ABSTRACT
The global financial crisis that impacted
on all world economies through 2007 and 2009 has not been confined to the
finance institutions but has had a direct and indirect impact on the property
markets worldwide from both an investment and ownership perspective. It must be
noted that the property markets have experienced various levels of impact from
the event. The impact of the crisis is considerable if one is to consider the
impact on Lagos property market and general real estate practice in Lagos at
the point of the crisis as enunciated by various writers, . However, despite
the very direct impact of the global financial crisis on residential property
markets in 2007, the year between 2009 and 2013 saw an increased rentals and
sales in residential properties in Banana Island. Therefore the impact of the
global financial crisis on residential properties in Banana Island submarket is
not significant. It is suggested that government should immediately increase
investment in public infrastructure to support private sector thereby enhancing
diversification and competitiveness in real estate investment and this will
make rentals more affordable to the increasing population. Also, lending rate
to real estate investors should be well managed to avoid predatory lending.
This could be achieved by way of reduction to property investors and this will
encourage further investment in real-estate development.
TABLE
OF CONTENTS
Title Page i
Certification ii
Declaration iii
Dedication iv
Acknowledgements v
Abstract vi
Table of Contents vii
List of Tables viii
List of Figures ix
CHAPTER
ONE: INTRODUCTION
1.1
Background to the Study 1
1.2
Statement of the Problem 5
1.3
Research Questions 7
1.4
Aim and Objectives of
Study 7
1.5
Significant of Study 8
1.6
Scope of Study 9
1.7
Study Area 9
CHAPTER
TWO: LITERATURE REVIEW
2.1
Global Financial Crisis
and its Original 12
2.2
Causes of Global
Financial Crisis 15
2.2.1
Mortgage Underwriting 15
2.2.2
Down Payment and
Negative Equity 16
2.2.3
Predatory Lending 16
2.2.4
Risk Taking Behavior 17
2.2.5
Excessive Private Debt
Level 18
2.2.6
Home Equity Extraction 18
2.2.7
Housing Speculation 19
2.2.8
Pro-cyclical Human
Nature 20
2.2.9
Corporate Risk Taking
and Leverage 20
2.2.10 Lack
of Transparency and Independence in Financial Modeling 21
2.3
Effect of Global
Financial Crisis World Economy 22
2.4
Global Financial Crisis
and Nigerian Real Estate Sector 27
2.5
Property Market 29
2.5.1
Overview of Property
Markets 29
2.6
Property Cycles 33
2.6.1
The Length of Property
Cycles 33
2.6.2
Property Cycles Stages 34
2.6.3
Overview of Elements of
Property Cycles Stages 34
2.7
Economic and Business
Cycles 36
2.8
Factors Influencing Real
Estate Value 36
2.9
Overview of Nigeria
Real Estate Market Performance 39
2.10
Relationship between
Financial Crisis and Property Market 40
CHAPTER
THREE: RESEARCH
METHODOLOGY
3.1 Overview 53
3.2 Research Design 53
3.3 Sources of Data 55
3.3.1 Primary Data 55
3.3.2 Secondary Data 55
3.4 Pilot Survey 56
3.5 Study Population 56
3. 5.1 Sampling Frame and Size 57
3.5.2 Sampling Procedure and Techniques 57
3.6 Population Characteristics 57
3.7 Data Presentation and Analysis 57
3.8 Data
Measurement 58
CHAPTER
FOUR: RESULT AND DISCUSSION
4.0 Introduction 59
4.1 Reliability
Test 59
4.2 Characteristics
of Respondents 61
4.3 research
Questions 62
CHAPTER
FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1 Summary 86
5.2 Findings 87
5.3 Recommendations 88
5.4 Conclusion and Summary of Findings 89
5.5 Recommendations for Further Study 90
References 91
Appendix 96
LIST
OF TABLES
Table 1: Description of Data
Table 2: Respondent’s Gender
Table 3: Years of Practice in Business
Table 4: Respondent's previous
involvement in Property Transaction
Table 5: Types of Property
Respondents have been involved in
Table 6: Number of Places Where the
Respondents had Direct Property Transaction
Table 7: Factors Responsible for
Global Financial Crisis
Table 8: Corporate
Risk Taking and Leverage
Table 9: Mortgage
Underwriting
Table 10: Down
Payment and Negative Equity
Table 11: Lack
of Transparency and Independence in Financial Modeling
Table 12: Predatory
Lending
Table 13: Pro-Cyclical Human Nature
Table 14: Risk
Taking Behavior
Table 15: Excessive Private Debt
Levels
Table 16: Home
Equity Extraction
Table 17: Housing Speculation
Table 18: Impact
of 2007 economic meltdown on Nigeria Economy
Table 19: The Global Financial Crisis
had significant effect on Nation's Property Market
Table 20: The
