Property Investment Markets

Investment property is real estate property that has been purchased with the intention of earning a return on the investment, either through rental income, the future resale of the property or both. An investment property can be a long-term endeavor or an intended short-term investment such as in the case of flipping, where real estate is bought, remodeled or renovated, and sold at a profit.

Real estate or immovable property is a legal term encompasses land with anything permanently affixed to it. Real estate (immovable property) is synonymous with real property called realty, in contrast with personal property (also sometimes called chattel). There are many types of property available for an investor and a variety of interests in such properties. Millington (1982) identified them as freeholds, short or long term leaseholds, ground rents, offices, shops, factories, warehouses and each of these interests or rights or types of property will have different features which make them more or less attractive to investor depending upon circumstance and the requirements of the particular interests. Property is thus seen as subject of ownership which concerns the right of individual, persons, sovereign power and the exercise of such rights of ownership are use and the nature of such rights are subject to influence human activities. The property types include industrial, agricultural, commercial and residential. A residential property which is the focus of this study is a multidimensional good differentiated into a bundle of attributes that vary in both quantity and quality (Can 1990).

 

The word "value" could command different meaning to different people depending on the context within which it is used. But value in real estate is the present worth of anticipated future benefit from ownership. It is the capacity of an economic good to command other goods in exchange. It also represents that price at which demand and supply coincide in the open market. Value then is determined by the intersection of demand and supply and for an object to have value, it must possess four elements or ingredients of value which are scarcity, utility, demand and transferability. Extrinsic value constituted of objective value as molded by the market forces of supply and demand. By contrast, intrinsic value is a measure of objects inherent utility to render services or satisfaction in use. Other concepts of value include that of Ricardo (1817) and Mill (1848).

 

The nature of value include market value, mortgage value, insurance value, compensation value, rental value, going concern value, liquidation or forced sale value, e.t.c. The concept of value for the purpose of this study has been taken as the amount of money which the property will bring to the owner if let or leased and this can be expressed as the rental value of such building determine at the lowest point of profitable production.

THE IMPLICATION OF VACANCY OF OCCUPANCY RATE TO PROPERTY INVESTMENT MARKET

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 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 actualvacancy rate provides some indication of future rent movements in that market. In addition to itseffect on the movement of rents, the level of the vacancy rate has direct implications for thereturn on property investment. In long-run equilibrium, the lower the natural vacancy rate, thegreater the amount of rent generated by a given rental property, everything else held constant. If thenatural vacancy rate declines over time, the return on rental property investment will rise, ceteris paribus.

 

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 atthe 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 acrossboth space and time. For example, Gabriel and Nothaft (1988) provide evidence of substantialvariation 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 acrossmetropolitan areas with a number of factors including housing costs, heterogeneity of the housingstock, tenant mobility, and population growth.

IMPACT OF PUBLISHED FINANCIAL STATEMENT ON SHAREHOLDER’S INVESTMENT DECISION

IMPACT OF PUBLISHED FINANCIAL STATEMENT ON SHAREHOLDER’S INVESTMENT DECISION

(A CASE STUDY OF WEST AFRICAN CERAMIC COMPANY AJAOKUTA)

ABSTRACT

This research project was designed to examine “the impact of Published Financial Statement on Shareholders Investment Decision” (A Case Study of West African Ceramic Company Ajaokuta). The primary and secondary sources of data were adopted. Questionnaires were distributed by hand and ninety nine were returned. Upon presentation and analysis of data, hypotheses were tested empirically using analysis of variance (ANOVA). The research revealed the following: Investors do not analyze financial statement before making an investment decision. Published financial statement of a company does not show true and fair view. Majority of the respondents agreed that information contained in the company’s annual report could be reliable for effective investment decision. The researcher recommends that all public limited enterprise should continue to publish their financial statement every year; hence it helps shareholders in making investment decision.

