• Sunday, February 25, 2024
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Investors hit as frequent collapse worsens buildings’ risk profiles

Investors hit as frequent collapse worsen buildings’ risk profiles

On top of rising building materials costs, high-interest rates and low demand, investors are now taking a hit from frequent building collapse that has raised the risk profiles of buildings, especially high-rises, in parts of Nigeria.

In the past, investors were known to be at home with an understanding of risks in real estate investment, which include finance, location, market and asset class, not with risks relating to building collapse, which is hardly envisaged in construction.

In the last decade, the real estate sector in Nigeria has witnessed many building collapse incidents involving largely low-rise structures in locations where construction activities are scarcely regulated, monitored or supervised by relevant government agencies.

However, in the last couple of years, the sector has recorded collapse incidents involving high-profile buildings in highbrow locations, notably Ikoyi and Banana Island, which are regarded as the choicest and most exclusive real estate destinations in Lagos in particular and Nigeria in general.

“I am sure you are as surprised as I am that such incidents could occur in those locations, which represent our best in terms of luxury real estate location. In addition to the loss of lives, someone’s investment goes down the drain each time a building fails. Part of the unintended consequences of such incidents is the increase in risk profile of buildings,” Tayo Odunsi, CEO of Northcourt Real Estate, said.

Odunsi, who spoke with BusinessDay in a telephone interview, said financial risk is a major culprit here. He said lenders would be a lot more circumspect when giving out loans for real estate projects, and borrowers would be paying premium charges for loans after rigorous due diligence.

“I am sure that, going forward, lenders will also be intentional in finding out who developers’ insurers are; they would also like to see all the regulatory approval papers and are certainly going to ask for their track records before giving out funds. Buyers are also going to be asking to know the contractors and their track records and even the quality and source of building materials,” he added.

Adedayo Ojo, a real estate investment and marketing consultant, said an investor should first and foremost be guided by an understanding of the financial risks of a particular property and the level of his risk appetite.

“Realising your investment comfort level can help you determine the level of risk you’re willing to undertake when it comes to buying and selling real estate,” he said, adding that these were often reflected in liquidity risk, which occurs when an investor can’t quickly sell an asset to raise money or credit risk, which occurs when, for instance, a tenant stops paying rent.

Ojo said the collapse of the 21-storey building still under construction in Ikoyi in November 2021, and that of a 7-storey building under construction in Banana Island have changed the narrative on financial and other risks in real estate investing.

Both developers and real estate professionals were shocked at the Banana Island incident, wondering how that could happen in a place where, according to David Majekodunmi, chairman of the Nigerian Institute of Architects (NIA), Lagos Chapter, the value of a plot of land could provide homes for about 2,000 people in Ajegunle.

Read also: Banana Island building collapse: Nowhere is safe anymore – Experts

“This collapse did not happen in run-down and remote areas but in Banana Island. Up till now, we cannot establish who the contractors or architects of the building are. If it were in other jurisdictions, it would be easy to establish who the contractors and architects on the building are because they would display their signboards at the project site,” the NIA boss said in Lagos.

Continuing, he said: “We know what the Nigerian problem is all about. It is about attitudinal problem. It is penny wise pound foolish. What has just happened is a product of quackery. We have been warning of this trend, but it seems nobody is listening. Government says it is investigating; when the result is out, we will know those involved.”

A developer who preferred to remain anonymous said he was not only shocked but also bitter about what happened. He recalled that when the Ikoyi building collapsed, his company lost some investors who would have bought from their projects, but had to run away with their money.

“The same thing happened again this time. We were on the verge of closing an investment deal when the Banana Island building collapsed and our partners called it off, saying that investments were not safe in the country if buildings could collapse in such a highbrow neighbourhood,” he said.