CHAPTER ONE

INTRODUCTION

1.1 Background of Study:

The financing of real estate, which includes or homes, shopping centre’s,

office buildings, farms and factories, is expected to be one of the major

responsibilities of our financial system in financing real estate

development.

After examining the special characteristics and problems in real estate

financing, I intend reviewing the most commonly used methods and

institutions for financing real estate development.

It is believed that well-selected land and buildings represent one of the

soundest investments available, and that their value increases by two

factors.

The CBN is the financial sector regulator of the Nigeria. CBN’s vision is

“to be one of the most efficient and effective of the worlds central banks

in promoting and sustaining economic development”

However, the role of the CBN as the orchestrator of economic

development encompasses

Financial services(banking, insurance, MFI , capital market,

mortgage financing, asset management, developmental finance

agencies.

The economic importance of real estate transactions is so obvious that

most people are only ill-informed about the impact of real estate

transactions on the financial market.

In a growing economy like ours, the pool of lendable money were not

always readily available where needed, or were not always known to a

potential borrower. To help bridge the gap, anew industry gradually

developed that is now known as mortgage lending(banking).

The importance that the government places on the housing industry is

shown by the many programs and banking procedures that have been

BANKINGDEVELOPMENTAL FINACE AGENCIES

CapitaL Markets

OFI

Asset

MGT

Insurance Pension

NFS

DMB’s, microfinance banks and primary mortgage institutions

Issuing houses;59

Stock brokers;236

FINANCE COMPAINES;113

BUREAU DE CHANGE;1500

DISCOUNT HOUSES:5

DEVELOPMENT FINANCE INSTI; 4

RE-INSURANCE COMPANY; 1 INSURANCE; 48 INSURANCE BROKERS;509 INSURANCE AGENTS; 870

PENSION FUND ADMINSTRATORS; 26 PENSION FUND CUSTODIANS; 5

implemented to assist the industry in its efforts to combat the financial

problem that plague stable operations.

1.2 STATEMENT OF THE RESEARCH PROBLEM

The problem of real estate financing is more acute in a developing

country like Nigeria than in a developed country like the U.K mainly

because of the lower per capita income and paucity of external sources

of finance in the former than in the latter.

According to the Financial derivatives company limited the following

below have been found out to cause problems in the real estate market in

Nigeria,

Houses prices remain relatively sticky in all market segments

Property market remains dull in highbrow areas like Ikoyi, V.I.

In contrast, low and middle end areas still have appreciable

increases in value

Low interest rates do not translate to higher demand for properties

Banks continue with foreclosures, depressing sales value

Real estate managers now earn more income from property valuation

than from property sale

Development of real estate is a major problem in a developing country

like Nigeria. This is because of the paucity of external sources of

finance. lack of effective demand for housing finance reflects primarily

the low average per capital income.

1.3 OBJECTIVES OF THE STUDY

Given the analysis above on what the problem of real estate financing

has been, this research study has the following objectives

To take a critical look at the parts that financial institutions have

played in the development of real estate.

To examine the possible ways of financing real estate

development.

To offer possible solutions for improving the present level and

effectiveness of finance for real estate development.

To study whether institutions have had a better performance in real

estate following from various government policies on housing.

The main aim of the project is therefore to make an analytical study of

financial institutions in real estate development in Nigeria with reference

to Banks, Insurance companies and the mortgage houses.

This study is therefore aimed at studying what the performance of this

sector has been under the various economic policies. It is also aimed at

finding suitable recommendations as to how the provision of finance for

the financing real estate development can be achieved.

1.4 RESEARCH QUESTIONS

To what extent have Nigerian banks successfully financed real

estate development?

What are the roles of financial institutions in ensuring real estate

development in Nigeria?

To what extent are the financial institutions in Nigeria financing

real estates?

How important is the financing of real estate to the economy?

How do these real estate companies obtain funds?

What are the long-term effects of financing real estate

development to the nation?

