COMMERCIAL REAL ESTATE RISK IN NIGERIA: ISSUES FOR INVESTORS
Real estate is defined as land, including the air above it and the ground below it, and any buildings or structures on it. It covers residential housing, commercial offices, trading spaces such as theatres, hotels and restaurants, retail outlets, industrial buildings such as factories and government buildings. Real estate involves the purchase, sale, and development of land, residential and non-residential buildings. Due to its unique nature, heavy capital involvement and complexity, its development entails a lot of uncertainties and risks. Entrepreneurs in this sector are expected to make sound decisions in the management of these risks in order to achieve their entrepreneurial objective on property performance.
Real estate sector is globally regarded as an integral partof a country’s economy. It is responsible for a considerable part of its development investment with sizeable amount of economic growth through backward and forward linkages to a considerable number of ancillary industries and sectors. Its contribution to GDP in 2010 was 28% (US) and 28% in United Kingdom (Kongela, 2013) .The Indian real estate sector is one of the most globally recognized sectors. It is slated to grow at 30 per cent over the next decade. The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy (Kimani and Memba, 2017). The GDP share of real estate in India was 6.3 per cent in 2013 and expected to generate 7.6 million jobs a year. In China, the GDP share of real estate grew from 5 per cent in 2000 to 15 per cent in 2012, with 14 per cent of urban employment coming from real estate and related sectors (Mutreja, Chua and Guha, 2015). Similar performance were realized by African states were real estate contribution to GDP was6.82% (Nigeria in 2014), 10.2% (Tanzania in 2012) while in Nigeria it registered 4.8% of GDP in the year 2013 (Kongela, 2013; Nigeria National Bureau of Statistics (KNBS), 2015. Although, this sector plays a pivatol role in economic development, the performance of real estate properties has perinnially been eclipsed by several challenges including the management of its risks borne throughtout their development life cycle. The resultant is a threat to its expected or intended performance (Wiegelmann (2012).
Risk, irrespective of its type, should be managed to achieve the desired outcome (Ghahramanzadeh, 2013). Given that projects undertaken in real estate sector are widely complex and often have significant budgets, reducing associated risks should be a priority for each project developer (Gajewska & Ropel, 2011). Risk management is a process designed to remove or reduce the negative effect of the risks that threatened the achievement of project objectives (Project Management Institute (2013).Although many investors enter real estate market because of its high growth potential and high profitability, achievability of properties’ long term and short term profitability objectives depends on how well the risks are managed (Koirala, 2012).Sibomana (2015) postulates that the cause of property failure can be directly related to the extent of risk management undertaken during the property’s development lifecycle. Ghahramanzadeh (2013) found that reactive risk management is practiced more than proactive risk management, resulting to dismal results. Poor performance is not only as a result of lack of knowledge in systematic approach to risk management by the developers, but the situation is worsened due to information asymmetry about risks in real estate in what are the different types of risks that affect their performances, and which ones can be considered to be major in terms of their criticality. Such information is important for effective decision making process when managing risk. Citroen (2011) states that the wrong decision made on the choice of strategy due to lack of information, often times will lead to failure of the project or subject the real estate developer to heavy consequences.
A study on Malaysian construction industry revealed that 92% of construction projects could not be completed within the contract period, while 89% were facing the propblem of cost and time overunn in the range of 5-10% of contract. In their study on the factors affecting effective risk management in public housing construction projects in Rwanda, Maina et al. (2016) postulates that although there is a well- developed, designed and implemented processes of project risk management such as risk management planning, risk identification, risk assessment, risk analysis and risk response planning, 51% of construction project experience failure attributed to occurrence of risks. In this regard, they advocate for effective risk management approach that helps to convert uncertainty to risk and convert risk to opportunity. Similar findings were arrived at by Ghahramanzadeh (2013) in his study on Iranian real estate industry where reactive risk management is practiced more than proactive risk management, resulting to dismal results.
Property failure in Nigeria is not different. In an audit report coveing two and a half years of sampled counties by the National Buildings Inspectorate (NBI) revealing some worring findings; out of 4,879 buildings that were inspected during that period, 650 were categorised as very dangerous, 826 as unsafe, 1,185 fair while only 2,170 representing about 44% were found to be safe for occupation (National Building Inspectorate, 2017). According to Githenya and Ngugi (2014) argue that construction projects do not always meet key performance goals such as scheduled time, cost, quality or return on investment and hence beg for answers to explain this phenomenon. Kariungi (2014) on the other hand postulates that although risks are managed every day in the Nigerian real estate industry, they are not managed in a structured way and knowledge of risk management was close to zero. . A case at hand is the Nigeria Power and Lighting Company project in Thika, where major risk management flows were found to have contributed to the project’s completion failure (Kariungi, 2014). Similarly, minimal application of risk management practices was associated to poor performance of Constituency Development Fund (CDF) projects in Juja (Mwangi & Kwasira, 2016).
Statement of the problem
Commercial real estate properties play a critical role in economic growth of any nation (Mouzughi, Bryde, and Al-Shaer, 2014). In view of this, the Nigeria government together with its development partners as well as private developers continue to allocate huge financial resources to finance real estate development in a bid to earn from its investment. Real estate properties are considered to be successful when they meet the client’s satisfaction in terms of project cost, scheduled time, economic and structural functionality, market demands, and return on investments (Hove and Banjo, 2015)
Despite the Nigerian Government and other state corporations considering the real estate as a significant contributor of economic development more than 70% of construction projects in Nigeria experience time overrun of a magnitude of over 50%, while 50% of the projects experience excess cost budget of a magnitude of more than 20% (Auma, 2014; Gwaya, Masu & Wanyona, 2014). In the year 2015, office space absorption levels dipped, rental levels for retail outlets stagnated while the residential accommodation uptake was low (Knight Frank, 2015). On collapsing of buildings, the cases has reached an ‘alarming stage’ in the past few years with several buildings structurally failing (Kioko, 2014).Between 2009 and 2014 seventeen buildings spontaneously collapsed, killing and injuring many people. (Fernandez, 2014).In total 87 cases of buildings that have collapsed and death toll of 170 people has been recorded to date (Kabala, 2019). Financial performance is similarly blink with defaults on mortgage standing at 38 billion shillings by December 2018 (Central Bank of Nigeria, 2018).
This documented poor performance may be attributed to lack of adequate insight on key risk factors, their criticality and failure to manage property risks in a systematic way. For the performance of commercial real estate properties to be realized insight on key risk factors, their effects on performance and how they are dealt with is necessary to the developers. Such information is lacking in literature and amongst real estate entrepreneurs in Nigeria. This study envisages filling this gap by investigating risk management of selected risk categories and its effect on performance of commercial real estate properties in Nigeria.
Purpose of the study
The purpose of this study is to examine risk management of selected risk categories and its effect on performance of commercial real estate properties in Nigeria.
Objectives of the study
The following are the specific objectives of the study
- To determine the effect of technical risk management on performance of commercial real estate properties
- To investigate the effect of financial/economic risk management on performance of commercial real estate properties
- To evaluate the effect of market risk management on performance of commercial real estate properties