Global Financial Crisis had significant effect on Lagos State Property Market
Table 21: The
Global Financial Crisis has been Influencing the Choice of Property Development
Table 22: The Global Economic Meltdown
made Residential Property a more Viable option of Property Investment
Table 23: There
has been significant downturn in the issuance of residential development
planning permit on the Banana Island
Table 24: Market
experience in terms of rental transactions for residential properties located
on the banana Island before and after the Global Financial Crisis
Table 25: Market
experience in terms of sales for residential properties located on the banana
island before and after the Global Financial Crisis
Table 26: Market experience in terms
of rental transactions for residential properties located on the banana island
before and after the Global Financial Crisis
Table 27: Market experience in terms of sales for
residential properties located on the banana island before and after the Global
Financial Crisis
Table 28: Factors
Influencing Real Estate Value on Banana Island Residential Property
Sub-Market
Table 29: Influence of Demography/Population in
Influencing Real Estate Value in Banana Island Sub-Market
Table 30: Influence of Interest Rate
in Influencing Real Estate Value in Banana Island Sub-Market
Table 31: Influence
of the Economy in Influencing Real Estate Value in Banana Island Sub-Market
Table 32: Influence of Title Document
in Influencing Real Estate Value in Banana Island Sub-Market
LIST OF FIGURES
Figure
1: Respondents Gender
Figure
2: Years of Practice in Business
Figure
3: Respondent’s Previous Involvement in
Property Transaction
Figure
4: Number of Property Respondents have
Involved In
Figure
5: Number of Places where the Respondents
had Direct Property Transaction
Figure
6: Corporate Risk Taking and Leverage
Figure
7: Mortgage Underwriting
Figure
8: Down Payment and Negative Equity
Figure
9: Lack of Transparency and Independence
in Financial Modelling
Figure
10: Predatory Lending
Figure
11: Pro-Cyclical Human Nature
Figure
12: Risk Taking
Behaviour
Figure
13: Excessive Private
Debt Levels
Figure
14: Home Equity Extraction
Figure
15: Housing Speculation
Figure
16: Impact of 2007 Economic Meltdown on
Nigeria Economy
Figure
17: The Global Financial Crisis had
significant effect on Nation’s Property Market
Figure
18: The Global Financial Crisis had
significant effect on Lagos State Property Market
Figure
19: The Global Economic Meltdown has been
Influencing the Choice of Property Development
Figure
20: The Global Economic Meltdown made
Residential Property a more visible option of Property Investment
Figure
21: There has been significant downturn in
the Issuance of Commercial Development Planning Permit on the Island
Figure
22: Market Experience
in Terms of Rental Transactions for Residential Properties Located on the
Banana Island before and after the Global Financial Crisis
Figure
23: Market Experience in Terms of Sales for
Residential Properties Located on the Banana Island before and after the Global
Financial Crisis
Figure
24: Market Experience in Terms of Sales for
Residential Properties Located on the Banana Island before and after the Global
Financial Crisis
Figure
25: Prices for the
Average Annual Sales from 2007-2013 (Million Naira)
Figure
26: Prices for the
Average Annual Rental Fee from 2007-2013 (Million Naira)
Figure
27: Influence of Demography Population in
Influencing Real Estate Value in Banana Island Sub-Market
Figure
28: Influence of Interest Rate in Influencing
Real Estate Value in Banana Island Sub-Market
Figure
29: Influence of Government
Policies/Subsidies in Influencing Real Estate Value in Banana Island Sub-Market
Figure
30: Influence of the Economy in Influencing
Real Estate Value in Banana Island Sub-Market
Figure
31: Influence of Title Document in
Influencing Real Estate Value in Banana Island Sub-Market
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Several
local and international media have reported on the cause, impacts and the
consequences of global financial meltdown. The global financial meltdown is a
situation where the world’s status quo can no longer be maintained (Ajayi,
2013).
Cubis
(2009) mentioned that over exposure of the lending practices of the advanced
countries, “led into a series of complicated issues within the global market
economies which resulted in the collapse of numerous banking and other
corporate entities, reduced liquidity and created global recessionary
pressure”.
