CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

Commercial 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 commercial real estate risk analysis and management that the researcher is examining to help secure an investment. The primary commercial 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 commercial 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 has 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. However, be that as it may, whenever investors are planning to purchase a land in an area, engage professionals (e.g. Surveyors) to confirm whether or not the land is under acquisition by government or could or could not be sold (Black, 1986).

At other times, after government has 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 commercial real estate investment. If an investor decide 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 commercial loan. Ideally, a real estate/home loan should be a single-digit interest loan, but what Nigeria currently have are double – digit commercial 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 commercial double-digit interest rates in order not to miss their desirable property.

Despite its inherent risks, commercial 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 commercial 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 commercial 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 commercial 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 THE PROBLEM

It is very important for investors in commercial real estate to first ascertain the risk factors of an investment asset as good as possible 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. Commercial real estate investment is usually rental properties intended to generate a return from rental income or capital appreciation. Commercial property types are office, retail, multi-family, industrial and hotel, self-storage, seniors housing and health care among others. 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 commercial real estate risks in Nigeria.

1.3   OBJECTIVES OF THE STUDY

The following are the objectives of this study:

1. To examine commercial real estate risks in Nigeria.
2. To identify the issues investors may have in commercial real estate sector in Nigeria.
3. To determine the challenges of commercial real estate sector in Nigeria.

1.4   RESEARCH QUESTIONS

1. What are the risks involved commercial real estate in Nigeria?
2. What are the issues investors may have in commercial real estate sector in Nigeria?
3. What are the challenges of commercial real estate sector in Nigeria?

1.6   SIGNIFICANCE OF THE STUDY

The following are the significance of this study:

1. The results of this study will enlighten investors from all over the world on the risks that may be encountered while investing in commercial real estate in Nigeria.
2. This research will also serve as a resource base to other scholars and researchers interested in carrying out further research in this field subsequently, if applied will go to an extent to provide new explanation to the topic.

1.7   SCOPE/LIMITATIONS OF THE STUDY

The scope of this study on commercial real estate risks in Nigeria will cover all the risks investors are exposed to in the Commercial real estate sector in Nigeria with a view of providing a guide against the risks.

LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

 Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

REFERENCES

Black, D., Success and Failure of Futures Contracts: Theory and Empirical Evidence, Monograph Series in Finance and Economics, Monograph 1986-1. New York University, 1986.

Clayton, J. “Commercial Real Estate Derivatives: They‟re Here… Well, Almost.” PREA Quarterly, Winter 2007), pp. 68-71.

Fisher, J. D., ‟New Strategies for Commercial Real Estate Investment and Risk Management‟, Journal of Portfolio Management, Vol. 32, 2005, pp. 154-161.

Syz. Juerg M. Property Derivatives. (Wiley: Chichester, 2008).