The benefits and challenges in real estate investment in Nigeria (1)

By Olumide T. Agunbiade |Online Editor

FOR decades, investing in real estate in Nigeria was a wide open playing field where anyone could seal any type of deals. Today, investors have been forced to re-discover themselves, the real estate and economic bubble.

Using Donald Trump as example, it’s easy to see that large fortunes can be made from investing in real estate. Like Mr. Trump, many people were fortunate enough to have grown up under the dedicated care of a father already successful in real estate investment. The question is whether anyone can be a profitable real estate investor without having the savvy of Donald Trump, or the benefit of his upbringing, to reap rewards.

The more effort put into understanding the daily and yearly requirements of rental property ownership benefit the investor’s long term prospects for success. Real estate is not liquid. Anyone who has invested in real estate that wants to get out knows selling at any price would be a challenge at this point in time because lending markets have shrunk; finding qualified and capable buyers who are motivated to buy is the another  hurdle.

Is the limitations expected? Yes. Experts foresaw this downturn in real estate and the economy, although the actual timing of it was not known. The spiraling prices of houses went to dramatic heights for far longer than anyone thought possible.

Clearly, Investing in real estate is likely to be one of the largest emotional and financial investment decisions you will ever make. A tremendous sense of pride comes with owning your own property, especially your own home. The value from real estate comes from two basic elements: land and the building on that land.

As well as providing the dual role of both shelter and investment, huge financial benefits can be derived from investing in real estate. Yet, every investment comes from some degree of risk and real estate is no different; it runs the full gamut of risk and investment success.

Whilst it is true that many of those who invested wisely many years ago have made fortunes from this form of investment, many others are still smarting from their wounds several years on,  as things can go so terribly wrong.

Here are some important aspects that people should bear in mind when considering investing.

LOCATION FACTOR       

It is often said that the three most important factors in real estate investment are: Location, location and location. The value of land is largely dependent upon its location. In the wrong location, the rent you may are receive on your property may be nothing compared to what you actually invested in the property.

The value of land is largely dependent upon its location. In the wrong location, the rent you may receive on your property may be nothing compared to what you actually invested in the property.

 Generally, however, people do make money; especially if the property is priced right and in good location. Neighbourhoods can change; community issues, poor enforcement of regulatory policies: these can affect an area adversely and diminish property values considerably.

It is important to have a fair knowledge of the particular location where you are looking to buy and try to find out as much as possible not only about it today, but plans for the area over the next few years.

FOCUS ON LONG TERM

Real estate is not a “get-rich-quick” investment; it requires time, patience and energy. It is risky to invest with a short term view, like stock market investment, real estate goes through up and down cycles that can last for many years.

Though there are boom periods in which even the short-term investor will smile to the bank, it is usually those who invest over the long -term that reap the benefits. In most markets, property prices do not move up quickly and property can take a long time to sell even at a decent and fair price.

MORTGAGE

The major challenge is the issue of mortgage.  According to the Managing Director, Federal Mortgage Bank of Nigeria (FMBN),Gimba Y’au Kumo, the inability of the CBN to pay its equity contribution into the National Housing Fund is responsible for the apex  mortgage bank’s inability to either provide the housing needs of Nigerians or mortgage for people to build their own homes. Also, there is no mechanism for risk sharing that will encourage banks and other financial institutions to extend loans to people at the lower income level. Yet, if loans are less expensive and easier to qualify, then the property becomes more liquid.

In addition, lack of primary infrastructure such as roads, water and electricity is another concern for investors. Poor infrastructure accounts for about 35 per cent of housing costs. In most cases, investors and property developers have to provide the infrastructure which invariably increases the cost of the houses they build thus making such houses expensive.

When you are planning to buy a property, be sure that you can actually afford it. Spending more than you can actually afford can derail your plans and if you fail to pay your mortgage, you could end up losing the property you acquired. The amount you will be able to borrow from a bank or mortgage institution is often tied to how much you earn, typically, three to four times an annual income.

The good news is, the Nigerian mortgage industry is fast developing and whilst tenors are relatively short and interest rates high, long term payment plans are now available for 10 years and beyond. Also, the National Housing Fund (NHF) disburses up to five million per applicant through primary mortgage institutions with fairly attractive repayment terms.

Apart from the purchase price of a property, which reflects its location, features, age and condition, there are significant transaction costs to consider including lender fees, valuation, survey fees, agency fees, legal fees, transfer taxes, stamp duty and insurance cover. Hence, spending more than one can afford can derail plan and failure to pay up could lead to losing the property acquired through mortgage.

RENTAL INCOME AND CAPITAL APPRECIATION

Increasing property prices and demand for quality rental accommodation means that homeowners enjoy income and can expect prices to rise above the rate of inflation. Such passive income which keeps  running whether you are working or not can supplement your current income and can be a wonderful boost in retirement. It can also offset any rent that you may be paying out to a landlord.

To be continued!