The
global financial crisis is considered by many economists to have been the worst
financial crisis since the great depression of the 1930s (Eichengreen and O’rouke
,2010).It threatened the collapse of large financial institution which was
prevented by the bailout of banks by national governments, but stock markets
still dropped worldwide. In many areas,
the housing market also suffered, resulting in evictions fore closures and
prolonged unemployment. The crisis
played a significant role in the failure of key business, declined in consumer
wealth estimated in trillions of U.S (United States) dollars and a downturn in
economic activity (Williams, 2012).
The
bursting of the U.S housing bubble which peaked in 2004 (US Census, 2006)
caused the values of securities tied to U.S real estate pricing to plummet,
damaging financial institution globally (Michael, 2011).
The
relationship between Nigerian banks and the international financial systems may
be weak but not totally absent (Nwokah et al, 2009). Thus, these banks, the Central Bank of
Nigeria (CBN) and the country herself are subject to the vagaries of the global
economy to a moderate extent.
Complete
or universal financial crisis often occur when investment booms and rapid
credit expansions collapsed because of expectations of high future returns that
drove them are not fulfilled. (Alabi, 2010).
It
is also worthy of note, “that where an economic downturn is preceded by housing
boom the downturn tends to be more protracted.(Alastair,2009). The effect of
the crisis has contributed to uncertainty in global economic condition and has
also heightened the volatility of investments and property markets.
As
a contributing factor to the crisis, the disappearance of the sub-prime
residential mortgage market in the United States of America triggered the
global financial crisis. As the crisis gathered momentum, the major property
markets in Nigeria such as Lagos, and Abuja recorded an all-time high boom
between 2007 and second quarter of 2008. This activities was easily explained
by the activities of Niger Delta Militants wherein oil corporations were
relocating their offices from the cities of Port-Harcourt to Lagos and Abuja
and this singularly exerted high pressure on the available housing stocks in
Lagos.
It
was not too long that it became clear that an adverse feedback loop had been
created between the financial markets and the real economy as a result of the
rapidly deteriorating world economies.
It
should be noted that this study is not to provide a comprehensive overview of
the global financial crisis that began some eight years ago. This has already
been done quite extensively in particular by Fajana (nd), Olaniyi and Olabisi
(2011), Sanusi (2011), Fapohunda (2012), Alabi (nd) and Ajayi (2013) among
others who all describe and analyze the numerous triggers and mechanism through
which the crisis unfolded and spread to the main developed financial market,
instead we would like to focus on the impact it may have had on residential
properties on Banana Island submarket.
In
the past year, private equity firms have taken Africa’s real estate market by
storm with millions of dollars in investments.
Residential
property in Lagos, a heaving metropolis of around 20 million people, can be
among the most expensive in the world with two-bedroom flat costing more than
$1 million in upmarket areas.
There
are 10.7 million houses in Nigeria and we regard this statistics highly inadequate
when compared to the size of the nation (Lamudi, 2015). To this end, the World Bank has estimated
that it would cost as high as N59.50 trillion to bridge Nigeria’s 17 million
deficit.
This
huge deficit figure may also be viewed as a vast and untapped investment
potential of the country’s residential property market.
The
Federal Government in recent times has shifted given a fight from physical
policy with a focus on capping inflation towards a looser policy aimed at
stimulating local economic growth and job creation. This change in policy has translated to the
recent easing of the cash Reserve Ratio by the Central Bank of Nigeria from 31
to 25 percent leading to an estimated N740
billion liquidity injection to the banks. It is hoped that this increase in
liquidity will lead to greater lending by banks to the real economy with the
hope of a fall in the high lending rate currently prevalent in the property
market.
Lending
rate in the local market remain stubbornly high at 20 percent and above other than
to the bank’s preferred customers. Such
high rates are not sustainable for real estate development which the gestation
period in most cases is at least two years before any rental revenues start to
accrue.
It
must be noted also that a lack of clear petroleum policy, a halving of the oil
prices and a move from onshore to deep water drilling have all had a negative
impact on International Oil Companies staff strengths and hugely impactful
knock on effect on demand in the real estate submarket.
In
a report released by the National Bureau of Statistic, 2015, third quarter
Gross Domestic Product GDP grew by 2.84 percent year-on-year in real term. This
was higher by 0.49 percent than the growth of 2.35 percent recorded in the
preceding quarter, yet less than half of the 6.23 percent figure recorded in
the same quarter of 2014. The slowing of
the economic has been attributed to the steep fall in the oil price since the
beginning of 2014 and the attendant fall in oil revenues over the period. Real Oil Sector growth increased by 1.06
percent year-on-year in Q3 2015 while the sector contributed 10.27 percent to
national GDP growth. Growth in the
non-oil sector was largely driven by the activities of agriculture, financial
services, telecommunications, and trade among others. The non-oil sector grew by 3.05 percent in
real terms in the third quarter of 2015 and contributed 89.73 percent to GDP
growth over the year leading up to the third quarter.
