ASSESSMENT OF THE IMPACT OF VACANCY AND OCCUPANCY RATE ON RESIDENTIAL PROPERTY INVESTMENT MARKET

ASSESSMENT OF THE IMPACT OF VACANCY AND OCCUPANCY RATE ON RESIDENTIAL PROPERTY INVESTMENT MARKET

CHAPTER ONE

1. Introduction

1.1       Background of the Study

A vacancy rate serves as an important indicator of the health of a real estate market. But we cannot draw sound inferences about a market just by observing the rate alone because many factors contribute to a vacancy rate. The same rate may tell different stories, and different rates may tell the same story. The vacancy rate is the percentage of all available units in a rental property, such as a hotel or apartment complex, that are vacant or unoccupied at a particular time. It is the opposite of the occupancy rate, which is the percentage of units in a rental property that are occupied. High vacancy rates indicate that a property is not renting well while low vacancy rates can point to strong rental sales.

The vacancy rate is calculated by taking the number of vacant units, multiplying that number by 100, and dividing that result by the total number of units. The vacancy rate and occupancy rate should add up to 100%.In real estate, the vacancy rate most often represents units that are vacant and ready to be rented, units that have been turned off upon the exit of a tenant, and units that are not currently rentable because they are in need of repairs or renovations. A property owner can use vacancy rates as a metric for analysis. Changes in the percentage of vacant units versus occupied units, the length of time occupied units are remaining active, or other rental conditions can provide guidance regarding how competitive a property owner has made the property. If a property owner is charging significantly more or less than the rest of the rental market, this may be reflected in the overall vacancy rates. It can also provide information regarding the effects of price changes or advertising on unit occupancy.

While vacancy rates are commonly used to assess an individual property’s performance, such as a hotel monitoring its nightly vacancy rate, aggregate vacancy rates are also used as economic indicators of a real estate market’s overall health. Many firms servicing the residential and commercial real estate space gauge the strength of the overall industry using metrics such as vacancy rates, rental rates and construction activity. According to the natural rate hypothesis, fluctuations in apartment rents are driven by deviations in the vacancy rate from equilibrium or “natural” levels. One reason to estimate natural vacancy rates is to confirm this hypothesis. Beyond that, however, estimates of the natural vacancy rate for a rental housing market provide information that is potentially useful for investors, lenders and other real estate professionals. Comparing the natural rate at a point in time to the actual vacancy rate provides some indication of future rent movements in that market. In addition to its effect on the movement of rents, the level of the vacancy rate has direct implications for the return on property investment. In long-run equilibrium, the lower the natural vacancy rate, the greater the amount of rent generated by a given rental property, everything else held constant. If the natural vacancy rate declines over time, the return on rental property investment will rise, ceterisparibus.

Housing markets are often modeled as a series of separate but related submarkets, with differing supply and demand conditions in each. In the case of a rental market, there may be separate submarkets for different apartment types (one-bedroom, two-bedroom, etc.), and for different geographic locations. If submarkets exist, it is possible that natural vacancy rates will vary by submarket. In that case, information on natural vacancy rates is made more useful if available at the submarket level.

Empirical support for the existence of a natural vacancy rate in rental housing dates back to Smith (1974). Since then, a number of studies have focused on variations in the natural rate across both space and time. For example, Gabriel and Nothaft (1988) provide evidence of substantial variation across major U.S. metropolitan areas. In a more recent paper, Gabriel and Nothaft (2001) find the duration and incidence of vacancies, and the natural vacancy rate, to vary across metropolitan areas with a number of factors including housing costs, heterogeneity of the housing stock, tenant mobility, and population growth. In an effort to decongest the population of Gwagwalada mini campus of the University of Abuja to enhance a conducive learning environment for its students, the university had relocated to its permanent site located at Ido Sariki, along airport road this have adversely affected the vacancy and occupancy rate in Gwagwalada while house rent in settlements around the permanent site of the university of Abuja has skyrocketed following the relocation of some departments of the university to that site. This has necessitated the need to carry out an assessment of the impact of vacancy and occupancy rate on residential property investment in the area.

1.2       Statement of the Problem

The rental vacancy rate is the fraction of rental properties not rented at a point in time. This captures pressures in the residential property investment market. It matters for understanding the balance between supply and demand, future pressures on rental prices and the typical duration of vacancy for a landlord’s budgeting purposes. The relationship between the vacancy rate and the housing production rate is expected to be negative as well. If the vacancy rate is high, the supply of residential property will be higher than the demand for residential property, which means that the property prices are stable or decreasing. Consequently, developers won’t have much stimulus to engage in residential property development and the housing production rate will be relatively low. This study seeks to assess the impact of vacancies and occupancy rate on residential property investment market in Gwagwalada, FCT Abuja.