CHAPTER ONE: INTRODUCTION

1. Background to the study      

Corporate organizations owe a duty to fully disclose matters concerning their operations so as to aid investors in making investment decisions. Both large and small organizations in addition to satisfying the legislating requirement tend to retain existing investors and to attract potential ones through the publication of their financial statements where the capital stock of a corporation is widely held and its affairs are of interest to general public relations.

The purpose of financial statement is to provide reliable information about the financial position, performance, and relevant changes in financial position of a company or business. Listed companies use financial statements as one of the major medium of communication with their equity shareholders and public at large (Cheng and Yang, 2003; Sloan, 1996; Hribar and Collins, 2002).Financial statements according to Illoumezie (2006:33) are like compasses “which navigators use to locate their bearing and find direction”. People use them to gauge their financial positions at various points in their lives in order to judge their progress towards their financial goals.

Financial statements according to Meigs and Meigs (1981:28) refers to reports which summarize the financial position and operating results of a business (balance sheet and income statements). It referred to as general purpose that satisfy the need of many groups generally called stakeholders. These groups are particularly concerned with the risk inherent in and returns provided by their investments, and who require accounting information to enable them assess the ability whether they should buy, hold and sell their investments.

According to Anayaogu (2002:14) financial accounting provides information to eternal decision makes such as shareholders, government, creditors, employees etc, these are people with whom or from whom money is ultimately paid or received. Anayaogu (2002:20) also states that records of financial accounting includes various ledges accounts, profits and loss accounts, balance sheet and other financial records. These records are intended to show the strength, progress, portability, management effectiveness and stewardship.

Financial statement are the means of communicating to interested partners information or the resource, obligation and performance of the reporting enterprise in a simple, clear and understandable form to all its user with such attributer of relevance to decision reliability, consistency and comparability materiality efficiency and understandability.

The annual report and accounts are said to be published owing to the fact. It is being printed and dispatched to each shareholder and any other unfrosted where person on request. The annual reports and accounts are the primary means of communicating vital economic information in the cooperation’s resources and obligation to absentee owners and could be investor by the management. The published financial statement serve as a means of conveying business information to the equity investor groups (shareholders), the loans creditors group, the employee groups, the business contract group, the government and its agencies as well as the general public. It gives a concise and genuine picture of an enterprise profitability trend and its financial position. The information contained in the published financial statement act as a basis for which shareholder maker investment decisions. However, the account days of pre-colonial administration, the preparation and publication of financial reports used by owner managers for internal control and cost determination. At the onset of industrial revolution, trade begins to increase and expand. This necessitated employing managers to manage the business on behalf of the shareholders. Managers positions now necessitated companies to prepare and publish a financial report that would reveal to the owners (shareholders) the operational state and financial position of the company and how the capital contributed by the shareholder had been utilized in the realization of the set out objectives of the company.

The company Act 1963 outline that every registered business organization should maintain and submit audited financial statements every year during the Annual General Meeting (AGM) where it is laid to the members. This is in consonance with the provision of schedule two of the Companies and Allied Matter Decree of 1990 which states internally that the form and contents of published financial statements and with the accounting standard issued from time to time by the Nigeria Accounting Standard Board (NASB).

Meigs & Meigs (1981:14) states that the preparation of financial statement is not the first step in accounting process. At the close of financial period, the stakeholder such as investors of a company naturally desires to ascertain the following:

• The result of the company’s operations for the period.
• The resources and hostilities of the company over the period in question.
• Wealth created by the company and how it has been distributed.
• Financial resources acquired and how they have been expanded.

Thus, published financial statement prepared under companies and allied matter decree (CAMA) 1990 supplies information about the above. As a matter of fact, shareholders of any corporation would require annual corporate report published about the entity and which must be relevant, sufficient and reliable.

