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Critical Study of Real Estate Returns in Nigeria


Background to the Study/Statement of the Research Problem

Investors desire a rate of return that rewards them for taking on risks (Khomassi and Shah, 2014). Real estate is one of the most profitable investments. Real estate refers to land and buildings, including commercial, residential, leisure, and industrial properties, among others, that can be held in the investment portfolios of people, corporations, or governments. An examination of institutional acquisitions and disposals in real estate investment worth 1.8 billion USD throughout Africa over the last two decades finds that Nigeria has the greatest real estate investments by country (Uroko, 2021). Among the many types of real estate, retail received the most attention, drawing 687 million USD in investment and yielding 8.6-10 per cent. The office space market has an investment value of 485 million USD and a yield of 7.2-10.4 per cent. Nigeria is the top destination for investors, with 140 million USD committed, whilst Lagos is the top city, with 140 million USD invested. A 480 million USD investment has been made in the leisure section of the industry, with a 7.5-7.6 per cent yield. The value of an investment in industrial real estate is 58 million USD, with a yield of 7.5-9.6 per cent.


There appears to be a widespread belief that humans are unsatisfied until they have invested directly or indirectly in real estate. This is because real estate has several unique characteristics that distinguish it apart from other asset classes. Real estate investment, for example, has been proven to be a hedge against actual inflation (Bond and Seiler, 1998; Quan and Titman, 1999; Dabara, 2014), whilst more recent research has shown that this cannot be generalised. The ability to invest in real estate is justified by the returns. Another key feature of real estate is the high return it provides investors when compared to other types of investments. According to Jordà, Knoll, Kuvshinov, Schularick, and Taylor (2019), residential real estate has been a worthy investment in a variety of advanced economies since the late 1800s. The authors estimate a geometric (arithmetic) average real net return of 6.6 per cent on housing (7.1 per cent per year), which is comparable to the performance of equities, which has provided significant returns throughout the majority of the twentieth century.


The increasing rate of real estate investment has had a favourable impact on Nigeria’s Gross Domestic Product. According to the National Bureau of Statistics, the real estate industry expanded by 1.77 per cent to 6.52 per cent in the first quarter of 2021, compared to -4.75 per cent in the first quarter of 2020. Whilst other industries were affected by the development of the Coronavirus pandemic, the Nigerian real estate sector recovered quickly. Despite the economic difficulties caused by the Coronavirus pandemic, the country’s economy is performing well (Uroko, 2021). This implies that opportunities abound in the Nigerian real estate market, and astute investors are not overlooking them.


Several studies have been conducted on real estate returns.  The data relating to real estate returns are specifically examined in several studies around the globe (Lu and Mei, 1999; Tse, Chiang and Raftery, 1999; and Lizieri, Baum and Scott, 2000). For example, Lu and Mei (1999) examine ten countries with emerging markets. The East Asian markets specifically incurred high negative excess returns during the Asian crisis. In other studies by Webb, Chau and Li (1997) and Tse, Chiang and Raftery (1999), real estate returns were examined in East Asian markets. Pagliari et al. (1997) find returns in different real estate property markets are not consistent across the countries examined. A majority of the past studies have found that real estate investment has significant returns (Favilukis, Ludvigson and Van Nieuwerburgh, 2017; Ghent, Torous and Valkanov, 2019; Giglio et al., 2021). However, comprehension of its longer-term track record is inadequate, especially when compared to the knowledge of past bond and equities returns (Jorion and Goetzmann, 1999; Dimson, Marsh and Staunton, 2002). Whilst it has been discovered that housing is a less profitable long-term investment than previously thought (Chambers, Spaenjers, and Steiner, 2021), no attempt has been made to assess how infallible real estate investment returns are, particularly for young investors.


Nigeria is a country where the majority of the population is made up of young people who want to make a better future for themselves. These young people are stuck in the middle of making decisions as to how to make provision for a better tomorrow. Given the return on real estate investment, there is a need to understand how infallible it is.

In light of this, the current study aims to address this gap by employing Nigerian youths as a case study.


Objectives of the study

The main objective of this study is to make a statistical-based conclusion on the real returns of real estate investing and to validate (or dispute) the assumption that real estate investing in Nigeria is an “infallible” long-term financial plan or venture for a young Nigerian who is looking to plan his or her future.


The specific objectives are to;

  • examine the expected real return on real estate investments in Nigeria;
  • examine the presumed real return on real estate investments in Nigeria;
  • examine the main risks of real estate investments in Nigeria;
  • examine how these risks are mitigated or avoided; and
  • determine the infallibility of real estate for young Nigerians.


Research Questions

This study intends to provide answers to the following research questions;

  • What is the expected and presumed real return on real estate investments in Nigeria?
  • What are the main risks of real estate investments in Nigeria and how can they be mitigated?
  • How infallible is real estate investment for young Nigerians?


Literature Review

This chapter consists of five major sections. The first section gives an introduction to the determinants of real estate returns. The section highlighted the concepts of real return and the determinants of individual property returns as shown by previous studies. The second section delves into the real estate investment market. The section covers topics such as the characteristics of real estate, major players in real estate investment and property investment vehicles. The next section presents an historical overview of real estate investment in Nigeria. The fourth section reviews the empirical studies on the performance of real estate investment. The final section summarises and concludes by drawing the knowledge gap warrants the current study.


Determinants of real estate return


The determinants of real estate return have been studied in the past. GDP, interest rates, loan interest rates, consumer price index (inflation), output services, and unemployment are all factors that influence real estate returns, according to Chen and Mills (2006). GDP, inflation, and unemployment are all related to the selling price, according to De Wit and Van Dijk (2003). The unemployment rate does not have a positive relationship with rental rates, whilst GDP does. In their study, Frappa and Mesonnier (2010) find strong evidence that inflation targeting has a significant positive effect on real house price growth and the house price-to-rent ratio. Inflation, according to Huizinga (1993), causes lower relative price stability, which leads to increased investment uncertainty.

Feldstein and Summers (1979) also confirm that higher inflation results in higher artificial person income taxes. Pai and  Geltner  (2007)  researched the  NCREIF  dataset to see if they could identify factors leading to long-run investment returns in real estate.  They find that real estate characteristics such as asset size,  property type,  and market tier could be used to explain returns. Real estate returns have been discussed in terms of market efficiency, and their distribution, predictability, macroeconomic variables that may help explain their variations, and measurement methods. The literature has also looked at the returns of specific types of property (for example, office buildings, foreign real estate, and contaminated properties). Some research has attempted to provide tools or methods for better understanding real estate returns and markets. However, when it comes to the young generation, there is a scarcity of information on the infallibility of real estate investment. There has been some success in predicting real estate returns in the literature (Tuluca, Seiler, Myer and Webb, 2000; Cooper, Downs and Patterson, 2000).

Real estate excess returns are easier to predict than returns on other assets, according to Mei and Liu (1994). Tuluca et al. (1998) developed a model that accurately predicted unsecuritized real estate returns, but they questioned previous claims that real estate returns can predict unsecuritized real estate returns. Cooper et al. (2000) examine the asymmetric information nature of real estate markets and conclude that real estate return predictability is more likely a sign of portfolio rebalancing than adverse selection. Several studies have revealed that individual property returns have a non-normal distribution (Young, 1994; Young and Graff, 1995). Financial institutions’ real estate investments, according to Mei and Saunders (1997), are not based on expected future returns, but rather on past real estate returns. In his study of market efficiency, Clayton (1998) uses data from the condominium housing market. There is a link between the efficiency of the real estate market and its price.


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