Are there Nigerian banking institutions established for the sole

purpose of financing real estate?

Has there been sustainable development in real estate over the

years?

Are there other effective sources of financing real estate in

Nigeria?

How does real estate development lead to economic growth in

Nigeria?

What policies have been created to support real estate

development?

1.5 STATEMENT OF HYPOTHESIS

The hypothesis of this project, based on the research questions would be

as follows.

Ho: Financial institution do not have a significant impact on the

financing of real estate development in Nigeria.

H1: Financial institutions have a significant impact on the financing of

real estate development in Nigeria.

Ho: Real estate development will not have a significant effect on

economic growth of the country.

H1: Real estate development will have a significant effect on economic

growth of the country.

1.6 SCOPE AND LIMITATION OF STUDY

The research study would be concerned generally with the ascertaining

the irrational effects of real estate development in Nigeria.

In carrying out this study, limitations encountered include:

Non-availability of necessary data from various sources which

make it impossible to collect all data and information necessary for

the study.

Inadequate time frame for the completion of a comprehensive

study.

A comprehensive appraisal of this nature is very expensive.

1.7 SIGNIFICANCE OF STUDY

Businesses which are looking to develop a bit of land will generally

need to obtain a property finance loan.

In many situations a development finance loan is the most suitable

option for enterprises with these desires as it splits the payouts up to deal

with the different stages of financing a property.

In numerous scenarios this permits lenders to supply a property

development loan at a little lower rate of interest than traditional

commercial financing. Regardless of the fact a property loan is generally

a better choice for these situations than classic commercial financing it

tends to hold a high rate of interest because it’s still considered a fairly

risky loan.

Most companies signing up for it also require a high credit status.

Employing a company loan broker can help a business get a property

finance loan at a marginally better interest rate. Brokers do this by

working immediately with multiple commercial financing corporations

to find the best possible terms. Firms looking to get this kind of

financing also should be prepared to demonstrate to banks the projected

costs for the whole project and the projected revenue for the whole

project. Providing these numbers will improve the percentages of getting

a development finance for the property and potentially help in reducing

the rate of interest. As per today’s reaction from the people to the

recession, property developments is beginning to become one of the

gigantic smell for folk, that is property development now plays and

critical part in getting things right for races.

1.8 DEFINITION OF TERMS

RED – Real Estate Development (This is the creation of housing units in

different parts of an area or state or the country)

CBN – Central Bank of Nigeria (This is the apex bank in the Nigerian

banking system. it regulates and monitors the system)

MFI – Mortgage Finance Institutions (This are institutions that provide

long term finance for building housing units or related activities.)

NFS – Nigerian Financial System (This comprises all the various

institutions involved in the transfer of funds from the surplus units to the

deficit units)

OFI – Other Financial Institutions

1.9 PLAN OF STUDY

This work makes an insight into the roles of financial institutions in

financing real estate development in Nigeria, its associated problems and

its prospects. In the light of this, the project has been divided into five

chapters.

Chapter one contains the introduction and historical background of the

study, the objective, scope and need for the study, it is also contains the

statement of hypothesis as well as the plan of study.

Chapter two makes a review of the relevant literature to the study.

Chapter three deals with the research methodology of the study, the

sample design, and the collection procedures.

Chapter four looks at the presentation and analysis of the data collected.

Chapter five, which is the concluding chapter, deals with the summary

and conclusion, findings and recommendations and finally references.

REFERENCES

A.T. OJO 1983 Real estate financincing in Nigeria

B.J. Rewane july 7, 2010

CHAPTER TWO

LITERATURE REVIEW

2.1 The Evolving structure of commercial real estate

As general improvement in occupancies and rents continues in

commercial property markets, a combination of new regulatory

provisions and perceptions of credit-rating agencies -- regarding the

riskiness of mortgages in lender portfolios -- is changing the structure of

commercial real estate capital markets. These changes are structural, not

cyclical. As a result, business as usual, that is, a return to almost

exclusive reliance on primary lending sources to supply capital to the

commercial real estate market, is not likely.

