic doctrine as exemplified by the American economic system. It is said to reincarnate the world economic depression of the 1930s which saw huge loss of wealth in both the money and capital markets around the capitalist world and led to actual and attempted suicide by many investors. Global economic instability describes the growing economic, political, technological, and cultural linkages that connect individuals, communities, businesses, governments and countries around the world and the negative impacts it carries with it as felt in the economies of different states and countries (Ajanlekoko, 2001).

The Nigerian economy faces the rippling effects of the economic instability or crises resulting to breakdown and decline in economic vigor. The effects find expression in downsizing, mass unemployment, and crashes in the money market and lack of finance for real estate finance and investment (Zubairu, 2001).  According to Ebie (2005), the Nigerian situation has been tagged feeble due to the negative effects the economic instability has had on the country. Every industry has had its fair share of the troubles and companies are licking their sores with resultant effects on the masses.

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. The benefits to be derived from a rise in estate financing in Nigeria are many and include; Increased rural and urban houses for the teaming Nigerian population, the construction of industrial estate for the localization of industries and commerce and an increase in employment for those in the construction industry.

The economic instability which affects 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.

Traditional means of financing 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 financing real estate are as follows; Equity Capital, Loan Capital, Mortgage Funding,  Debenture  and Contractor Financing (Omuojine, 1993).  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 all these sources a finance for real estate financing are negatively affected by economic instability in Nigeria. It is against this background that this study seek to  examine the impact of economic instability on real estate finance in Nigeria.

1.2       Statement of the Problems

Real estate practice has continued to express divergent views on the impact of the current economic instability in Nigeria on the nation’s real estate market. While some operators are complaining of low demand, over supply, falling prices and many unsold/unoccupied houses with no buyers or tenants, others see the economic instability in the property market as opportunities for brave investors with expectation of high returns when the country climbs out of instability. Most of the houses and estates in high-brow areas like Asokoro, Gwarinpa, Maitama, Wuse II, Utako, Katampe districts are unoccupied as a result of the high cost of renting or leasing. Houses and estates in Gaduwa, Apo, Dei-Dei, Gwarimpa, Lugbe, Kubwa, Gudu, Life Camp, are also in similar situation of no buyers or renters and lack of finance to develop new ones. But in spite of the glut in the real estate market, property values have stagnated and in most cases have increased tremendously in the low and medium income neighbourhoods in Abuja.

The problem of real estate finance 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 as a result of the current economic instability. 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 thus posing a great treat to real estate finance. This have given rise to the need to examine the effect of economic instability on real estate finance in Nigeria.

1.3       Aim and Objectives of the Study

The aim of the study is to examine the impact of economic instability on real estate finance in Nigeria with particular reference to Abuja.

Objectives:

The objectives are:

1. To assess the current state of economic situation in Nigeria
2. To assess the various sources of finance available for estate development.
3. To assess how private estate developers obtain mortgage facility from financial institutions.
4. To examine the factors militating against the availability of finance for real estate development in Nigeria
5. To seek ways of enhancing the present level of real estate finance

1.4       Research Questions

1. What is the current state of situation in Nigeria
2. What are the various sources of finance available for estate development?
3. How does private estate developers obtain mortgage facility from financial institutions.
4. What are the factors militating against the availability of real estate finance?
5. What are the ways of enhancing the present level of real estate finance

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 economic situation and proffer effectiveness and alternative strategy to mae available finance for real estate development

It is hoped that this study would help estate developers to appraise the impact of economic instability on real estate finance while investing in real estate development.   The research will be of great benefit to the local government, investors in the real estate sector such as property developers, end users and government parastatals on the situation of economic instability on real estate development in the study area. This would enable them to know the essence of instability in real estate practice.

Also, corporate bodies and developers can use the information derived herein to improve their resilient in the face of this current economic instability in Nigeria and its effect on real estate finance. Furthermore, this study is expected to give rise to further studies which will enhance knowledge in areas of the impact of economic instability on real estate finance in Nigeria.

1.6       Scope and Limitation of the Study

This is limited to the study of the impact of economic instability on real estate finance in Nigeria with focus on both the effect of economic instability on traditional method of financing and the modern method of financing real estate development.

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.

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.

Real Estate: Is “property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more generally) buildings or housing in general.

Recessed Economy: An economy is said to be recessed when it has faced a negative economic growth for two consecutive quarters

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.