A section of Lagos                                          Photo courtesy

Real Estate is the land and building attached to it. Real Property is the legal rights that run with land and building; leasehold, leased fee, fee simple and freehold. Real estate is the 2-3 dimensional physical aspect of real property. Example of real property is fee simple or freehold; ownership in perpetuity except when interrupted by police power and/or eminent domain of the state.

When a state in Nigeria grants one a  'CO' - certificate of occupancy, even though it is for a term certain [leasehold], it is considered real property given the initial term and renewal options. The land one owns in their village via 'RO' - right of occupancy,  is freehold because such land is owned in perpetuity but still subject to police power and eminent domain.

The analysis I offer is intended to alert those in property economics and valuation modeling to question Nigeria's income versus value indices. A property that commands a gross potential rental income of N600,000 equivalent of $4,000, with the possible sale price of N30m or $200,000, is unimaginable in a developed economy where income is the basis of value. Assuming one was to borrow to acquire such property and rely on the income to carry the mortgage note, it would not happen. If the rule of the thumb, devoid of analysis were to hold true in all cases of property valuation, the highest value one can expect from such property earning N600, 000 annually is N6m or $40,000. That is a 10x factor.

Nigeria's real estate is skewed and overly hinged on transactions motivated by undue volume of cash chasing few investment assets. Nigeria real estate market is very small. The asset class and grade are hardly investment quality. Major foreign pension funds and insurance companies shun Nigeria's real estate opportunities due to the limited and confusing market fundamentals that direct and influence investment interests.

Given that real estate transactions in Nigeria are often done to hide money from questionable sources, it is not uncommon that the market sees large cash infusion on assets of less desirable grade with returns that are unsustainable. Most buyers are not informed on the economics of real estate; they simply want to buy assets for social prestige as opposed to economic fundamentals. Sophisticated investors therefore stay away while the vultures come in and further make the market unattractive.

Since Nigeria’s financial institutions and service companies have limited exposure in real estate investment in the country, the cash driven investments are not at levels to produce desired trends. Very few cities in Nigeria (such as Abuja, Lagos and Port Harcourt)  have some level of limited sophistication. The rest of the cities are bare and not attractive for considerable investment. Here is a measure of property class:

Nigeria has less than 5,000,000 square feet of purpose built office buildings available for rent. This is an indication that the economy is not knowledge based and when it comes to R&D spaces, it is virtually non-existent. Nigerians are trading people and even the retail real estate are denoted with street hawking, dominated with open space markets, and mom-pop shops/stores that sell anything and everything.

What many in Nigeria regard as shopping centers and malls, are basically neighborhood stores of less than 100,000 square feet. While definitions can be localized, certain grade of real estate assets are universal by definition, and when such definition seems to go counter  international standards, global investors shy away.

Nigerians like to define their own rules; a dangerous culture that increases their notoriety while damaging their national reputation. The consequences of such culture is the absence of volume of transactions and sophistication to help jump-start the real estate market. Since real estate in developed economy constitutes about 70% of a nation's economic wealth, the manner of its use must meet certain standards in order to add value to the overall economy.

Most municipalities in US rely on real estate property taxes as source of their revenue. It is the highest single source of their revenue, bringing in up to 45%. In Nigeria, property tax called rating valuation lacks good administrative structure and skilled practitioners to help states and local governments increase and improve their revenue base. It is no wonder; most Nigeria states and cities (except for Lagos with bare attempts) collect less than 5% in revenue attributed to property tax. How can they, when real estate ownership in Nigeria is more about prestige than returns and responsibility?

As it is, Nigeria is a fifth rate country in terms of a country considered favorably for global real estate investments. Until there is significant investment in Nigeria’s non-oil/gas sectors, the economy will never produce enough activities to absorb the needs of its teeming population. Ironically, the dance and songs about Nigeria oil is just that. Nigeria in 2011 realized less than $40b in the sale of oil/gas. Nigeria can realize about more than $200b from property taxes were the leadership sincere and committed to jump starting the domestic economy. While Nigeria is one of the largest oil producers, it's largely an undeveloped country that dances around a single commodity – oil.

I Rest!

Ejike E. Okpa, II
Real Estate Practitioner
Dallas, Texas.
[email protected]