1. Statement of the Problem     

Virtually, every economic entity maintains its records on a historical cost basis. The historical cost figures alone are inadequate. This is because net profit is over stated, the balance sheet does not reflect the current worth of the enterprises and inflationary situation, and the charging of the historical cost of operations to profit and loss account may endanger the maintenance of the operating capital of the entity. It is obvious that the current situation of published financial statement has some limitations. This is because the result of operation (net profit) is a function of accounting standards, policies and conventions adopted by a company and used in the preparation of the financial statements. Hence this study examine the impact of published financial statement on shareholders’ investment decision making with a particular interest in West African Ceramic Company Ajaokuta.

1. Research Questions

The research questions help keep the research in focus in order to achieve the desired aims of this research. Therefore the following research questions about the impact of published financial statement on shareholders’ investment decision making are being asked so as to find answer to them.

1. Do investors understand financial statement very well?
2. What do shareholders see as the importance of published financial statement of companies?
3. To what extent do the financial statements of a company encourage investors to invest?

1. Objectives of the study

The main objective is to ascertain the impact of published financial statement on shareholders’ investment decision making in West African Ceramic Company Ajaokuta. The specific objectives are stated as follows;

1. To know whether the information in the financial reports of companies are understood and used for investment decision making.
2. To ascertain the extent the company’s published financial statement are capable of meeting shareholders and investors need.
3. To determine how financial statement deficiency affects the shareholders investment decision.
   1. Statement of Hypotheses       

The research would test the following research hypothesis to ascertain whether their correct or not.

H0₁:   Most investor does not analyze financial report before making an investment decision.

HA₁: Most investor does analyze financial report before making an investment decision.

Ho₂:   Financial statement does not show true and fair view of the statement of a company.

HA₂: Financial statement show true and fair view of the statement of a company.

1. Significance of the study

This research work is expected to be of great importance to investors and shareholders in particular. It will serve as a guide to individuals who are interested to acquire shares in any firm, company or business organization. It is expected to serve also as an indispensable tool for current and potential investors of business organization as well as companies in their investment decision making by way of providing sound investment strategies for shareholders and other users of published financial statement.

1. Scope of the Study

This research work is limited to the impact of published financial statement on shareholders’ investment decision making with particular interest in West African Ceramic Company Ajaokuta. The researcher find out all  the relevant accounting information that was needed by investors / shareholders of West African Ceramic Company Ajaokuta and the investment states of West African Ceramic Company Ajaokuta using its published annual report and financial statements.

1. Limitations of the study

This research work is limited to the Impact of Published Financial Statement on Shareholders Investment Decision Making with Particular Reference to West African Ceramic Company Ajaokuta. 

In carrying out a research work of this nature, a lot of problems are encountered and the degree varies from one research to another. The obstacles faced in this research work include distance, security challenges, lack of research materials etc.

1. Definition of Terms
2. Dividend: Is the distribution of part of the earnings of a company to its shareholders. The dividend is normally expressed as an amount per share on the par value of the share.
3. Dilution of Earnings: This is when additional shares of stock are sold without an immediate increase in income. This result is a decline in earnings per share until earning can be generated from funds raised.
4. Earning Per Share: Is the amount of profit after tax and preference dividend (but before taking accounting of extra-ordinary income and expenses attributable to each ordinary share in issue and ranking for dividend during the period.
5. Financial Information: This is any information dealing with the operation of company and how the fund acquired.
6. Efficiency: This refers to achievement of organization goals within minimum waste of resources that is best possible use of resources.
7. Financial Statement: This is a periodic financial reports accounts and other related documents that highlights the financial position of an enterprise as well as the financial profitability.
8. Investment: This is the commitment and utilization of funds and other scare resources in a project with the expectation, that the utilization will generate return.
9. Ordinary Shares: These are the common stock of a company which is to be issued out for sale to individual public.

Profitability: Profitability refers to the relationship between profit and the resources employed in earning it. Its resultant effect is usually expressed as a percentage.

