THE EFFECT OF REAL ESTATE DEVELOPMENT ON ECONOMIC GROWTH IN NIGERIA
CHAPTER ONE: INTRODUCTION
Background of the Study
Real estate development helps in creating employment, providing shelter to families, promoting distribution of income in an economy and lessening poverty. Real estate property is property made up of a mix of land, buildings, and natural resources sitting on the land, flora and fauna (Muli, 2013). Real estate development involves purchase, management, ownership, rental land or sale of real estate for profit (Abraham, 2009). Real estate investments relative to other form of investments is illiquid, demanding in terms of capital (although capital can be secured through mortgage) and highly dependent on cash flow. If the variables influencing the investment growth are not well mastered and controlled by an investor, investment in real estate is significantly risky (Geoffrey, 2011).
Theoretically, the investment theory endeavors to explain investment shift by investors. The theory states that individuals are for utility maximization, always switching from one investment to another primarily due to risk difference even though returns may be the same (Markowitz, 1958). Where real estate offers better returns given its moderate risk, then investor will prefer switching their investment to this sector hence contributing to its growth. Solow-Swan theory on the other hand posits that an output of an economy is directly proportional to the existing knowledge. The models ignore the impact of natural resources including land in determining output of an economy and views production as a function of Labour, Capital and knowledge. New growth theory was an improvement of neoclassical growth theory where unlike in neoclassical theory, progress in technology was considered part of the production function. The endogenous theories primarily seek to explain source of technological driven productivity growth.
The Nigerian real estate property market comprises of all property classes from houses occupied by a single family to those inhabited by many families, commercial land, Agricultural land, office space, go-dawns and warehouses, shopping complexes and retail shops (Masika, 2010). However, Nigeria’s real estate sector continues to lag in fulfilling these fundamental roles due to various factors affecting the sector including the pursuit by most Nigerians to own houses, increased migration to urban areas, increased remittances from Nigerians living in diaspora among others. Consequently, prices of properties in urban setup have skyrocketed. Government investment in heavy infrastructure such as the construction of Thika Road and Mombasa road has led to fast development of properties in the served areas due to improved demand price. It’s therefore important to examine factors that support investment growth to inform policies that would sustain future growth of the sector (Muli, 2013).
Real Estate Development
Real estate property comprises of land and all else that is permanently affixed to it. Real estate can also be defined as part of individual’s estate comprising of realty, where estate refers to total individual worth (Brueggeman & Fisher, 2008). Solnik and Mcleavy (2009) describe real estate as a form of intangible asset one can touch, see and feel, as opposed to financial instruments claims. Real estate falls under four broad categories; Residential, Agriculture, Commercial and Development Real estate (Michigan State Tax Commission, 2013).
Real estate industry, like any other industry, undergoes continuous evolution. Rural urban migration has been noted to be key demand driver of both residential and commercial properties in Nigeria and world over (Kimani et al., 2016). Consequently, demand and supply mismatch occurs. The sitution is aggrevated by inefficiency on the supply side as a result of challenges ranging from lack of financing mechanism and loan capital, unfavourable interest rates, low earning levels by the general population, cost of building materials and issues of land acquisition in Nigeria.
Real estate development can be measured through a number of approaches. One of the approach is to use securities exchange stock price indices. Indices are commonly used as benchmark when measuring shares and fixed interest stock performance (Barkham, 2012). They are applied in the property market but in a limited scope as compared to stock markets primarily due to unavailability of data. Owing to the subjectiveness of many approaches used in valuing properties, Ideally property index should be derived from a large sample free of influence from any one institutional investor where income, capital performance and total performance are segmented and considered separately for each property category.
Alternatively, the market value can be used to measure performance of property in the market. The value placed on a property is a major determinant of its performance. The value may be either market value or fundamental value. The fundamental value being the property value attached to a property by the owner and which does not in many instance relate to the market, Thalmann (2006). The market value is the value market places on the property.
Normally, property indices are produced by industry players such as investment firms with significant market share or government valuing agencies. In real estate sector, indices are
produced by real estate investment firms e.g. HassConsult Real Estate Ltd. Specifically, the Hass composite Sales Index is a measure of asking property sales price, based on a Mixed Adjusted Methodology.
Economic growth can be defined as the increase in the total output of an economy and can be measured using gross domestic product (GDP) with a finality aim of enhancing standard and quality of life among the populace. This happens when the output per capita outgrows population, Case, Fair and Oster (2012). Haller (2012) defines economic growth as process of growing the sizes of countries’ economies, the macro-economic indicators particularly GDP per capita, systematically and that results to a positive effect on the social-economic sector. Thus, economic growth is the expanding of a country’s economy.
Growth in a given economy can be measured using GDP, which estimates market throughput by summing values of final goods and services created and exchanged for money within a given time period, Costanzaet al.,(2009). Subsequently, the rate at which economy grows is defined as the percentage change in the produced quantity of goods and services from one year to the next (Keithly, 2013).
Real Estate development and Economic Growth
The effect of property market developments on growth of an economy has attracted interest for the longest time. This may be due to the role housing plays in a Country in providing one of the basic need to its population; shelter. While this is an important sector to a country’s growth plan, particularly in addressing the ever increasing urban population
resulting from among other factors rural-urban migration, its contribution, or lack of it, to economic growth remain unclear.
The change in real estate prices as a result of wealth effect may affect an economy. A hypothesis by Friedman on permanent income suggest that people are likely to change their desired consumption if prices of houses affect their target lifetime wealth (Norman, 2011). Investment theory endeavors to explain investment shift by investors. Where real estate offers better returns given its moderate risk, then investor will prefer switching their investment to this sector hence contributing to its growth (Markowitz, 1958). Solow-Swan theory on the other hand posits that an output of an economy is directly proportional to the existing knowledge. The models ignore the impact of natural resources including land in determining output of an economy. New growth theory was an improvement of neoclassical growth theory where unlike in neoclassical theory, progress in technology was considered part of the production function. Hence, progress in technology contributes to the overall output of an economy.
Various studies suggest that there exists a direct relationship between real estate and economic growth. Ho and Wong (2008) in Hong Kong while assessing the effect of prices of house on private local demand found that booms in housing market significantly augmented domestic demand. Studies by Ludwig and Slok (2004) and Case et al., (2005) reported existent of relationship between price of properties and the consumption in the USA and several other OECD economies. Leung (2001) investigated consumption and investment channels in Hong Kong and found that the two channels significantly responded positively to prices of property.
Conversely, a study by Peng, Tam and Yiu (2008) in China found effect of wealth on consumption as negative and to be of statistical insignificance. Delong (1992) and Long and Summers (1991) suggested that investment in buildings has insignificant relationship to GDP growth when using purchasing power parity adjusted data. Green (1997) and Podenza (1988) view is that residential real estate investment just like interest rates and prices of stock is a good predictor of GDP. Delong (1992) and Long and Summers (1991) suggested that structural investment has no relationship worth noting with GDP growth when using purchasing power parity adjusted data.