THE IMPACT OF THE COST OF CONSTRUCTION MATERIALS ON REAL ESTATE VALUES

THE IMPACT OF THE COST OF CONSTRUCTION MATERIALS ON REAL ESTATE VALUES

ABSTRACT

This study examines the impact of the cost of construction materials on real estate value with particular reference to commercial properties in Makurdi. In attempt to achieve this aim, the researcher identify the impact of the cost of construction materials on real estate value, evaluate factors affecting cost of construction materials in the study area, identify the causes and effects of high cost of construction on real estate values and proffer solutions on how to minimize cost of construction materials in the study area.  The research adopted the survey design which offers the opportunity to gather information through the use of questionnaires, personal interview and observation. A structured questionnaire was administered to the respondents which comprise the tenants/landlords of Tonimas and Eje Plaza. Data were presented and analysed using simple statistical tools. The study revealed that the there is a steady increase in the cost of construction materials and that this increasing cost have a significant effects on real estate value. The research also shows that majority of the construction carried out used a combination of locally and foreign sourced building materials while others construction work sole depends on foreign sourced or imported building materials which mostly result in higher construction cost. The study recommends that the government policy on production of building material should be enhance to ensure that building material are readily available for use. Research and development into local building materials should be encouraged by the government, fund should be provided for such research in the fiscal budget.

CHAPTER ONE

1.0       INTRODUCTION

1.1       BACKGROUND OF THE STUDY

The first stage of the construction project cycle is the understanding of what the scope and requirement is and how it can be satisfied. This includes deciding on the size, materials, quality of facility required, and project management technique with high profile and certified professionals (contractors) experience skilled and unskilled labour. The cost benefit analysis is the prerequisite for all development projects.

Globally, the construction sector is inundated with high cost in the delivery of building projects. This experience has brought about loss of clients’ confidence in consultants, added investment risks, lack of ability to deliver value to clients, and disinvestment in the construction industry (Mbachu and Nkado, 2004). It is of essence that the objectives of a building contract are met to the contentment of the parties involved. Cost, time and quality are significant, interrelated and interdependent targets for achieving the objectives/goals expected of project construction (Ashworth, 1999, Gould, 2002). Thus, it is crucial to keep up a proper balance between the three so that project outputs are realised on time, within the financial plan and with the requisite quality (Akinsola and Potts, 1998). However, it is an admitted fact that in Nigeria, the majority of construction suffer undue time extensions and /or additional cost to the client and /or inadequate quality of work (Oluwole, 2008b).

High cost of construction can be either avoidable or unavoidable. High construction cost due to design plan or project management problems are avoidable because they could have reasonably been foreseen and prevented (Shanmugam et al., 2006). However, there are some unavoidable costs such as those due to unanticipated events which cannot reasonably be prevented. Construction cost may add value to projects when extra work is done with the intention of producing a better output. High cost may also add value when they involve work that was omitted from design plans but clearly needed to be done. However, some high cost may not add value and represent wasted money if they do not result in a better product.

Construction cost of a project refers to the actual ‘actual cost incurred’ to the client during construction of a building project (Janaka, 1992). Higher construction is the difference between the value originally envisaged for the project and the value reflected in the final certificate. Higher cost occurs from overspending the allowances, making changes and encountering unforeseen problems. Proper planning can greatly reduce cost overruns.

The growing need for construction of all types coupled with a tight monetary supply has provided the construction industry with a big challenge to cut cost.

According to Mendelson and Greenfield (1996) the remaining part of the twentieth century would involve corporations, institutions and government in a race to survive. The attendant dwindling economic fortune of nations economies around the World have geared up the participant in these sectors (the client in particular) to take up the challenge of ensuring efficient use of their resources to obtain value for money in terms of performance.

The total cost of construction in normal circumstances is expected to be the sum of the following cost: Materials, Labour, Site Overheads, Equipment/Plant, Head office Cost and Profit but in many parts of the world particularly in Nigeria, there are other costs to be allowed for.

The construction cost of a building project is always a primary concern for the vast majority of construction clients/owners. Cost is said to have a direct relationship with quality which can also be expressed by a popular saying ‘you get what you pay for.’ There’s also a popular quote by John Ruskin that says ‘it is unwise to pay too much, but it is worse to pay too little’. Regardless of Ruskin’s advice, cost is a critical factor in most building projects as some owners will always seek a low price. Low price and maximum price competition, however, often have negative impacts on quality standards and achieving best value for money overall.