THE IMPACT OF INTEREST RATES ON SAVINGS ANDINVESTMENT IN NIGERIA

THE IMPACT OF INTEREST RATES ON SAVINGS AND INVESTMENT IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Interest is the reward that accrues to people who provide the fund with which capital goods are bought (Soyibo and Adekanye, 1992). Interest can also be defined as the payment made to a lender by a borrower for the use of a sum of money for certain period of time. The charging of interest on loan was initially abolished during medieval days, both was later legalized by King Henry VIII in 1545 when he abolished the usury laws in it was condemned. These usury laws were established during the medieval time when the payment of interest rate was strongly condemned and termed usury. During that time it was believed that loan was an aid to an individual or neighbour who is distressed, for such reason, they felt charging of interest on loan was not proper (Bhatia and Khatkhate, 1973).

Interest rate deregulation was later introduced into the monetary system by Central Bank of Nigeria, which was part of the Structural Adjustment Program (SAP), which was introduced in July 1986 by the head of state then-Gen Ibrahim Babangida (Osofisan, 1993). Interest can also be said to be the charge assessed for the use of money. It can also be seen as “the payment made to owners of capital fund which they are ready to put at the disposal of others; thus, interest rate is like a price which bring into equilibrium the demand for resources to invest with the readiness to establish from present consumption. Interest rate is determined by the force of demand and supply of capital and for the condition that demand and supply of fund are equal. Hence, interest level is arrived at by the intersection between savings and investment (Luckett, 1984). Savings is defined as that portion of income after tax, which is not spent on consumption goods. Savings can also be seen as that part of income, which is not devoted to the purchase of household items and firm  (McKinnon, 1973).

Investment on the other hand can be defined as the expenditure of funds lending to the creation of net additions to the stock of physical capital; it is done almost exclusively by firms. Interest rate favours the investors when the interest rate is low. The major factor that determines investment is interest rate and this is influenced by savings. The investors will also be favoured when the marginal efficiency of capital is high. Marginal efficiency is defined as the expected rate of returns from additional unit of capital asset. It refers to the expected rate of profit per year on real investment of the most efficient type, it depends upon the entrepreneur expectation of future return. However, there will be no investment of profit expectation which are not very bright, this is the reason why investment falls to a low level during a depression despite all the encouragement to stimulate private investment (Revel, 1975).

Interest rate favours savers when the rate is high, savings were looked upon as beneficial both for the individual and the society at large. Thus, an  increase in savings will ultimately lead to an increase in savings of the community. It was due to this effect that the classists believed in thriftiness (Ritter and Siber, 1986). They were of the view that an individual saving was a great private as well as social virtue.

1.2    STATEMENT OF THE PROBLEM

Many developing countries, under a crushing burden of debt and other external disequilibria, have adopted programmes to restructure their economies. A major cornerstone of such adjustment programmes is the liberalization of financial markets and a greater role assigned to market forces in the allocation of financial resources, and generally involves interest rate deregulation and relaxation or cancellation of the policy of directed credits.

The policy of interest rate in developing countries seems to have been backed by the McKinnon-Shaw financial intermediation hypothesis which postulates that interest rates have a positive response to savings and economic growth (McKinnon, 1973; Shaw, 1973). The link between interest rate responsiveness and savings, as postulated by the McKinnon-Shaw hypothesis, is investment. However, behaviourally and operationally, savings and investment differ (Bhatia and Khatkhate, 1975; Fry, 1978); the transfer of savings to investment being dependent on a host of factors other than the real interest rate. Such factors include the availability of investment opportunities at rates of return exceeding cost of funds, the existence of private and social profitability differences, institutional constraints and the cost of administering funds. Thus, a study of the link between real interest rates and investment cannot be done solely via the McKinnon-Shaw hypothesis. Unfortunately, studies of financial liberalization policies assumed the link between savings and investment as given and/or regard specification of the effect of the real interest rate on investment as difficult (Mwega et a!., 1990).

However, a study of banking system operators’ perceptions of the impact of the different regulatory regimes on the performance of the system has its own merits. It can spotlight the areas of general consensus as to the effectiveness or otherwise of government policy. Such a study can also be a type of ex post evaluation of the impact of government policy on the banking system from the point of view of those directly affected.