The structural changes underway mean that traditional patterns of direct

mortgage lending by financial institutions will be permanently

supplemented by 1) real estate-backed debt securities, 2) new channels

of intermediation between borrowers and suppliers of capital, and 3)

continuing growth in real estate-backed equities via REITs. These

changes will broaden the commercial real estate capital market. New

investors will become a part of this market and will also take part in

pricing risk, which, after securitization, will be diversified between more

market participants. This also means that the aggregate mix of debt and

equity will change to meet investor risk/return expectations. These

changes are truly a fundamental departure from the traditional way that

commercial real estate has been financed and should be understood by

all participants to operate effectively in the future.

Current Economic Underpinnings in Property Markets

To place the evolving capital market conditions into context, it should be

stressed that certain economic fundamentals will not change.

Commercial real estate will continue to have a very high debt financing

capacity and that capacity will obviously continue to be predicated on

property values. General indicators of improvement now underway in

property markets are summarized in Exhibit 1. (Exhibit 1 omitted)

In general, data in panel A of Exhibit 1 indicate that since the recession

in 1991, occupancy in virtually all sectors of the commercial market

(including multifamily) have either stabilized, or are now improving.

Significant progress is evident in suburban office markets. Retail and

hotel markets are also improving markedly. Improvement is occurring

more slowly in the multifamily and warehouse sectors. Panel B of the

exhibit confirms this improvement as data show that net operating

income and/or rents have also steadily improved since the economic

recovery began.* The data also suggest that the investment performance

of most institutional property portfolios has begun to stabilize and to

show definite signs of improvement. With no major construction surplus

on the horizon, this implies that a stable foundation in property values is

now forming and will serve as the basis for a new, underlying structure

of debt and equity capital that is beginning to emerge.

Capital Market Indicators

Consistent with improving property performance in property markets,

delinquency rates on commercial mortgage loans have also improved.

This is reflected in Exhibit 2, which shows that since reaching a peak

during the 1991-1992 period, delinquencies and foreclosures reported by

life insurance companies and commercial banks have declined markedly.

(Exhibit 2 omitted) Some of this improvement is the result of

restructurings and the sale of problem loans. Much of it, however, can be

attributed to the gains achieved in occupancies and rental income,

thereby improving debt-service coverage and lowering delinquencies

and foreclosures.

Structural Transitions in the Commercial Mortgage Market

As the underlying basis in property values improves, structural changes

in capital markets are accelerating. To illustrate this point, total

commercial mortgages held by traditional, primary lenders continue to

contract. Furthermore, a dramatic change in the number and relative

importance of capital supplier/sources is underway. Exhibit 3 shows that

from 1989 through the second quarter of 1994, total mortgages

outstanding declined by about 8%. (Exhibit 3 omitted) However,

mortgages held by the largest three lenders (commercial banks, life

insurance companies and savings institutions) declined by a total of

about $160 billion. This represents a decline from about 19% of levels

reached in 1989. Of this amount, S&Ls have reported a decline of

almost 50%, life insurance companies have reported a decline of 15%,

and commercial banks have reported a decline of 2%. While this trend is

partially the result of past weakness in property markets write-downs,

sales, restructurings, etc., there are a number of additional factors that

have changed the makeup of holding; by these suppliers of capital.

These are:

* For savings institutions, regulatory provisions contained in the

Financial Institutions Reform and Recovery Act (FIRREA) essentially

ensure a return to single-family and multifamily lending with some

lending for residential land development. This is essentially the role that

they played prior to the boom years in the early to mid-1980s. This will

leave a void to be filled, as this source once provided as much as $240

billion, or almost 25% of debt capital to the market.

