ANALYSIS OF REAL ESTATE RISK IN RESIDENTIAL PROPERTY INVESTMENT
(A STUDY OF ABUJA – KEFFI ROAD, MARARABA)
ABSTRACT
This study analysis the real estate risk in residential property investment in Mararaba. To achieve the stated aim above, the researcher identifies the types of residential real estate investment, identify the residential real estate investment risks, analyze the factors responsible for the identified risk and examine the challenges of residential real estate investment in Mararaba. The researcher adopted survey design which offers the opportunity to gather relevant data from the population of interest which comprises of property developer, investors, landlords, tenants and estate agents or property agents in Mararaba. The data gathered were presented and analyzed using the descriptive statistics. The findings of this study based on the data presentation and analysis shows that the real estate risk in residential property investment in Mararaba are majorly as a result of lack of housing provision and financing in both the public and private real estate sector, change in government policies which makes the real estate sector prone to political uncertainty that can adversely affects real estate investments. Research also shows that lack or improper implementation of development control poses a great risk in residential property investments as the appropriate authority did not carry out their responsibility diligently in areas of zoning, approval of plans, provision of Certificate of Occupancy and other development control measures. Finally the study recommend that real estate investors should make preliminary investigation in residential real estate market in Mararaba before venturing into investing their money so as to identify the risk inherent and try as much as possible to reduce it, property owners, investors and developers should ensure that they comply with the provisions of development control authority thereby reducing the risk of demolition, environmental degradation and natural disaster which arise from developing a property in a site which are prone to environmental risk and the government should make concerted effort towards reducing the stress and time of processing C of O so that investors can easily identify who the real owners of land are therefore reducing the risk associated with land acquisition.
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of study
Residential real estate investment, like life itself, comes with its own associated risks and these risks are events that could bring harm or loss to an investment. A risk is that probable event that could lead to depreciation of the value of property or outright loss of investment (Clayton, 2007). The existence of such factors should not discourage an investor from investing but rather use the knowledge of residential real estate risk analysis and management that the researcher is examining to help secure an investment. The primary residential risk in real estate investment in Nigeria is the possibility of falling into the hands of fraudsters. Fraudsters sometimes attempt to sell a property that does not belong to them. This is another source of issues for investors but could be eliminated by engaging the services of professionals to help investigate the title to the property that is being sought for purchase and to ensure that all the documents needed from the seller are prepared, signed and collected (Fisher, 2005).
Another possible residential real estate risk investors may face as a real estate investor in Nigeria is government or political risk. Because of the wide ranging power of the executive arm of government and fluidity of functions, the government could acquire private land but the land so acquired must be for public purposes. Unfortunately, there are several instances where government had acquired private land for “public purposes” and “development control” only to turn around and allocate to other individuals to use for their own private projects. Some have experienced their Certificate of Occupancy revoked by a new government due to the fact that the owner does not belong to the same political party. This kind of policy inconsistency is a major discouragement to investors. They should be that as it may, whenever investors are planning to purchase a land in an area, engage professionals (e.g. Estate Surveyors and valuers) to confirm whether or not the land is under acquisition by government or could not be sold (Black, 1986).
At other times, after government had acquired family lands and compensated the appropriate families, some of the traditional land owners still go ahead to sell portions of those lands to the unsuspecting public. Many people purchase such lands and begin to build without government building approvals. The implication of this, as many have painfully learnt, is that when government decides to take possession and pull down the structures on such lands, such a purchaser will not be compensated by government. It is also important to note that some areas have already been acquired or building developments in such areas already restricted (Syz, 2008). For instance, land under the power cables should not be built upon. Many are flaunting this law but should the government decide to enforce such regulations, several people would be affected.
There are also financial risks involved in residential real estate investment. If an investor decides to use a bank loan to buy a property, there is need for the awareness that what we call mortgages in Nigeria, is technically a residential loan. Ideally, a real estate/home loan should be a single-digit interest loan, but what Nigeria currently have are double – digit residential loans. Although, the government established a National Housing Fund (NHF) single-digit-interest loan that could advance a contributor up to N25m, many have not been able to access the loan due to bureaucratic bottlenecks and red tape. Some who have accessed the loan have had to apply for a bridging loan at residential double-digit interest rates in order not to miss their desirable property.