1.3    OBJECTIVES OF THE STUDY

The main objective of this research includes the following:

1. To determine the impact of interest rate on savings in Nigeria.
2. To determine how interest rate impact on the investment rate in Nigeria.
3. To determine the impact of savings on Investment in Nigeria

1.4    RESEARCH QUESTIONS

As a follow up to the above objectives, the following questions are asked;

1. What is the impact of interest rate on savings in Nigeria?

2. What is the impact of interest rate on investment in Nigeria?

3. Do savings have an impact on Investment in Nigeria?

1.5    HYPOTHESES

The following hypotheses have been formulated based on the objectives of study and the research questions;

HO: There is no positive significant impact of interest rate on savings in Nigeria.

HO: There is no positive significant impact of interest rate on Investment in

Nigeria.

Ho: There is no positive significant impact of Savings on Investment in Nigeria?

1.6    SCOPE OF THE STUDY

In order to carry out a comprehensive and meaningful research work on the critical effect of interest rate as a determining factor in the growth of savings and investments in Nigeria. This work was based mainly on Central Bank of Nigeria (CBN), which regulates the employment of interest rate, savings and investment and on the Intercontinental Bank plc. Data used covers a period of ten years (1970 – 2008) so that the impact of interest rate on savings and investment can be compared using the interest policies.

1.7    SIGNIFICANCE OF THE STUDY

The deterioration of the Nigeria economy calls for a scrutinization of the economic policies. This Nigeria like all other developing countries is faced with the problem of choosing the most appropriate policies, which will be employed to attain economic growth. An identification of the factors, which influence the economy, becomes necessary, the level of investment being a major influence of economic growth lead us to the study of interest rate which is one of the factors influencing investment as well as savings (which provides funds for investment). In order to avoid decisional myopia there is a need for efficient and proper economic planning. The need for undertaking this study stems from the important role the rate of interest plays in determining the growth of savings and investment. This shall be of immense benefit to commercial banks in general, the CBN, the general economy and to future researchers in the field of interest rate.

1.8    DEFINITION OF TERMS

Marginal Efficiency of Capital is used to measure the rate of return on investment Osofisan (1993).

Interest Rate This is the rate at which the Central Bank Of Nigeria lends to financial institution thus supply and demand for funds Mwega, Ngola, and Mwangi, (1990)

Interest rate policy This is the policy Central Bank uses to control inflation in the economy. It also used to control the money supply by the monetary authorities, in order to achieve the stated or desired goals Ndulu (1990).

Savings The total amount of deposit in financial Institutions Fry (1978)

Investments investible Funds which are utilized to expand the growth in the economy Elliot(1984).

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.

EVALUATION OF RISK ELEMENT IN REAL ESTATE INVESTMENT IN NEW NYANYA

EVALUATION OF RISK ELEMENT IN REAL ESTATE INVESTMENT IN NEW NYANYA

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

The growing expectation of any investor is to achieve maximum satisfaction in his investment. To attain the investment objective of maximizing wealth, maximizing returns and minimizing risks as a prudent investor will be paramount; therefore, investors choose between ranks of alternative investments.  The term risk is seen as the probability of loss of income, assets or condition of mishap, unfortunate situation or circumstances that result in the decline of revenue or loss of income, property, wealth and other items having economic and financial values. In statistics, risk relates to a situation where a probability or weight can be assigned to a possible outcome arising from a policy decision (Enever and Isaac,1997).

In the financial sense, risk is somewhat more intricate than the calculation of historical or expected returns. It is the possibility that an investor will lose some or all of the initial investment. Such conditions are the outcomes of a fall in product demand, high competitive pressure, unfavourable government policies, poor economic conditions, community uprising, industrial disharmony and management inefficiencies. Environmental factors such as changing weather conditions and environmental degradation are also noted to have adverse effect on investment. The international component of risk is relatively more complex, which arises from divergent economic policies, political and cultural ideologies thus making management of risk across national boundaries a difficult task. From the real estate investment perspective, risk is seen as the level of probability that a required return will be achieved when measured in terms of capital value and income.