* Life insurance companies are now laboring under risk-based capital

provisions developed under the auspices of the National Association of

Insurance Commissioners (NAIC), and are expecting additional

restrictions in Model Investment Regulations, which are now under

review. While these new provisions are far too extensive to detail here, it

is sufficient to say that they will certainly affect and change the nature of

assets held by the life insurance industry. This is likely because the risk-

based capital requirements and other financial standards agreed to by the

NAIC have undoubtedly been incorporated in reviews of firms in the

industry made by credit-rating agencies. Because direct commercial real

estate lending has a much greater impact on risk-based capital

requirements than other investment alternatives like bonds, life

insurance companies will have to continually evaluate the trade-offs

between making direct real estate loans and investing in other

alternatives, such as government securities and investment-grade

corporate bonds. The latter have far lower risk-based capital

requirements. However, NAIC guidelines indicate that commercial

mortgage backed securities with investment-grade ratings (Baa or better)

have a far lower risk-based capital requirement than direct mortgage

loans. As a result, commercial mortgage-backed security (CMBS)

offerings containing investment-grade and subordinated tranches

continue to evolve. Indeed, this has enabled life companies to: 1)

originate and pool loans, 2) issue securities against those pools, and 3)

retain the senior-rated, investment-grade tranches for investment, and

sell the subordinated tranches to other investors. This should enable life

companies to continue to meet capital requirements and to originate

loans simultaneously.

* As is the case with life insurance companies, commercial banks must

also comply with expanded government regulations and interface with

credit-rating agencies. Commercial banks have been subject to a myriad

of recent federal legislation that now affects their operations and they

must comply with risk-based capital requirements as well. Banks will

also be faced with similar tradeoffs regarding direct commercial real

estate lending and other loan-lending alternatives. But, because of their

number (10,000+), geographic diversity, and knowledge of local

markets, these institutions will continue to provide short-term credit

(construction loans) and will evolve as an important supplier of credit to

the growing, private mortgage conduit business.

As a result of these changes in the regulatory/credit rating environments,

major changes are likely to occur in the debt capital markets:

1. Only two institutions will emerge as direct providers of commercial

mortgage credit: life insurance companies and commercial banks.

Savings institutions will be limited to financing multifamily properties.

2. Because of the increased awareness of (and perhaps overreaction to)

the nature of credit risk associated with mortgage lending, the debt

component of total capital used to finance commercial real estate is

likely to be reduced. As a result, more reliance on higher cost equity will

be required (this could also be interpreted to mean lower loan-to-value

ratios on individual properties). This change in the financing mix will

tend to raise the weighted average cost of capital for the commercial real

estate industry in conjunction with current investor perceptions of

greater risk.

3. As fewer direct providers of debt capital remain, more reliance on

securitized debt will result.

4. New channels, including commercial mortgage conduits that will

match borrowers and lenders, will emerge and develop to accommodate

these changes.

To support this view, new channels of intermediation in debt markets are

now forming. As shown in Exhibit 3, as direct lending by major

institutions declined during the past four years, mortgage debt provided

by Private Mortgage Conduits now accounts for $44.5 billion of total

outstandings. Conduits are now the fourth-largest source of commercial

real estate debt capital. Furthermore, the data also show that U.S.

Government-related agencies (TC, FDIC, etc.) are continuing to reduce

their mortgage portfolios, much of which has been securitized. These

agencies have played a very important role in the evolution of the

CMBS market. This will undoubtedly be a catalyst for further private

securitization and formation of conduits.

The extent of future growth in conduits is difficult to assess at present. It

will be dependent on 1) the extent to which risk based capital regulations

reduce direct lending by banks and insurance companies, 2) how cost

effectively loans can be pooled/originated, warehoused, administered,

and serviced, and 3) the evolution of additional investor markets for

these securities, particularly for the subordinated and less-than-

investment-grade tranches. Investors now consist of hedge funds, mutual

funds, and individuals. But, as more investor groups become familiar

with the underlying commercial real estate collateral, and improving

conditions in property markets, the CMBS market should increase in

breadth and depth.

