Land banking, the death of real estate in Nigeria

In contemporary times, Land banking has gained popularity as a legitimate and successful investment strategy among Nigerian real estate investment firms and private investors. The industry is still thriving in major Nigerian cities, despite the fact that most citizen’s disposable income is declining due to the country’s current economic situation. This economic activity comes with its corresponding challenges and risk factors.

However, one of the greatest motivators in this line of real estate business is that land supposedly appreciates over time irrespective of its location and economic climate of the country. As the Nigerian population continues to grow on a geometric basis, the demand for housing will continue to go higher and this is one of the major factors that make land banking a most profitable business especially in a fragile economy like Nigeria where investments in bonds and other financial assets are being eroded by inflation. Real estate investors in this category are always on the lookout for landed properties that are not developed especially in the non-highbrow areas of a city, semi urban cities, and even rural areas with potential for development.
There are many problems associated with land banking which makes it one of the riskiest real estate investments. Some of the most common challenges and problems associated with land banking include but are not limited to:

Land prices do fluctuate, even though raw land is becoming scarce. The investor is banking on the hope that the value of the Land would appreciate. In most cases , the properties are bought for an exorbitant and overvalued price: when the investor cannot resell the land, they will be forced to sell at a price lower than what they paid for the land thereby loosing money . They may not be able to utilise the property in the way that they envision before they exit the investment. According to the Journal of African Real Estate Research, large proportion (60%) of predicted property values produced an error margin of ± 20% which is far above acceptable industry standard. The implication of this is the increase in the risk of investment for various real estate investors/stakeholders and in turn influence the instability of property market prices. The issue of land/property valuation accuracy cannot be overemphasised due to its influence on the overall economy of the nation: when a land is purchased at an overvalued price the effect of this is an increase on rent or property sale price when the building has been constructed. Leading to inflated property prices and invariably cost of living
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Land grabbing is one of the many factors that are bedevilling land banking business in Nigeria. This forceful acquisition of lands by a higher authority is a major threat to land banking. In major Nigerian cities like Abuja and Lagos, so many low income investors and even recognized real estate companies have lost their hard earned investments to the government and big organisations due to evolving policies on development control overtime.
In the Nigerian real estate market, It is not atypical to see prices of Properties: Buildings, Plots of Land running into several millions or billions of naira especially in highbrow areas in Abuja (Asokoro, Maitama, and Garki etc), Lagos (Ikoyi, Victoria Island, Ikeja, Lekki, Banana Island, VGC etc). For instance, the asking price of an undeveloped less than full plot of land in Allen Avenue in Ikeja is priced at 250 million naira. N250 million can fix an estate somewhere in Ikorodu (Lagos state), Abakiliki (Ebonyi State), Okigwe (Imo state), Umuahia (Abia state) amongst others, with high returns on investment as well.

There is no doubt that real estate is thriving and will continue to be attractive in Nigeria in view of the fact that our enormous population is truly devoid of sufficient accommodation mostly due to the exorbitant price of Properties. Nonetheless, it will be beneficial if we are a little more astute, discriminating, and not easily swayed by pretentious sales pitch. Juxtapose the current Real Estate windfall in Nigeria with the US housing bubble in 2006. Housing bubbles may occur in local or global real estate markets. In their late stages, they are typically characterized by rapid increases in the valuations of real property until unsustainable levels are reached relative to incomes, price-to-rent ratios, and other economic indicators of affordability. Land prices contributed much more to the price increases than did structures. The exorbitant prices of land and real Properties in Nigeria would inevitably lead to housing bubbles where an average Nigerian cannot afford to buy a home or even pay rent.

The major problem is not lack of housing, rather it is lack of affordable housing as there is an oversupply of housing with exorbitant sales or rental prices.

My recommendation is for a review in the valuation of land prices.

When tackling affordability, little to nothing can be done about the cost of construction, leaving us with the valuation of the land as the only mode of tackling the issue of affordability.

The major problem facing many developing economies is opportunity cost, and with the constant increase in the population of the workforce, there is an increase in the number of daily commuters that have to move from the suburban(affordable) areas into the main city(unaffordable/overpriced) areas.

Opportunity cost, which is a brutal killer of an economy’s productivity, is one of the major reasons for expansion of roads, development of new cities and expansion of already existing cities.

We must therefore find a way to make land banking more realistic than detrimental to the general public as the negative aspect of it is lack of proper development, valuation fraud and overvaluation of the land itself which invariably affects the housing market in the area of affordability.

Dr. Munachino Obinna Eze, is the Chairman of Millennium Group.