MCO
Real Estate Investment Report, (2015) notes that with considerable investor
interest, international investors who have the greatest impact on big ticket
real estate transactions have spent the year waiting for greater clarity on the
state of the economy. However, local
transactions with little or no exposure to currency risk have continued to
thrive. Development in the middle market
residential space, middle market retail space and local hotels still continued
to sustain the real estate and construction markets albeit in an economy based
on the reduced spending power of the consumer due to economy downturn.
1.2 Statement of the Research Problem
Generally,
the global financial crisis has left a remarkable impact on real estate sector
of the economy.
Before
2007, there were high and increased lending to the real estate sector leading
to the booming and surfacing of modern real estate development (Oladele, 2014).
The
financial crisis has its root in credit contraction in the banking sector due
to certain laxities in the U.S. financial system. The crisis which later spread to Europe has
now become a global phenomenon.
The
financial crisis at the early stage manifested strongly in the sub-prime
mortgages because households faced difficulties in making higher payments on
adjusted mortgages (Soludo, 2009).
The
development led to the use of credit contraction by financial institutions in
the U.S. to tighten their standards in the light of deteriorating balance
sheets.
The
impact of the global financial crisis on residential property market is a
veritable basis for it examination.
There
is therefore need to examine the impact of global financial crisis as it
affects the residential property market of the study area.
Residential
property is one type of property that is also hitherto seen as a legacy a
parent bequeaths to the offspring. With
the realization that real estate is a major source of capital appreciation and
a good hedge against inflation, the real estate market is coming close in
popularity and importance to the money and capital markets.
As
Nigeria stands on the threshold of establishing a secondary mortgage market to
mobilize capital market finance for the primary market, the need to assist real
estate investors and professionals with information on the impact of Global
financial crisis on residential property market cannot be over stressed.
Although
several studies have focused on the impact of Global Financial Crisis on
banking sectors in Nigeria, so much cannot be said of its impact on residential
property market.
It
is recognized that a more focused examination be made to expose the situation
in the study area. It is therefore
necessary to ask; what are the impact of the global financial crisis on the
study area? What was the performance of
the study area residential property sub-market between 2005 and 2015? What are the extraneous factors influencing
the performance of residential property sub-market of the study area?
These
are what this thesis was positioned to explore, thereby contributing to
empirical studies on the impact of global financial crisis, with particular
focus on the residential property sub-market.
1.3 Research Questions
1. To understudy the
extraneous factors influencing real estate value in the residential sub-market
between 2005 and 2015 in the study area.
2. To evaluate the
performance of residential property market in the study area between 2005 and
2015.
3.
To examine market trend
in the study area between 2005 and 2015.
4a. To
examine the effect of the recession on the residential sub-market of the study
area.
4b. To
examine the factors responsible for global financial crisis and their relevance
in real estate value.
1.4 Aim and Objectives of Study
The
aim of this study is to examine the impact of Global Financial Crisis on prime
residential property sub-market in Banana Island. The above aim will be
achieved through the following objectives:
1. To understudy the
extraneous factors influencing real estate value in the residential sub-market
between 2005 and 2015 in the study area.
2. To evaluate the
performance of residential property
market in the study area between 2005 and
2015.
3. To examine market trend
in the study area between 2005 and 2015.
4a. To examine the effect of the recession on
the residential sub-market of the study area.
4b. To
examine the factors responsible for global financial crisis and their relevance
in real estate value.
1.5 Significance of the Study
Globalization
is an inevitable phenomenon in the history of man that have been bringing the
world closer through the exchange of products, goods, knowledge, information
and culture. But over the years, the pace of global interpretation has become
much dramatic and faster and this is due to the unprecedented and advancements
in science, technology, communication, industry and transport. The resultant
effect of these advancements are readily observable in the availability of
information about market performance particularly those involving real estate
investment.
In
the wake of the global crisis in 2008, we were told by the administration of
our erstwhile economy that the Nigerian economy was hedged against the global
financial crisis. This was hinged on the fact that we had just emerged from the
euphoria of bank consolidation which increased the capital base of operating
banks to a minimum high of N25billion and
our huge investment in foreign reserve. Professor Chukwuma Soludo, the then
Central Bank of Nigeria Governor declared, “We won’t have economic recession”
in the face of the global crisis which created fear over the future of our
fragile local economy. However, the current trends have proved otherwise as
will be seen later.