Real Estate Equities -- REITs

As the mortgage debt sector of commercial real estate capital markets

continues its transition, a change in the mix of debt and equity required

to finance commercial properties will also evolve. Panel B of Exhibit 3

indicates that cumulative equity capital raised from 1989 to the present

through primary and secondary offerings by REITS now totals over

$29.5 billion. This is additional confirmation of the underlying

improvement in property markets. It is also, however, evidence that the

aggregate mix of debt and equity is changing to conform to investor

expectations regarding risk and return in this market.

Because of the many changes affecting property markets and capital

markets simultaneously, the depth of real estate equity markets is also

difficult to estimate at this time. Recent regulatory changes should aid in

the markets' transition. Legislation passed in late 1993 provides the

possibility for increased participation by pension fund investors. Smaller

pension fun are now able to add real estate to their investment portfolios

via equity REIT securities. Larger funds may now add REIT securities

to supplement portfolios containing real estate investments, through

separate accounts or direct ownership. This will enable these funds to

make tactical adjustments in their total real estate exposure without

having to liquidate ownership of properties. In any event, this legislation

should serve to increase the scope of the equity market. As more

investors are included, real estate markets should become more efficient,

and assessment of the markets' risk will be evaluated by more investors.

2.2.THE NEW WORLD OF REAL ESTATE FINANCE

Real estate finance has undergone a significant structural shift, and it is

not turning back. Real estate finance is segmenting, with new vehicles

and structures designed to price the different slices of a property's real

estate capital structure based on their specific risks. This change has

significant implications for the industry. Many real estate transactions

will require multiple layers of finance, bringing the complexity typically

seen only in select large deals to a broader segment of the marketplace.

This dramatic shift in the marketplace is driven by growing equity

requirements, but is possible today because of better information, more

sophisticated underwriting, and the discipline and techniques learned

from the CMBS and REIT industries. In the corporate world,

"traunching" of bond risk, convertible debt, preferred equity, and

numerous other finance techniques that "slice and price" the different

layers of a company's capital risk have been common for years. In many

ways, real estate is just naturally evolving to a more sophisticated

finance foundation.

Growing real estate equity requirements have triggered this change.

More equity is needed today than is available, necessitating creativity in

finance. For example, new construction equity requirements have

increased from 10% or less in the 1980s to 25% or more today,

representing a 150% increase of equity needed. Put another way, $100

million of equity in the 1980s could support a billion dollars of

construction, but only $400 million today. Combined with higher equity

requirements on refinancing, equity is at a premium.

These changes in the basic structure of real estate finance have been

accompanied by changes in the sources of real estate capital. On the debt

side, traditional long-term lenders like savings and loans are nearly

gone. Life companies, the other reliable long-term lender, face a

changing environment due to demutualization and changes in risk-based

capital regulations that promote investment in alternatives to long-term

mortgages. Commercial banks still dominate the construction-lending

sector, but many have migrated to longer-term loans, high-yield

mortgages, and other real estate banking activities.

Real estate equity sources, who have historically focused on the four

major property types in the United States, are now presented with scores

of opportunities including net lease deals, mezzanine funds, joint venture

developments, REIT joint ventures, opportunity fund investments, real

estate venture funds, and a full range of international investment

opportunities.

The implications of these changes, whether you are accessing capital,

providing capital, or part of the service industry, are that your

relationships and knowledge need to be broader than they were in the

past, to insure your relevance in the future. These changes have already

stimulated mergers, acquisitions, and alliances among-service providers,

finance companies, and investors, and such activities are expected to

continue in the future.

The rest of this article provides an assessment of some of the current

trends and information that is critical to keeping abreast of the changes

under way in the industry today.

ECONOMIC OUTLOOK

Perhaps the most important issue facing real estate finance today is

uncertainty about the future of the economy and property markets. The

feelings of uncertainty are based on individual experience and the

widely varying forecasts of economists. The Economic Cycle Research

Institute, a well-respected industry group, is perhaps the most negative,

predicting a recession starting in the second or third quarter of this year.