As an investment, some properties have a high-risk profile while others have low-risk profile. This depends on the type, nature, location and possibly, the lease term of the property. Over time, the variance of actual return from expected return can be measured and used to help determine probability level. Risk is a deviation from the expected return and not just the chance that the return on an investment will be below expectations (Geddes, 2002). Thus, risk is about the interaction of future returns, which can have a number of possible results, and the chances that any particular outcome will occur. It is all about variances and probabilities. The degree to which actual performance may exceed the expected performance is called the upside potential while the amount by which it falls below expectation is known as the downside risk. Investors are concerned with the upward potentials, particularly when the investment is funded by borrowed capital. Upward potential is the actual bonus over and above the targeted return (Dubben and Sayce, 1991).

Another possible 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).

There are also financial risks involved in 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.

Risk is a common feature of all forms of investment including real estate and fundamental to investment choice. Therefore, any investor who embarks on a project development or acquires a property expects some benefits as future returns. Like any other form of investment, real estate has two principal components: expected return and risk. In an ideal situation, an investor is expected to maximize returns while minimizing risk. Therefore, the investor assumes risk with the hope of making profit or other forms of return. Risk assumption depends on past investment operation, future projection, trend in the economy, government intervention programmes and the expected returns from the investment. Often, the actual returns from the investment may vary from the projected returns. In some cases, the invested capital is lost. According to Ubom (2010), the degree of variability of the actual return from the estimated return of the investment as well as the probability of the loss of capital reflects the risk elements of investment. The higher the degree of such variability, the higher the risk involved and vice versa; and the greater the risk involved in a project, the greater the expected rate of return or cost of capital. The problems associated with investment risk cannot be totally eliminated even in an ideal economic situation. Real estate investors come across various types of risk in the course of embarking on projects and in the life of the projects.

Investment risk may be examined on the basis of the fundamental components or sources of risk and making predictions on how future returns will be affected by each fundamental risk. Risks have been variously classified into business, financial, interest rate, market and business power risks. Other forms of risk are political risk, tenant risk, sector risk, structural risk, taxation risk, planning risk, legal risk, comparative risk, timing risk and holding period risk, risk of unplanned obsolescence as well as management or union risk (Bowlinet al., 1980; Okafor, 1983; Messner, 1984; Dubben and Sayce, 1991;Ajayi, 1998; Geddes, 2002; Chandra, 2010; and Udoudoh, 2016). These risks are collectively described as investment risk. The goal of an ideal investor is to embark on any project or scheme that involves minimum risk with an expectation of maximum profit.

 In New Nyanya where this study is based, there has been phenomenal growth in real estate investment due to the influx of people and investors from other parts of the country as well as the ongoing renaissance in infrastructural development. There is therefore the need to empirically evaluate the risk element in real estate investment in New Nyanya in order to generate a roadmap that would guide prospective investors in the real sector.

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 real estate investment risks in New Nyanya and Nigeria at large.

1.3       Aim And Objectives Of Study

The primary aim of this study is to evaluate risk element in real estate investment in New Nyanya. The objectives of the study included:

1. To examine the various forms of investment available to the real estate investor in New Nyanya
2. To identify the qualities expected from an investment that is attractive to the investor.
3. To highlight the various stages of real estate development.
4. To examine the different elements of risk in relation to the various stages of real estate development.

1.3       Research questions

1. What are the various forms of investment available to the real estate investor in New Nyanya?
2. What are the qualities expected from an investment that is attractive to the investor?
3. What are the various stages of real estate development?
4. What are the different elements of risk in relation to the various stages of real estate development?

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 evaluate risk element in real estate investment in New Nyanya. 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 purposee 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.