This
study seeks to identify the extent to which the crisis has affected the real
estate market particularly, the residential property sub-market of Banana
Island. The significance is established in the provision of the understanding
of the extent and the nature of the impact in the periods before and after the
property boom and to provide information that will be useful to investors in
the Lagos property market. This study is also significant in filling the
empirical gap in the knowledge of the impact of the global financial crisis on
the prime residential property sub-market in Banana Island. Also there is need
to understand the behaviour of the market and its participants to financial crisis.
1.6 Scope of the Study
Ideally,
a study of this nature should cover all the prime residential locations in
Lagos metropolis but time and cost will prove to be serious constraints in an
attempt to do this. This study has therefore been confined to the prime
residential area of Banana Island. These locations are the areas with the
highest property transaction prices in Lagos before the global financial
crisis.
The
scope of issues to be examined in this study ranges from property prices (sales
and rentals), a set of macroeconomic indices such as Foreign Direct Investment
(FDI) figures, Consumer Price Indices, prevailing interest rates during the
period of study etc. Perception of stakeholders in the selected residential
property submarket of Banana Island will also be considered. These stakeholders
include Estate Surveyors and Valuers with properties in the study area,
Institutional investors, Fund Managers, High class tenants in the study areas,
Lending Institutions and Property developers in the area.
1.7 Study Area
Banana
Island is in Lagos State and Lagos is one of the largest cities in the world.
With a population that is estimated at 15 million, it is experiencing an annual
growth rate of nearly 6%. It is home to Nigeria’s principal commercial sea and
airports and over 45% of the country’s skilled workforce is resident in the
State. Lagos State lies approximately between Longitudes 2042E and 3042E and
Latitudes 6022N and 6052N. The 180km long Atlantic coastline forms the Southern
boundary of the State while its Northern and Eastern boundaries are shared with
Ogun state. On the Western side, the Republic of Benin borders the boundary
(Balogun, 1999). Lagos metropolis occupies 2,910 square kilometers out of the
3,577 square kilometers land area of Lagos state. Lagos Metropolitan contains
the largest manufacturing sector and provides employment for over 45% of the
skilled man-power of the country (World Bank, 2002).
It
is the nodal point of all transport modes (air, water, road and rail) in which
road transportation is the most predominant and most utilized within the
Metropolis (Oni, 1992). According to Reports, by 2015 Lagos is expected to
become the world’s third largest City with 25million inhabitants growing at a
rate of six per cent per annum.
Banana
Island is an artificial Island off the foreshore of Ikoyi, Lagos, Nigeria.
Banana Island is 8.6 kilometers east of Tafawa Balewa Square. Part of the Lagos
Local Government Area of Eti-osa in central Lagos. According to Punchng.com
(2013) it is known for its wealthy, multicultural community and has some of the
most expensive real estate in Nigeria. It has one of the highest density of
millionaires with it boundaries.
Banana
Island is a man-made Island in Lagos state, Nigeria that is slightly curved is
shape like banana. It is located in Lagos Lagoon and is connected to Ikoyi
Island by a dedicated road which is linked to the existing road network near
Parkview Estate. According to this day online.com(2..) and the
chagouryconstruction.com(2006) the Island was constructed by the Lebauese-
Nigeria Chagoury Group I partnership with the Federal Ministry of works and
Housing and is considered on par with the seventh Arrondissement in Paris, La
Jolla in San Diego, and Tokyos’ Shibuya and Roppongi neighborhoods. The Island
occupies a sand-filled area of approximately 1,630,000 square metres and is
divided into 536 plots (of between 1000 and 4000 square meters in size) main
arranged along cul-de-sacs, so designed to enhance the historically residential
nature of Ikoyi. The Island is a planned, mixed development with dedicated
areas for residential, commercial and recreational activities. On the
residential side of the Island, planning permission is not granted for
dwellings over 3 storey’s high.
Residents
are provided with world class utilities including underground water supply
network, underground electrical systems (versus the overhead cabling common
throughout Lagos), treatment plant, central sewage system, satellite
telecommunications networks and street, lighting according to the
chagourygroup.com (2014).
The
Island hosts several high and residential developments such as Ocean Parade
Towers (a series of 14 luxury tower blocks strategically located at one end of
the Island to take advantage of 180 degree panoramic views overlooking the
lagoon.
Login To Comment