Alternatively, the Conference Board's Index of Leading Economic

Indicators and the Recession Watch Index, compiled by Comerica Bank,

both indicate a decline through early 2001 with a pickup in the second

half of the year. This more positive forecast is supported by the Urban

Land Institute, which forecasts two to three quarters of flat gross

domestic product (GDP) growth of 1.5% followed by a gradual increase

to 2% for all of 2002.

While there is a dispute about the depth and breadth of the economic

downturn, there is consensus that the economy has turned significantly

downward, even if GDP continues to grow at 1% to 2% per year.

Accordingly, while we are not officially in a recession, it still feels like a

significant downturn given GDP growth of 4%-5% in recent years.

There is also no dispute that Nasdaq is down 50% from its peak and the

S&P 500 is down 15% from its peak, significantly reducing wealth in

the economy. Venture capital spending is also down from $100 billion a

year in 2000 to approximately $50 billion projected for 2001. Perhaps of

most concern is that two-thirds of the current economic growth is driven

by consumer spending, and there continues to be speculation about the

future ability of consumers to continue to spend. Despite this concern,

consumer confidence has rebounded in recent months.

The collapse of the telecom industry is a further area of concern, not

only for real estate building owners, but also for the economy as a

whole. Many companies, including key real estate telecoms such as

OnSite Access and Broadband Office, have declared bankruptcy, and

many others are expected to follow. The severity of telecom problems is

best illustrated by the huge numbers involved. With over $800 billion

invested in telecom, losses are expected to reach over $150 billion, equal

in magnitude to the S&L collapse. Tenants, building owners, carrier

hotel investors, and major firms such as Cisco and Nortel are among

those seriously affected. In the first quarter of 2001, for example, Nortel

declared a $19 billion loss. Perhaps the silver lining is that with a

substantial oversupply of fiber-optic cable put in place, our economy

will benefit from the infrastructure investment. However, in the short

run, don't expect bargains due to the oversupply, because stable and

successful telecom firms will be charging a "stability" premium.

REAL ESTATE MARKET OUTLOOK

The real estate markets are well positioned to withstand declines in the

economy. Most important, due to better underwriting, more regulatory

oversight, and the discipline brought on by the emergence of the CMBS

and REIT sectors, the property markets are strong. Office vacancies,

while rising in the first quarter to 9.5%, are still below levels near 20%

at the start of the decade. Annual new construction has dropped to near

2% of total inventory and is forecast to stay low for at least the next two

years. This compares to an average of 4% between 1998 and 2000 and

sustained levels of 6%-7% in the mid- to late 1980s. A similar story can

be told for the other major property types, providing confidence that

dramatic market collapses are unlikely to emerge.

Reports by the Real Estate Research Corporation, LaSalle Investment

Management, PricewaterhouseCoopers, Torto Wheaton, the Urban Land

Institute, and others, all suggest a soft economic landing would have

limited long-term negative effects on the real estate markets. Owners,

due to much more significant equity cushions than in the past, are also

well positioned to survive projected economic declines.

Other positive signs for the real estate industry are found in recent

surveys. Based on a survey of responses from leaders in the Urban Land

Institute, 78% of all businesses thought that prospects for profits through

mid-2002 were excellent, very good, or good, while only 8% thought the

prospects for profits were fair or modestly poor. Bank of America

Securities did a survey of 34 of the largest public real estate companies

with an equity capitalization of $105 billion and found that, combined,

they have invested only $230 million in technology ventures. This

equaled approximately 0.2% of their equity capitalization, with most

companies having invested less than $10 million. They conclude that

most real estate companies avoided the temptation to take the

technology leap of faith; thus, negative financial effects have been

minimal.

