THE IMPACT OF PRIVATE DEVELOPERS ON FINANCING RESIDENTIAL PROPERTY DEVELOPMENT
ABSTRACT
This project is an attempt to assess the impact of private developers on financing residential property development in Nigeria. The specific objectives of this study is to assess the various sources of finance available for residential property development, to assess how private estate developers contribute to financing of residential property development, to examine the factors militating against the availability of funds for residential property development and to seek ways of enhancing the present level of housing financing for residential property development. Survey design was adopted for data collections, this enable the research to make use personal observation, interviews and questionnaire to gather relevant data for the purpose of the study. Data were presented and analyse using tables, percentages and descriptive statistics. The findings of the study reveals that private estate developers play significant roles in the provision of finance for residential property development in Nigeria and Abuja specifically. Based on the research findings the research recommends that the government should create enabling policy, provision of land and financing which will enhance the effectiveness of private estate developers in the provision of finance for residential property development and affordable housing in Abuja and Nigeria at large.
CHAPTER ONE
- INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Private sector investment in residential real estate development in Nigeria has been one of the responses to the limited success of governments with provision of public housing as Nigeria government has consistently not been able to satisfy the demand for housing, as almost 90% of the nation’s housing stock is provided by the formal and informal private sector (FGN, 2002; UN-HABITAT, 2006; Olatubara, 2007).
The private developers play significant role in financing residential property development and housing delivering at large. Housing 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 housing 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 especially residential property. 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 and private developers who source for fund from their personal savings and other possible means for financing residential property development..
In Nigeria, housing 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 residential property development also persists.
Traditionally, real estate development was based on equity funds. Equity funds wholly generated and owned by one and to which there is no attachment. The chief source of equity funds is savings and these savings arise out of that part of income of individual or corporate organization. Equity funds sources could be private or public.
Private developer equity may be drawn from individuals or corporate savings, that is, retained earnings, assets stripping, for cash or revenue reserves of companies over a period of time and accumulated savings of individual from employment and/or profits from business enterprises. Other sources of private developers equity funds apart from savings include funds from family sources, friends, Isusu system and thrift system.
Availability of decent and affordable housing has been inadequate in virtually all places and almost throughout history. This is more pronounced in developing countries where rapid rate of population growth and urbanization is unmatched by corresponding and commensurate change in social, economic and technological development. (Mabogunje, 1978). Thus, this phenomenal rise in population, spontaneous increase in the number and size of most Nigerian cities have in the past few decades led to acute shortage of decent and affordable dwelling units. The outcomes of this developmental process are diverse urban problems ranging from overcrowding, deplorable environment, poor living conditions, inadequate and poor infrastructural services, homelessness and other related problems (Federal Government of Nigeria, 2004; Olotuah and Ajenifujah, 2009; Jiboye, 2009).
In many countries the private sector plays an important role in financing residential property development. It constructs housing either for sale or rent for different income groups. The private sector should participate in the construction of housing for all categories of the population either for sale or rent, manufacturing and supply of building materials in the housing construction sector, infrastructure development for human settlements and encourage members of communities to improve their living environment through community participation in projects.
In Nigeria a number of efforts have been mustered to solve the housing problem; from the most discernable and debut of the Lagos Executive Development Board (LEDB) in 1928 till now, a satisfactory level have not been achieved. The achievement from the changing finance mechanisms, material and construction technology development, delivery mechanism etc over the years is minimal and therefore calls for deeper and wider thought towards means that is all-embracing, meets other societal needs yet accelerating the enormous task of housing the nation’s teeming population (Bayode, 2008).
Residential property development is an issue that only touches on the life of an individual, but also has the potential to contribute to national development (Agbola, 1998). In Nigeria, housing is a space within which a generation of families expresses its existence and preserves the history and identities of lineage. Families discover themselves according to their lifestyle and dictates of the cultural values of the society to which they belong. The family residential housing therefore is a symbol of social identity and community recognition.
The successful completion of any kind of development largely depends on the availability and affordability of the essential factors requisite for such property development (land, labour, building materials and finance). Finance being the most significant determines the availability and quality of other factors, as it is required to acquire land, reward labour and buy building materials. Thus, this study seeks to examine the availability of finance for the purpose of residential property development in Nasarawa town, having due regards to its affordability. In view of the above therefore, efforts shall be made to assess the impact of impact of private developers on financing residential property development in Nigeria.
1.2 statement of the problem
Over the years, the government had been the major player in the area of housing delivery in Nigeria, by providing direct finance for previous housing schemes. This was embedded in the housing policy of past administrations but today, the dwindling nature of revenue accruing to the government, coupled with gross mismanagement and misappropriation of public funds and revenue has prohibited the ability of the government to continue to play her role as before (Nubi, 2000). The problem of financing residential property development has become an everyday discussion in all quarters of the public and private services of the developing countries of Africa. It has become increasingly glaring that most of the urban population live in dehumanizing housing environment while those that have access to average housing do so at abnormal cost. Furthermore, private developers as a compassionate housing providers performance need to be compare whether they are performing to the much expectation of residents in their need of housing supply. It is on this premise that the research seeks to evaluate the impact of private developers on financing residential property development.
