ENEMS MICROSYSTEMS RESEARCH SPOT: Real Estate Risk

ANALYSIS OF REAL ESTATE RISK IN RESIDENTIAL PROPERTY INVESTMENT IN ADO EKITI

(A CASE STUDY OF FLORENCE COURT ESTATE)

ABSTRACT

This study analysis the real estate risk in residential property investment in Ado Ekiti with particular reference to Florence Court Estate. 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 Florence Court Estate. 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 Florence Court Estate. 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 Florence Court Estate 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 Florence Court Estate 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 Ado Ekiti.

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 Ado Ekiti – A case study of Florence Court Estate.

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 Florence Court Estate
To analyze the factors responsible for the identified risk.
To examine the challenges of residential real estate investment in Florence Court Estate

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 Florence Court Estate?
What are some of the risk investors may face in residential real estate investment in Florence Court Estate?
What are the challenges of residential real estate investment in Florence Court Estate?
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 Florence Court Estate.

Some factors militated against the success of this work, though the researcher endeavored 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 organization’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 cooperate 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 Types of Residential Properties in Florence Court Estate

The followings are some of the residential real estate investments in the studied area:

1. Apartment or Flat – An individual unit in a multi-unit building. The boundaries of the apartment are generally defined by a perimeter of locked or lockable doors.

2. Multi-family house – Often seen in multi-story detached buildings, where each floor is a separate apartment or unit.

3. Terraced house or townhouse– A number of single or multi-unit buildings in a continuous row with shared walls and no intervening space.

4. Condominium – A building or complex, similar to apartments, owned by individuals. Common grounds and common areas within the complex are owned and shared jointly.

5. Cooperative – A type of multiple ownership in which the residents of a multi-unit housing complex own shares in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.

6. Semi-detached dwellings

7. Duplex – Two units with one shared wall.

8. Detached dwellings

9. Tents – Usually temporary, with roof and walls consisting only of fabric-like material.

Monday, 24 April 2023

ANALYSIS OF REAL ESTATE RISK IN RESIDENTIAL PROPERTY INVESTMENT IN ADO EKITI

ANALYSIS OF REAL ESTATE RISK IN RESIDENTIAL PROPERTY INVESTMENT IN ADO EKITI