TRANSACTION ACTIVITY

The differences in the way buyers and sellers interpret market

uncertainty have led to a significant slowing of transaction activity. By

some reports, both sales and mortgage origination activity are down over

50% from highs during the last two years. Leasing activity has also

stalled as tenants, hoping that they are finally back in the driver's seat,

pause to consider the effects of the economy on their businesses and

determine the point in time where they can extract the best deal from

landlords. The one bright side in the transaction market is refinancing,

where historically low interest rates and new mezzanine financing

structures allow owners to extract significant capital without having to

sell.

The slowing of transaction activity is reflected in bidask spreads, which

are the widest they have been in many years (bid-ask spreads measure

the difference between what the buyers want to pay and sellers are

asking as measured in differences in capitalization rates). Bid-ask

spreads were over 100 basis points for hotels and power centers. Office

buildings, industrial properties, and community shopping centers were

centered around 70 basis points. Apartments had the lowest bid-ask

spread of 50 basis points.

As might be expected, bid-ask spreads vary significantly by property

type and geography, Property types with longer leases typically have

wider spreads, as do markets which have seen accelerated rent increases

in the last several years. If history is a guide, the wide gaps in bidask

spreads should last 3-6 months, with sellers eventually moving to the

buyer's position. However, the strong equity positions and financing

options available to many owners are likely to extend slow transactions

longer then has been the case historically.

There are numerous indicators that transaction activity should rebound

strongly in the next 12 months. First, buyers, sellers, and tenants should

gain confidence as the direction of the economy and real estate markets

becomes more clear. Opportunity funds, which have raised over $50

billion in equity, and invested significantly more on a leveraged basis

during the last five years, are under pressure to sell assets. While their

financial strength will enable them to hold assets, they have significant

selling pressure due to internal rate of return hurdles and the detrimental

effect of longer holding periods on internal rates of return.

Transaction activity from the REIT sector should also increase as REITs

recapitalize through joint ventures and sales of marginal-quality assets.

The REIT bond market has also been strong, enabling access to

unsecured debt, providing further transactional liquidity. Other positive

trends for transactions include expected increases in pension fund

allocations to real estate in 2002, increased corporate activity as rents

stabilize, and continuing healthy capital markets.

Another strong trend in the transaction market has been the growing

activity of high-net-worth individuals. According to CB Richard Ellis,

high-net-worth individuals and syndicates accounted for 44% of

transactions in 2000, followed by life companies and pension funds at

25%, opportunity funds at 14%, and REITs at 11%. This trend of

investment by high-net-worth individuals is expected to continue as

wealthy individuals continue to diversify their stock market positions.

Given the substantial wealth in the economy, even after drops in the

stock market, small changes in individual investment decisions can

result in significant new real estate equity investment. Proof of this trend

can be found in a survey in the Spring 2001 Real Estate Alert that

identified 78 active real estate opportunistic and value-added vehicles,

operated by 60 different sponsors. These funds raised $26.6 billion by

the end of 2000 and were expecting to invest $26.7 billion in 2001 at an

average target leveraged return of 19.2%.

REIT TRENDS

REITs usually get press disproportionate to their influence in the real

estate capital markets due to public disclosure requirements. In this case,

REITs have earned their press with returns through the middle half of

the year near 8% compared to returns of -17% for Nasdaq and -7.1% for

the S&P 500. The strength of REIT performance is even more stellar

when looking at the last 12 months where REITs have achieved 18%

total returns versus a negative 46% for Nasdaq and a negative 16.1% for

the S&P 500. The best REIT performers during the last 12 months have

been those sectors of the market hurt the most previously, retail, hotels,

net lease, and healthcare. Healthcare REITs led the pack with a 46.2%

return during the last 12 months.

Despite the substantial increase in share prices during the last 12

months, average REIT net asset values (NAVs), as a percent of total

market capitalization, were 95% through the middle of 2001, up from

88% in June of 2000, but still far below the peak of 130% set in March

of 1997.