1.3 Aim and Objectives of the Study
The aim of the study is to assess the impact of private developers on financing residential property development in Nigeria.
Objectives:
The objectives are:
- To assess the various sources of finance available for residential property development.
- To assess how private estate developers contribute to financing of residential property development
- To examine the factors militating against the availability of funds for residential property development.
- To seek ways of enhancing the present level of housing financing for residential property development
1.4 Research questions
- What are the various sources of finance available for residential property development?
- To what extent do private developers contribute to financing of residential property development?
- Examine the factors militating against the availability of funds for residential property development?
- What are the possible ways of enhancing the present level of housing financing for residential property development?
1.5 Significance of the Study
A study of this nature will be beneficial to a wide range of stakeholders in Nigeria. Recommendations made in this study will enable the government take a serious look at the current Housing policy in Nigerian, its effectiveness, alternative strategy and alternative sources and the need for re-engineering.
Also, corporate bodies and developers can use the information derived herein to further their work on source of finance for residential property development. Furthermore, this study is expected to give rise to further studies which will enhance knowledge in areas of the sources of finance for residential property development.
1.6 Scope and Limitation of the Study
In terms of scope, the study will evaluate the impact of private developers on financing residential property development with particular reference to CITEC Properties Limited Abuja. Due to limited time and resources the study not will cover the contribution of other private estate developers in the study area. The study will examine in details the dominant issues of private estate development as an option for providing finance for residential property development in Abuja.
Limitation
In the course of carrying out this research work, several challenges were encountered. Some of these challenges are:
- Administering and gathering of questionnaires in real estate development firms was not an easy feat.
- The entire project was very capital intensive, gathering information on sources of project financing.
- Organizations are not ready and willing to review the source or sources of their project financing.
1.7 Operational Definition of Terms
Private Developers: Private developers are property developers within the private sector. They acquire buildings or land in order to construct or refurbish building projects on the site. Private developers aim to generate a profit, as opposed to the government which aims to provide buildings for social and welfare reason.
Finance: According toInvestopadia online dictionary Finance is the science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities.
Estate: Udechukwu (2006) defined estate as “A legal entity denoting the character and quality of right that an individual or individuals possessed on a property.
Housing Estate: In the word of Essien G.A (2012) in his Lecture Note “An Approach to Property Development II (Vol. 3)”. “Is an area of land on which many houses are built either by private enterprise or by a public authority”.
Development: Is the process of generating latent values in land or creating benefits there from by incurring on it costs in the form of labour, capital or management skill (Umeh, 1983).
Residential Properties: Oxford advanced learners dictionary defined residential properties as properties suitable for living in, consisting of houses rather than factories, or offices.
1.8 Historical Background Of The Study Area
CITEC Property Limited Abuja Incorporated as a limited liability company in the year 2001, Citec Properties Limited Abuja began work at the Mbora district of Abuja in 2001 having secured the understanding and approval of the Federal Government to deliver houses for low income earners at its Mount Pleasant Estate on about 230 hectares of land provided by the Federal Government. Today, the estate boasts of the best infrastructure by any estate developer in the FCT.
The mission of CITEC Properties Limited is to provide top quality housing for Nigerians in life enhancing environments using experienced and qualified personnel working with the best technology available.
The core values of CITEC Properties Limited includes
- Professionalism
- Integrity
- Excellence
- Team Work
- Innovation
Mount Pleasant Estate where Citec targets about 3000 housing units features underground central sewage system, tarred internal roads with pedestrian walkways, recreation areas, school, shopping mall, worship centres and other modern facilities that make it unnecessary for residents to look outside the estate for further services.
With Mount Pleasant Estate, Citec has redefined standards and offered The Federal Capital Territory residents a wide range of top quality houses with exquisite finishing in a homely environment. Before embarking on the Mount Pleasant Estate project, Citec, in partnership with the Federal Housing Authority had built over 300 housing units of various types at its Citec Villas in Gwarimpa II Estate which has become the reference point in the Federal Capital.
CITEC Nigeria Limited has mandate under the Partnership with the Federal Housing Authority to complete 308 housing units of different house types. The partnership agreement was signed in the month of February, 2001 and mobilization to site began in the month of June 2001. Among the conditions agreed upon was a 12-month completion period. Field surveys show that only 65% of total housing units completed were within 2001 to 2004 — a period of four years. And the remaining, 35% completed between 2004 and 2006, another additional two (2) years.
The project was financed by commercial banks with very high interest rate of 32% between 2001 and 2004 which later rose to 36% in 2005. The 308 units were however completed in 2006, with project duration of six (6) years instead of 12 months as planned. However based on the detailed partnership agreement signed by the two partners on a 60:40 percent profit sharing between CITEC and FHA respectively, the expected operational profit per unit of total housing units are projected based on the assumptions that the housing units will be completed in good time and sold. There are four housing categories in Gwarimpa II partnership scheme. All the house types do not reflect the status of low and middle-income earners, but strictly for high income earners.