Despite its inherent risks, residential real estate presents a compelling opportunity for investors. Not only does the sector provide many long-term investment benefits, including healthy income returns and a hedge against inflation, but fundamental factors such as the improvement of the risk/return characteristics of the overall mixed asset portfolio. The case for investing in residential real estate looks particularly attractive when viewed in the context of the current market environment, although it is not without risk. Perhaps the most obvious reasons why residential real estate merits inclusion in a management portfolio are derived from both cyclical and noncyclical factors – specifically, the favorable long term outlook for real estate demand, from both users and investors, property cash flows and real estate’s potential inflation hedging characteristics. The liquidity of residential real estate provides investors the most efficient means to obtain exposure to property markets globally. The ability to trade daily not only provides a useful tool for investors to create tactical allocations to the sector and global regions, but it also provides a means to efficiently re-balance allocations as market conditions change.
1.2 Statement of Problem
It is very important for investors in residential real estate to first ascertain the risk factors of an investment asset before committing investment funds to such investment. Investors’ informed decisions with respect to the risk and develop strategies of real estate investments in order to ensure profitability. Residential real estate investment is usually rental properties intended to generate a return from rental income or capital appreciation. Investments in these real estate assets are associated with multiple risk complexities which includes: investment illiquidity, asset value volatility, asset valuation inaccuracies, leverage-amplifying negative performance during falling markets, limited/ imperfect benchmarks to gauge closed-end fund performance, combination of a large lot size (capital intensive investments) and high transaction costs. However, the researcher will provide an overview of residential real estate risks in Nigeria.
1.3 Aim and Objectives of the Study
The main aim of this study is to analyze the real estate risk in residential property investment in Mararaba.
To achieve the stated aim above, the following objectives are pursued:
- To identify the types of residential real estate investment in the study area
- To identify the residential real estate investment risks in Mararaba
- To analyse the factors responsible for the identified risk.
- To examine the challenges of residential real estate investment in Mararaba
1.4 Research Questions
The researcher deem fit to find answers to the following research questions to enable him achieve the desired aim of this research:
- What are the types of residential real estate investments in Mararaba?
- What are some of the risk investors may face in residential real estate investment in Mararaba?
- What are the challenges of residential real estate investment in Mararaba?
- What are the causes of the identified risk in residential real estate investment?
1.5 Significance Of The Study
The finding of this study will be of benefit to the following groups; firstly, investors who bear the cost of property development, secondly, the tenants and thirdly, real estate firms who are involved in the management of properties. This will again enable the investors to understand the trends of property investment as it relates to its cost in the face of risk. The research will also be of great importance to students and researchers who are interested in studying the real estate investment risk on residential properties.
The government and the financial sectors regulators (CBN) will find this research useful as it highlights the risk of residential real estate investment /development and provision of sustainable housing for her teaming citizens.
1.6 Scope and Limitations of the Study
The study helps to analyze the risk of residential real estate investment in Mararaba Town.
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.
1.7 Definition Of Operational Terms
Market analysis: The market analysis is activity of gathering information about conditions that affect a market. A market analysis studies the attractiveness and the dynamics of a specific market within a special industry.