Managing building costs is a challenging task for a design team, as well as for construction managers, contractors and consultants. Owners would often demand that their design and construction teams respect their financial and economic objectives and that they control costs during project delivery. This expectation is found in both the public and the private sectors in all client industries, locations, and financial situations. Owners expect that a budget prepared early in a project would be accurate and that the project will be completed to the required scope, quality and performance within that budget. The research will appraise the impact of construction cost on quality value of commercial properties in Makurdi.

1.2       STATEMENT OF THE PROBLEM

The demand for more construction of all types, coupled with a tight monetary supply has provided the construction industry with a big challenge to cut costs. The problem of high contract costs of all aspects of construction is becoming obvious. Consequently, substantial increases are being observed in projects. This substantial increase has brought about loss of client confidence in consultants, added investment risks, inability to deliver value to clients, and disinvestment in the construction industry, the aforementioned scenario necessitate this research to examine the impact of the cost of construction materials on real estate value.

1.3       AIM AND OBJECTIVES OF THE STUDY

The aim of the study is to find out the impact of the cost of construction materials on real estate value.

The objectives of the study are as follows:

1. To identify the impact of the cost of construction materials on real estate value  
2. To evaluate factors affecting cost of construction materials in the study area.
3. To identify the causes and effects of high cost of construction on real estate values
4. To proffer solutions on how to minimize cost of construction materials in the study area. 

1.4       RESEARCH QUESTIONS

The following research questions shall guide the researcher towards achieving the aim and objective of the study:

• What are the impact of the cost of construction materials on real estate value?  
• What are the factors affecting cost of construction materials in the study area?
• What are the causes and effects of high cost of construction on real estate values?
• What are the solutions on how to minimize cost of construction materials in the study area. 

1.5       SIGNIFICANCE OF THE STUDY

The result of the this research “impact of the cost of construction material on real estate value” would enable Clients, Contractors, Consultants and Estate Valuers  give an economic approach to construction work such that they would be able to identify the dominating factors leading to high construction cost in Nigeria.

The application of the solutions proffered to minimizing construction cost would restore client’s confidence in consultants, reduce investment risks, and generally boost the viability and sustainability of commercial property in real estate market in Makurdi and Nigeria at large.

The research contributes to the wealth of knowledge thus, will serve as a research material for researcher / students who are interested in study the impact of rising cost of construction on quality and value of commercial property. 

1.6       SCOPE AND LIMITATIONS

The scope of this research is limited to identification of the impact of cost of construction materials on quality and rental value of commercial properties in Nigeria with a particular interest in Makurdi town. The study is limited to commercial properties in the Makurdi town because there is easy access of information in Makurdi by the researcher.

LIMITATIONS

A study of this nature cannot be done without some problems and as such it was considered by many factors namely time, finance and data.

• Time factor was the major constrain couple with multiplicity of other classroom work and lecture requirement were a set back to the research.
• Un-cooperating attitude of some respondents as they were busy to attend to the researcher.
• In accessibility of adequate information from research respondent due to illiteracy among them, some find it difficult to understand some question they were asked.
• Finance was also a limiting factor in the course of the research.

1.7       DEFINITION OF TERMS

Cost: Oxford Advance Learner’s Dictionary (6th edition) define it as the amount of money that you need in order to buy, make or do something.

Building: Business dictionary define building as the permanent or temporary structure enclosed within the exterior walls and roof.

Materials: English oxford dictionaries define materials as the  substance of which a thing is composed or made.

Building Materials: this is any material which is used for construction purposes.

Property: a thing or things belonging to someone; possessions collectively.

Development: this is a process of developing or being developed.

Property Development (The Collins English Dictionary,2014): the business of buying land and buildings and then making improvements to them so that their selling price exceeds the price paid for them.  

Commercial Property: 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 gain or rental income.

1.8       HISTORICAL BACKGROUND OF THE STUDY AREA

Makurdi is the capital of the state Benue in Nigeria. The city is located in central Nigeria along the Benue River and holds the base for the Nigerian Air Force’s MiG 21 and SEPECAT Jaguar aircraft squadrons. As of 2007, Makurdi had an estimated population of 500,797. The major ethnic groups are the Tiv, Idoma and Igede. Makurdi is home to Benue State University and the Federal University of Agriculture.

Makurdi is located on the banks of Benue River, a major tributary of the Niger River. It is also located on the main narrow gauge railway line running north from Port Harcourt, although this is not currently working. There are regular bus services linking Makurdi to neighbouring towns.

