THE IMPACT OF DEPRESSED ECONOMY ON REAL ESTATE FINANCE

THE IMPACT OF DEPRESSED ECONOMY ON REAL ESTATE FINANCE

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Global trends have had an impact on the processes and outcomes of business fortunes even in developing countries; and have caused industrial relation actors to think differently about their goals. The current global economic crisis 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. It was a crisis that arose from the failure of the market to correct itself. Global economic depression 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).

Real Estate 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 real estate 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, real estate 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 real estate finance are substantially affected during a depressed economy.

The Nigerian economy faces the rippling effects of the depressed economy resulting to breakdown and decline in economic vigor. The effects find expression in downsizing, mass unemployment, and crashes in the money market. There is need to understand the dynamics of the present economic depression with careful study and examination of the issues involved and how it affects real estate finance in Nigeria(Zubairu, 2001). The Nigerian economy has continued to witness renewed and sustained recession, characterized by galloping inflation, unemployment and declining businesses. The general business cycle of depressed economy affects human resource management. Such factors as interest rates, inflation, and economic growth help determine the availability of fund for real estate investment (Mailafia, 2005).

According to Ebie (2005), the Nigerian situation has been tagged feeble due to the negative effects the global economic meltdown and depression has had on real estate finance. Every industry has had its fair share of the troubles and companies are licking their sores with resultant effects on the masses. Therefore, the thrust of this study investigates the impact of depressed economy on real estate finance in Nigeria.

1.2       Statement of the Problem

Real estate practice has continued to express divergent views on the impact of the current depressed economy in Nigeria on the nation’s real estate finance. 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 crash in the property market as opportunities for brave investors with expectation of high returns when the country climbs out of recession. Most of the real estates in high-brow areas like Asokoro, Gwarinpa, Maitama, Wuse II, Utako, Katampe districts are undeveloped or 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. 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. Therefore this research seek to examine the impact of depressed economy on real estate finance.

1.3       Aim and Objectives of the Study

The aim of this project is to examine the impact of the depressed economy on real estate finance in Abuja with particular interest in Garki.

The following specific objectives are pursued:

1. To identify the causes of depressed economy
2. To assess the sources of real estate finance
3. The determine the development and management of real estate during a depressed economy
4. To determine the average rental value of properties during the recessed period within the study area.
5. To evaluate the impact  of depressed economy on real estate finance.

1.4       Research Questions

1. What are the causes of depressed economy?
2. What are the sources of real estate finance?
3. Are there development and management of real estate during a depressed economy?
4. What is the average rental value of properties during the recessed period within the study area?
5. What are the impact  of depressed economy on real estate finance?

1.5       Significance of the Study

The following are the significance of this study:

Findings from this study will be a useful guide to the policy makers and the government of the day on how real estate sector can contribute to the nations development and how the housing policies can be implemented effectively to boost economic growth.

It is hoped that this study would help estate developers to appraise the significance of depressed economy 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 recession on real estate finance in the study area. This would enable them to know the essence of recession in real estate practice.

This research will also serve as a resource base to other scholars and researchers interested in carrying out further research in this field subsequently, if applied will go to an extent to provide new explanation to the topic.

1.6       Scope and Limitations of the Study

The scope of this study on the impact of depressed economy  on real estate finance in Abuja will cover the structure and activities of real estate in Nigeria and its contribution to the nation’s economy.

Limitation of the Study

Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.7       Definition of Terms

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.

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

Management: the process of dealing with (planning, organizing/directing and controlling/supervising) things or people towards achieving set objectives.

Property: A thing or things owned or possessed by someone. For the purpose of this paper, however, property shall mean the rights one holds in the ownership (as by a landlord) or possession (as by a tenant) of any land or landed property.

Property Management: Is an act of intermediation between owners and occupiers on issues affecting the parties arising from ownership and occupation of buildings.

1.8       Historical Background of the Study Area

The Federal Capital Territory Abuja as create in 1976 by decree No. 6 of (197) which also established the Federal Capital Developments Authority (FCDA) as the Federal Government Agency responsible for the design contraction, and administration of the territory. The decree vested ownership and control of land in the three territories in the federal government of Nigeria.

            Location

The territory which is located at the center of country cover an case of 8,000 square kilometric is therefore more than twice the land area of Lagos State (3,535/km) and about two third of that Imo state (31,032/KM) because of its central location the major cities to Abuja is easily accessible form all part of Nigeria.

The Federal Capital City itself which is located in the eastern fringe of the territory designated to cover an area of the territory and at full development the city is expect to have a total population of 3.2 million.

This means that 7344 square kilometer (97%) of the land are of the territory constitute the city regional component to be utilized for other service such as the development of agriculture to supply the population of the city and the development of satellite town to absorb the excess population of the city.