Development risk: Development risk is defined as the risk that the leasing or sale of the project will generate insufficient returns to cover cost and create the desired return due to a lack of sales or inadequately meeting the needs of the market in terms of type and location. The more unusual a particular type of project is for the developer, the higher the chance that the developer will misread the market and the higher the development risk. (DICKINSON, 2001)
Building site risk: This is the risk that the selected site is unsuitable, or needs to be modified at cost to become suitable, for the intended use due to environmental issues (such as contamination) or its natural characteristics (stability, water levels, subsidence etc.) (DICKINSON, 2001)
Risk Management: Risk management as a systematic and integrated approach to the management of the total risk that a company faces. Risk management is the process of identifying, assessing and controlling threats to an organisation’s risk. (DICKINSON, 2001)
Market Value: This is the worth of an interest in property in which measurable buyers and sellers would agree to, when referred to market with existence of condition for comparative market application. Market value can also be defined as the higher price in terms of money which a property should bring in comparative or open market under all condition requisite to a fair sale, the buyer and seller each acting prudently, knowledge and assuming the price is not affected by undue stimulus. (Wendth and Paul, 1979)
Value: This is the monetary worth of a thing that is expressed as the value of the goods or services measured by the amount of other goods and services for which it will be exchange. (Wendth and Paul, 1979)
Residential Properties: Residential properties are those properties that are occupied for the purpose of providing shelter to the occupants and serves as a habitation for them. Residential properties are properties providing housing accommodation, (Leramo,1992) Residential properties are generally constructed to mean property primarily acquired for residence and its attributed to giving shelter, security, comfort, privacy, investment, and personal identify, (Malady and O’ Donneland, 1994).
Property: Legally there are two types of property. They are real property which is land and buildings and personal property that is all kinds of personal possession. In economic the term property means anything that yield interest or income to the owner,
The terms property is defined as the bundle of right invested in a persons or a co operate bodies over a specific parcel of land, buildings object, e.t.c in the relation to other persons which gives right to use and enjoy and control on the land.
1.8 Historical Background of the Study Area
Mararaba is a town in central Nigeria, within Karu Local Government Area, Nasarawa State. It sits along the Abuja- Keffi Road and it is often regarded as a suburb of the capital city, Abuja. The area is densely populated which contributes to the heavy traffic on the road channels there. Some of the neighbouring towns to Mararaba are Kurundurna, Ado, Masaka, New Nyanya and New Karu. Mararaba town is an economically friendly residence for people working in Abuja. Noteworthy developments are financial institutions, Mararaba General Hospital and Kwad Mall.
Mararaba is a border town between the Federal Capital Territory (FCT), Abuja, and Nasarawa State. Its proximity to Abuja, being the seat of power, has made it difficult to identify the boundary between the two states. Densely-populated with middle and low- income earners, Mararaba is predominantly occupied by civil servants that work in federal government establishments in Abuja metropolis. These workers daily commute from this suburb to Abuja city centre, where most of the government offices and corporate establishments are located.
The workers apparently took advantage of hw-cost houses, affordable cost of living and land to build a place of abode for themselves. As a result of the high concentration of people there, basic infrastructure like roads, power, education and health facilities have been overstretched by daily inflow of Nigerians who have found solace in this part of the country in spite of the obvious social challenges that have made life and living unbearable.
The town is regarded by many FCT residents as one of the most populated towns in and around the FCT that is synonymous with poverty, absence of infrastructure and poor living standard, as evidenced in the daily complaints and lamentations of the residents. Life could be unbearable in Mararaba, particularly in the rainy season, because already bad roads become worse and flooded as a result of blocked waterways. Electricity installations are pulled down by regular downpours, and the environment stinks due to open defecation and heaps of refuse that ooze offensive smells.
In the midst of this, epidemics are visited on the residents due to poor sanitary conditions. But as they strive to give themselves a better lease of life, those who could afford it turn to a mini (local government) providing amenities like borehole water system, power supply, medical services and security for themselves.
Commercial motorcycle, otherwise known as “Okada” has become the choice mode of transportation in Mararaba, that has to an extent exposed the people to several safety risks. Some of the operators claim to be “encyclopedia of Mararaba” having worked there for years. The architectural design of Mararaba has no major bus stop and as a result commercial aid private motorists stop at will to either drop or pick passengers. While they do that, they totally forget that there are many other vehicles that ply the road and each time a vehicle stop for few seconds either to pick or drop a passenger, tens of others behind are forced to also stop and wait. The result, unexpectedly, is gridlock.
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