1.3       Aim and Objectives of the Study

The aim of this project is assess the impact of vacancies and occupancy rates on residential property investment market in Gwagwalada FCT Abuja.

The specific objectives of this are as follows:

1. To ascertain the extent of vacancies rate of residential property in Gwagwalada
2. To evaluate the causes of vacancies of residential properties in the study area
3. To assess the impact of vacancies and occupancy rates on residential property investment market in the study area.

1.4       Research Questions

            The following research questions will serve as a guide to the researcher:

1. To what extent are vacancies rates of residential properties in Gwagwalada?
2. What are the causes of vacancy of properties in the study area
3. What are the impact of vacancies and occupancy rates to residential property investment market in the study area?

1.5       Significance of the Study

The findings of this research “Assessment of the impact of vacancy and occupancy rate on residential property investment market” will serve as a guide for investors to be able to make reliable investment decision that will ensure high return on investment.

The result of this study will serve as a guide to other researchers who are interested in further research into the impact of vacancy and occupancy rate on residential property investment market in Gwagwalada and Nigeria at large.

1.6       Scope and Limitation of the Study

The scope of this study covers only the assessment of the impact of vacancy and occupancy rate on residential property investment market in Gwagwalada, FCT Abuja. This further limited to old Kutunkun, Compensation layout.

Limitations

Some factors militated against the success of this work, though the researcher endeavoured to accommodate them. Thus, some of the constraints inherent in the course of carrying out the research include, among others, the peculiar nature of real property market. It is not like commercial markets where one can easily come face to face with both the buyers and sellers to get information he wants. In real property market, information is not easily circulated among Estate Surveyors. Vital information required by the researcher from some respondent Estate Surveyors were not collected due to pressure of work and other commitments facing them during the time the researcher required those information. The researcher also faces other challenges such as finance, time and the un-corporative nature of some respondents.

1.7       Operational Definition of Terms

Vacancy: Dictionary.com define vacancy as the state or condition of being vacant or unoccupied; emptiness.

Occupancy Rate: A measurement expressed as a percentage of the total amount of occupied space divided by the total amount of existing inventory. Occupied space is defined as space that is physically occupied by a tenant. It does not include leased space that is not currently occupied by a tenant.

Vacant Space: Vacant space is defined as space that is not currently occupied by a tenant, regardless of any lease obligation that may be on the space. Vacant space could be space that is either available or not available.

Percent Leased Rate: A measurement expressed as a percentage of the total amount of leased space divided by the total amount of existing inventory. Leased space is defined as space that has a financial lease obligation. It includes all leased space, regardless of whether the space is currently occupied by a tenant. Leased space also includes space being offered for sublease.

Investment: An investment is an asset or item that is purchased with the hope that it will generate income or will appreciate in the future.

Real Estate: Real estate is the property, land, buildings, air rights above the land and underground rights below the land. The term real estate means real, or physical, property.

Property: In common law, real property (immovable property) is the combination of interests in land and improvements thereto, and personal property is interest in movable property. Real property rights are rights relating to the land.

Investor: An investor is a person that allocates capital with the expectation of a future financial return. Types of investments include: equity, debt securities, real estate, currency, commodity, token, derivatives such as put and call options, futures, forwards, etc.

Availability Rate: A measurement expressed as a percentage of the total amount of available space divided by the total amount of existing inventory. Available space is defined as the total amount of space that is currently being marketed as available for lease in a given time period. It includes any space that is available, regardless of whether the space is vacant, occupied, available for sublease, or available at a future date, although it excludes space available in proposed buildings.

1.8       The Study Area

Before the creation of Federal Capital Territory, Gwagwalada was under the Kwali District of the former Abuja emirate now Suleja emirate. Gwagwalada Area Council was created on 15 October 1984. Its official population figure of 158,618 people at the 2006 census. The relocation of the seat of government from Lagos to Abuja in 1992 and the recent demolition of illegal structures within the Federal City Center brought a massive influx of people into the Area Council being one of the fastest growing urban centers in the FCT. The population of the Area Council has grown to over 1,000,000 people. Gwagwalada Area council is one of the five Local Government Area Councils of the Federal Capital Territory of Nigeria, together with Abaji, Kuje ,Bwari , and Kwali ; the FCT also includes the City of Abuja .Gwagwalada has an area of 1069.589 km 2.