The Techniques For Investment Appraisal

Techniques For Investment Appraisal

INTRODUCTION

Different techniques are available by which to evaluate the original needs of development. In some cases these rely upon investment appraisal techniques that assess the expected profitability of undertaking such jobs. Other techniques may also be used that attempt to form a relationship between the benefits that may be achieved by the compared with the costs involved with the project.

The Techniques For Investment Appraisal

1. Payback period
2. Average rate of return
3. Discounting method

• The Pay-Back Period Method

This is literally the amount of time required for each inflows from a capital investment to equal the cash outflows. Put differently, it consists of assessing investment by the amount of time that it will take for profits from the project to pay back the total cost. A cut-off point can be chosen, beyond which the project will be rejected if the investment has not been paid off. The usual way that investor / firms deal with deciding between two or more projects is to accept the project that has the shortest payback period.

Payback period = Initial payment / outlay + Annual cash inflow

So, if N4 million is investment with the aim of earning N500,000 per year (net cash earning), the payback period is calculated thus:

P = N4,000,000 ÷ N500,000 = 8 years

This all look fairly easy! But what if the period has more uneven cash inflows? Then we need to work out the payback period on the cumulative cash flow over the duration of the project as a whole.

Merit Of Payback Period

1. It is popular because of it is simple and easy to calculate.
2. In a business environment of rapid technological change, new plant and machinery may need to be replaced sooner than in the past, so a quick payback on investment is essential.
3. If the future market of the product is particularly difficult to assess, perhaps because of other firms expanding into the same line of production, the projects giving early payback will be most valuable, and this method of assessment will have some validity.
4. It helps to identify how quickly the cash flow might become positive on the project – useful where firms have cash flow problems.

Demerit

1. The method takes no account of expected profits earned after the payback period.
2. It can give an overly simplistic view of the situation.
3. IT does not look at the long-term profitability of the project since it takes no account of cash flows beyond the pay-back period. It is therefore difficult to make comparisons between project with different life expectancies using this criterion.
4. Finally, it takes not account of what is happening with interest rate.

• Average Rate of Return

The average rate of return is the ratio of profit (net of depreciation) to capital. The average rate of return used to be the main method of investment appraisal as it purports to measure exactly what is required, namely the annual profit as a percentage of the capital invested. Taking the total profits earned on the investment over the whole of its life and dividing by the expected life of the project in years perform calculation of the average profit. Total profit is the total cash inflows less the total cash outflows, which automatically considers depreciation. The average investment is normally regarded as half the original investment because the end of its useful life will wholly depreciate it. This means that the most typical figure to represent a gradually reducing investment over the years is the average of its initial cost and its fully depreciated value of zero.

DEMERIT

• The rate of return does not readily rank projects in their order of merit.
• The rate of return method does not consider timing in its calculation.
• It concentrates solely on averaging the total profits earned over the whole life of the project, irrespective of the years in which they are earned.

• Discounting Method

The techniques of discounted cash flow (D.C.F) has been developed primarily by economists and accountants as a tool in the decision making process. It is used to assess the profitability of investment projects given certain criteria. It may be used to calculate whether or not a particular project meets such criteria as laid down by management, or to compare projects one with another to ascertain which is most profitable. Discounting methods are based on the fact that N1 today is worth more than an equal sum of money at some time in the future even ignoring inflation. This known as time value of money. This because it allows for the possibility of investment consumption taking place at the intervening period. This principle is valid independently of inflation, which also result in immediate money being work more than future money. In a period of high price inflation, discounting techniques are of even greater importance than previously for accurate investment appraisal.

To make a D.C.F calculation, all future costs and receipts have to be estimated and tabulated. In the case of land development, the cost will normally be the original capital outlay, and the receipts will be the income generated thereby.

