Real Estate: What it is & How it works in developed economies & Nigeria

The Story

In the past year, there has been a tremendous rise in home prices globally. The price rise which is an increase in both rent and the selling price of houses is one of the many aftermaths of the pandemic. Incredibly low interest rate, fewer construction projects, and change in family spending that came with the pandemic account for the rise we’ve seen in home prices in the last 18 months.

In this article, we’ll take a look at how the real estate market works and how to position yourself as an investor in the market.

Real Estate, What Exactly Does It Mean?

Real estate is broadly defined as land including everything that lies above and below it, the things permanently attached to it, and all the rights of ownership that come with the land.

In economics, real estate is a factor of production (remember land, capital, labor & entrepreneurship) and is one of the major determinants of economic growth.

Striking Features of Real Estate

• Real estate is limited in supply, this implies it’s scarce and always in demand. Scarce assets are positively correlated with inflation, making real estate a good hedge for inflation.
• Every real estate property is unique. No two real estate properties have the same geographical location.
• Land is indestructible, the building on a land can be destroyed but the land will remain.

Types/Categories of Real Estate

There are 6 types of real estate properties, they include:

Agricultural Properties: These are lands dedicated solely to agricultural use such as ranching, farming, tree planting, etc.

Residential Properties: These are properties that people live in they include: apartment buildings, single-family homes, condominiums, etc.

Commercial Properties: Commercial properties are properties used for commercial activities, examples are office spaces, shopping malls, theaters, parking lots, hotels, etc.

Industrial Properties:  These are buildings put up for the purpose of being used as warehouses, factories, power plants, etc.

Mixed-Use Properties: These are properties that serve multiple purposes. These types of properties can double as commercial and residential properties.

Special Purpose Properties: Special purpose properties are dedicated to public use. They include religious centers, government buildings, libraries, schools, etc.

How Real Estate Ideally Works

Though buyers and sellers denominate the activities in the real estate market. There are a number of other players like developers, construction workers, insurance companies in the real estate market. Property prices are determined by several factors but the major determinant of prices of properties are supply and demand.

In situations where real estate properties available for sale exceed the demand for properties, we have a buyer’s market. The buyer’s market is ideal for buying properties as property prices are usually low in a buyer’s market. The buyer’s market also reflects the illiquidity of real estate properties, low demand for real estate properties implies a property can be available for sale for several months with no interested buyer.

The opposite of a buyer’s market is a seller’s market. Here the sellers tend to dictate the price of properties as there is demand for properties and limited vacant spaces. Buying properties in a seller’s market can be rigorous as several buyers can bid for the same property, driving up the price of such property.

In developed economies, real estate indicators are released monthly to help track housing statistics and tell how the real estate market is performing. Some of these indicators are new constructions and interest rates.

New Constructions: New constructions help to gauge how much investment is ongoing in an economy and the supply of new homes. Typically, newly constructed properties are more expensive than resale homes as they are built in compliance with new building regulations, require less maintenance, and are more energy efficient than older homes.

Interest Rate: Among the many reasons interest rate is tracked, real estate is one. Interest rates determine the mortgage on houses (i.e., rates individuals will pay as interest on the monies borrowed to buy houses). The demand for houses tends to rise in low-interest rate environments implying a rise in the price of real estate properties in low-interest-rate environments. In periods of high-interest rates, people take on fewer mortgages and home prices are low.

Real Estate in Nigeria

The real estate industry in Nigeria has shown tremendous growth over the years. As reported by the Nigerian Property Center demand for real estate in 2019 rose by double digits and in 2020 Nigeria moved up 15 places from 83^rd to 68^th on the Global Real Estate Transparency Index. As of 2015, the Nigerian real estate sector was valued at N6.4trn with an average annual growth rate of 10%.

Real estate in Nigeria is however a little different from what obtains in other climes. The land use act of 1978 regulates the ownership of real estate in Nigeria. This law gives state governors authority over any land situated in the state. The Governor gives the right of ownership for individuals and corporate bodies to hold and use the land for a limited term, by issuing a Certificate of Occupancy or Governor’s Consent.

Despite the growth witnessed in the Nigerian real estate sector, housing remains a major issue. The housing deficit in Nigeria according to PwC is estimated at 17mn in 2021. Access to housing is a major issue in Nigeria. Mortgages are very expensive and so most Nigerians live in rented apartments.

The pandemic, border closure, devaluation of the Naira, all led to the rise in building materials making houses more expensive and unaffordable.

How to Invest in Real Estate

Real estate is one of the few assets that hedge against inflation and is always in demand, making it a favorite with investors. There are different ways of investing in real estate, some of which are:

Rental Properties: One of the most popular ways investors earn from real estate is through rental properties. Investors buy properties with the sole aim of renting them out. This serves as a source of regular income and a hedge against inflation as rental income rises with inflation.

House Flipping: Here investors buy and sell houses at prices higher than the original purchase price. To get the best out of house-flipping as an investor in Nigeria, it is best to buy properties at their off-plan stage (i.e., when the property is still under construction). Prices are cheaper at off-plan, and they immediately rise when the real estate projects are completed.

The downside to rental properties and house flipping is that real estate properties can sometimes be illiquid.

Another way investors invest in real estate is via Real Estate Investment Trusts (REITs). REITs are a portfolio of real estate properties managed by a real estate company. Investors buy units of the REITs and earn dividends from their investment. REITs can be publicly listed or privately managed. Publicly traded REITs pay all their profits as dividends to investors.

Real estate funds are also a viable way of investing in real estate, allowing investors to earn a return on an annual basis. Diversified real estate funds (i.e., funds with investment in properties in different parts of the world) are ideal for Nigerian investors as they provide an extra hedge against devaluation.

Investors that do not want to be bordered on the rigors of managing real estate properties can invest in REITs and real estate funds.