Real estate still offers hidden wealth creation opportunities
Historically, the three main asset classes have been equities (stocks), fixed income (bonds), and cash equivalent or money market instruments. Currently, most investment professionals include real estate, commodities, futures, other financial derivatives, and even cryptocurrencies to the asset class mix.
According to Muna Real Estates Research Team, about 73 percent of Nigerians in various States of the federation choose a real estate agency or brokerage as a side hustle.
And of the 73 percent, only 4 percent have formal education on real estate. The basic thing the 69 percent do is to help people sell their properties, mostly undeveloped land.
However, in as much as real estate boils down to buying and selling of properties; there are still so many professions one can take up in the industry.
The most popular are the brokers or agents. There are also opportunities for the developers, the deal packagers, the investment analysts, and the financial modelling and valuation analysts, just to mention a few.
What many people may not recognise is that in real estate, it is not only about the property alone, but about the property and the cash invested. This leads us to the point where we talk about the metrics, the strategies and the exit plan.
The most popular metric investors use is the ROI – Return on Investment. Let us take a look at a typical ROI scheme.
You buy a property for $100,000 (N52, 7000, 000) and sell it after 2 years for $120,000 (N63, 240,000). Your profit is $120,000 (sales proceeds) – $100,000(Initial Purchase Price) = $20,000. It means $20,000(profit)/$100,000(initial investment) = 20%.
The problem with this ROI is that it does not account for the time value of money. By saying the time value of money, I mean the non-recognition of the effects of inflation which reduces the purchasing power of money over a period of time.
It does not account for capital gains tax, maintenance, agency/brokerage fees and so many other things that affect the value of the money invested as compared to the money gained.
In sales of a property, it is easier said than done. Investors often find themselves taking advice from unprofessional estate agents and end up making regrettable investment decisions.
Let us take land for instance. A common saying states that if you haven’t bought land then you have not landed. Leave that quote in the waste bin. I do not advise anyone to buy land as an investment except when they intend to develop the land in the near future.
Bare land as investment ties down money because undeveloped land does not produce cash flow. You are banking on only speculated appreciation and not guaranteed appreciation. As an investor inland, even if you get that appreciation; to exit the investment you need to sell that land.
The land has elastic competition. There is land everywhere. Selling the land 96 percent of the time becomes hard for the investor because there is land everywhere for sale, why would an investor buy your own land? This is the primary reason why we don’t advise land as an investment.
This is part of why we have decided to host the largest real estate conference in Africa in the largest ultra-modern event hall in Enugu state Nigeria, to enlighten Nigerians on the intricacies associated with the real estate industry.
This conference would be the largest real estate conference in Africa. It is scheduled to be held on the 6th of November 2021 at Amadeo Hall, Elim Plaza, Off Ogui Road, Enugu, Enugu State, Nigeria and will have in attendance Munachino Obinna Eze, CEO of Muna Real Estate and chairman of Millennium Group of Companies.
I have consulted in the real estate industry for over 6 years and in these past years, I have seen a lot of people who bought lands with a promise that never came to pass. People who jumped into an investment with no clear exit plan. I will take three examples – Abuja, Enugu, and Lagos.
Abuja – in a newspaper published by the DG of NBBRI, The director-general, Nigerian Building, and Road Research Institute, NBBRI, Sampson Duna on the 16th June of 2021. He charged the Civil Society Organizations, CSOs, operating in the country to commence a process that would compel the Federal Government to place a heavy tax on empty houses scattered over the Federal Capital Territory, FCT, Abuja.
There are so many empty houses in Abuja and amidst the housing deficit; there are also thousands of new constructions coming up in Abuja as well. This plunges the real estate market in Abuja into a chronic recession.
As an investor who buys to sell for future appreciation – the Abuja market is like dancing into a fire. Basic economics is supply and demand. When there is too much supply and not enough demand, property prices fall.
As an investor, you keep spending on maintenance of the property while looking for someone to sell to so you can exit the market.
This is the case of an investor who consulted me in 2018 to assist in selling his properties at Apo, Abuja. I simply converted his units to serviced accommodation so he could at least be earning rental income while waiting to sell.
Enugu – in 2017, the State government decided to develop an area behind the former NNPC Depot at Emene, from 2018 till date. The price of each plot is still going for 1.5million naira. The early investors have tied their money down. In 2017 with 360 as the dollar to naira black market rate, 1.5 million naira would be $4,166.
Now in 2021 with 508 as the black market rate, 1.5million naira is $2,952.
If you had left your 1.5million in dollars in 2017, you would have a dollar profit of $1,214. That’s a better option than buying the land with no appreciation. Hundreds of investors put their savings down and bought the promise.
Lagos – the tale of Ibeju Lekki investors. Thousands of investors in Nigeria and diaspora have invested in Ibeju Lekki with the promise of appreciation and guarantee to be the Dangote Refinery. There is appreciation. But how do you get the appreciation without selling the landed property?
There are investors who have acquired the property in Ogun state and still believe that their property is in Ibeju Lekki. For some investors, it could be their spare cash, and for some others their life savings. Either way, before making a real estate investment, there are so many considerations or analyses to be conducted in the aspect of the cash invested property market cycle and also government regulations.
The most performing investment for some of my clients is that which they invested in an apartment that sold 883,000 Arab Emirates Dirham (AED) in June. And currently, it is selling for 1,068,000 AED since August. There is 185,000 AED already in profit which can be withdrawn by taking a second mortgage (refinancing) on the property.
This is making 26,270,000 Naira in profit in a space of 2months, 100 percent tax-free money. People need to understand the finance part of real estate. People need to understand tax and legal avoidance strategies. Then, people need to understand property market cycles. And, people need to understand real estate investment analysis in general.
At this conference, we have a confirmed guest speaker from the UAE Simon Samir who has over 10 years of investment knowledge in the Dubai property market. The chairman of Copen Group who was also the President of the Real Estate Developers Association of Nigeria is a confirmed speaker on the topic – Understanding the real estate value chain.
I will be speaking on real estate investment analysis and sales, among other top industry experts with a wealth of knowledge to share at the conference. Education may cost, but ignorance costs more.
Kenneth Etiaka is a public affairs analyst and writes from Lagos.