There are two major methods of making D.C.F calculations, namely:

1. The Net present value (N.P.V) method, and
2. The Internal Rate of Return (I.R.R) method.
   1. NET Present VALUE (NPV):

• The future stream of benefits and costs converted into equivalent values today. This is done by assigning monetary value to benefits and cost. Discounting future benefits and cost using an appropriate discount rate, and subtracting the sum total of discounted costs from the sum total of discounted benefits.
• NPV establishes what the value of future earnings is in today’s money. To do the calculation you apply a discount % rate to the future earning. Further out the earnings are (in years) the more reduced the net present value. The discount rate should reflect the opportunity cost of the resources devoted to the investment. What the resources could have earned if they had been invested elsewhere.
• Total discounted revenue (referred to as “Present Value of Revenues”) less total discounted costs (referred to as “Present Value of costs”). This method is one of the better financial measures of an investment.
• NPV tells us how much the property is worth now to the investor. IRR tells us the rate of return if the property is bought at a certain price.
• The sum of the present value of all costs and monetary valued benefits of a facility over its economic life.

1. Internal rate of return (IRR) or Internal yield

The concept of an internal rate of return as a measure of performance, or return on investment, is not new, nor is it peculiar to real estate investments. It is safe to say, however, that the internal rate of return (IRR) did not enjoy widespread use until modern computer technology simplified the process of cash flow analysis and remove the drudgery of repetitive calculations. Use of the IRR and related yardsticks is no longer impractical and has to become commonplace. The increased practical applications have been so rapid that the rationale of the IRR is sometimes left unexplained.

The Internal Rate Of Return As A Discount Rate

It has been state that the terms interest rate and discount rate are often used interchangeably. If the IRR can be explained as an interest rate, it follows that the IRR should also be explainable as a discount rate. A future payment can be discounted to present value by calculating the amount that should be invested now to grow with compound interest at a satisfactory rate to equal the future. The standing discounting formular for converting future value to present value is:

Present Value = Future Value (I)

                                (n=r)^t

Where r is the rate of return on capital per period and n is the number of years (periods) that payment will be deferred. If a series of future payments is discounted, using the standard formula and the total present value of the series is the sum of all the present values.

Findings The Internal Return

Finding the IRR is by trial and error. Occasionally the IRR can be calculated mentally, or directly, without using trial rates. The usual procedure, however is to calculate the net present value of the cash flows, using various trial rates, until one is found that will satisfy the IRR equation. The objective is to find the rate that will make the net present value equal to, or nearly equal to zero.

The process that requires some education guess work to establish a starting point, but from that point on it is not difficult to zero in on the IRR. If the trial rate produces a net present value greater than zero, we know that in most cases, the trial rate is less than the true IRR. If the trial rate produces a net present value less than zero, we know that, in most cases, the trial rate is greater than the true IRR. With this knowledge, we can sense the direction for the search to locate the IRR by bracketing. When the bracketing defines a narrow range, a close approximation of the IRR can be obtained either by linear interpretation or by similar triangles.

CONCLUSION

Investment appraisal refers to a series of analytical technique designed to answer the question – should we go ahead with a proposed investment? What are these techniques: There are four techniques and all involve a comparison of the cost of the investment project with the expected return in the future.

The four techniques

Payback: The time taken to recover the cost of the investment

Accounting Rate of Return: Profits earned on investment expressed as a stage of the cost of investment.

NET Present Value: The present value of net cash flows received in the future less the initial cost of the investment.

Internal Rate of Return: The discount rate that causes the net present value of an investment to be zero.

The non – discounting methods

• The first two methods are non – discounting methods
• The financial return from an investment comes in a stream over a number of years.
• The non-discounting methods make not distinction between the return which comes in ten years time from the return that will come during the current year.
• In other words these methods ignore the time value of money.

The discounting methods

• The significant feature of these methods is that they take into account the time value of money.
• What this means is that we recognized money received in the future does not have the same value as money received today.

 

 

REFERENCES

1. Olayonwa G. (2000) Property Management; Principles and Practice Iwo Debo Publishing Company.
2. Olayonwa G.O. (2012) Property Valuation, Iwo Debo publishing company, Iwo.