Makurdi is the Capital of Benue State, it was established in the 20^th century, and its total population was recorded to be 300,377 in 2006.  Starting from 1927, Makurdi started gaining popularity however, in 1976; the town became the capital of Benue State even until now. Makurdi is essentially an administrative centre with very limited industrialization occurring in it. River Benue divides the town into north bank and south bank. Two bridges further connect both the north and south banks to each other: the railway bridge which was constructed in 1932, and the new dual carriage bridge was constructed in 1978. Makurdi is a colonial town Just like Jos City, it was developed during the colonial period; initially, the capital of Benue province was not Makurdi, it was somewhere toward Gboko.  According to Daniel Otega, (A rural geography coordinator on the History of Makurdi )“ A rich migrant once settled very close to the river Benue Bank, he was surrounded by local villagers who did not have  knowledge about monetary value. This man was the only person who had access to money at that time and he was very rich, for the reason, the villagers usually come to him to collect money and then exchange it with other goods. Since then, they started calling him “mme- kurdi” which later became the name of the town “Ma-kurdi”, pronounced as Makurdi until today.

Location

Markurdi is located on the south bank of River Benue, where the railway line running from Port Harcourt stretches to the present government house, which was formally a residence for majority of engineers working there. The geographical coordinates of Markurdi town are 7⁰ 44¹ 0”N, 8⁰ 32¹ 0”E.

Transportation

Roads, railway, water and air are the common means of transportation routes that connect to Makurdi town with other towns and states; the major north route is the straight road that links Makurdi, Lafia and Jos Plateau road. The south routes are linked by Makurdi, Otukpo, Enugu, Yandev, Adikpo and Calabar roads. This Makurdi Rail Bridge provides the only rail link between the northern and eastern parts of Nigeria; though the railway is not currently working, it used to serve as a port from which goods, including locally grown sesame seeds and cotton were transported to Lagos State and to the Niger River delta ports.

Makurdi Airport has the Nigerian Airways and other private airlines provide air links between Makurdi and the rest of the country. The beautiful beaches of River Benue can be exploited to provide good sites for relaxation. The river itself provides tourist opportunities for fishing, boating swimming and scientific research. The Makurdi Moratorium that houses a variety of animals including some rare species also serves as another feature of tourist attraction.

Urban growth

In 1984, an industrial estate was built to provide urbanization with facilities and road networks; there was an establishment of coca cola deport and Benue State breweries along Gboko road. In 982 Agro mining food processing unit owned by a private individual for mining of rice was also created in Markurdi hence, there are printing press, small-scale industries, beautiful science, high commercial activities, hotels, banks, hospitals and recreational centres all over Makurdi town. Some institutions also exist such as Benue State University, Fidei polytechnic, Federal University of Agriculture, University of Mkar, and Benue State Polytechnic etc.

Makurdi is the biggest urban centre in Benue State, the present Makurdi has grown up to 348,990 in number, and other towns found in Benue were formed in the late 20^th Century, which means that there is no town that is more than 100 years. There is an expansion of urbanisation, which has attracted administrative staff and population increase hence, native authority has gain popularity due to the growth of Makurdi town. There is a major development of new towns which were not there before on the way that leads to Gboko toward PKO, the southern parts is fast developing , while the northern parts is not as developed as the southern parts. The Jukun are the predominant settlers in the north bank, on the hills that used to be the colonial residence towards where the government house is presently located.  When viewing the landscape, you can see that Makurdi is  just like Garden city, the trees are lavishly planted to modify the micro climate of this area, but the low lying area of this town are covered with flood.

Economic activities

Generally, Benue State is known as an agricultural catchment area, it cultivates more of cash crops, fruit crops and food crops hence, it is commonly called “The food Basket of the Nation”. This rich attributes can easily be noticed while traveling from Jos to Benue State. In addition, the State logo and other physical features give important insight on the type of occupations that the state is dealing with.

Climate and Vegetation

Based on Koppen’s Scheme of Classification, Benue State lies within the AW Climate and experiences two distinct seasons, the wet/rainy season and the dry/summer season. The rainy season lasts from April to October with annual rainfall in the range of 100-200mm. The dry season begins in November and ends in March. Temperatures fluctuate between 23 – 37 degrees Celsius in the year. The south-eastern part of the state adjoining the Obudu-Cameroun mountain range, however, has a cooler climate similar to that of the Jos Plateau.

The vegetation of the State consists of rain forests which have tall trees, tall grasses and oil palm trees that occupy the state’s western and southern fringes while the Guinea savannah is found in the eastern and northern parts with mixed grasses and trees that are generally of average height.

Benue’s topography is mainly undulating plains with occasional elevations of between 1,500m and 3,000m above sea level. The state’s main geologic formations are sandy-loam shelf basement complex and alluvial plains. These together with its location in the transition belt between the north and south ecologies and a favourable rainfall pattern account for its support for a wide variety of crops.