REITs have rebounded successfully from their poor performance in

1998 and 1999 when they experienced negative total returns of 16.9%

and 4.6% respectively. The challenge today is to continue the strong

performance and growth while limiting risks. As capitalization rates

have declined and low-hanging fruit has been picked, it is more difficult

to find acquisitions that generate growth at appropriate risk levels.

REITs have responded by turning to development. Green Street

Advisors, Inc., reports that the current development pipeline for public

REITs and real estate operating companies is approximately $18 billion.

This represents almost 20% of the market equity of the companies

undertaking development. So far, the market does not appear to be fully

rewarding the additional growth brought on by development, unless it is

adjusted for market, financial, and property risks.

The REIT Modernization Act (RMA), which went into effect January 1,

2001, is one way that REITs are expected to push forward their growth.

The RMA, which allows REITs to own taxable real estate subsidiaries,

thus enabling them to provide real estate-related services to their tenants

and third parties, has been underestimated in some circles as a driver of

growth. While many REITs will only marginally use the powers of the

RMA, other firms are contemplating substantial vertical integration

including such ideas as apartment REITs owning furniture companies or

offering single-family sales and brokerage services to tenants who are

moving into the single-family market. Credit card companies for

regional mall REITs or multifamily REITs going into condo conversion

are a few of the many other ideas and actions being implemented today.

REITs need to be careful in their planning to take advantage of the

RMA's power. The problem can be seen in the way the stock market has

treated commercial real estate services companies that went public since

1996. These companies, which make up five of the 10 largest

commercial real estate services firms in the country, have suffered

dramatically falling stock prices and have been unable to raise sufficient

additional capital to fund their growth. One reason for this, and why

REITs have fared better, is that the market does not reward

unpredictable transaction-based income. Accordingly, since REIT

analysts look very carefully at the nature of income, and have a

preference for asset-based income, any expansion of activities due to the

RMA should be evaluated based both on their ability to contribute to

share price as well as the specific profitability of the subsidiary.

REITs also continue to face the challenge of raising new capital. While

O & Y Properties Corp recently filed for a $98 million IPO to create 0 &

Y REIT, the IPO market has otherwise been dead. Only two IPOs worth

$292 million were sold in 1999, and no IPOs have been done since. On

the positive side, REITs have been able to access unsecured debt

through public offerings during the last few years. Unsecured debt

offerings exceeded $7 billion per year in 1999 and 2000, and through the

first five months of 2001 nearly $5 billion in unsecured debt had been

raised. Although a total of $10.4 billion of offerings were completed in

2000, money raising paled compared to the average of over $40 billion

raised annually in 1997 and 1998.

REIT merger and acquisition activity declined significantly in 2000.

Only 7 REIT to REIT mergers occurred in 2000, compared to 14 such

deals in 1999. While merger, acquisitions, and consolidation activities

are expected to continue in the future, most observers do not expect the

pace to pick up significantly in the near term.

DEBT TRENDS

Commercial mortgage interest rates have remained relatively constant

since the start of the year, at historically attractive rates of approximately

7.5%. However, while prices are good, borrowers are experiencing

difficulties in obtaining acceptable loan to value ratio coverage,

particularly with construction loans or other properties with higher risk

positions.

Tight underwriting practices by banks have been in place for some time.

Based on the most recent survey by the Federal Deposit Insurance

Corporation of bank underwriting practices, covering the October 2000

through March 2001 time period, underwriting practices for commercial

real estate loans tightened further. The same report showed that banks

active in construction lending actually increased their frequency of

making speculative construction loans (that is, projects without

meaningful presale, prelease, or takeout commitments). Approximately

29% of those making construction loans participated in this practice.

Bank underwriting will not tighten excessively as it did in the early

1990s if Alan Greenspan has his way. In early June, Greenspan, the

Federal Reserve chairman, told the Senate Banking Committee that

banks should not tighten lending standards despite some erosion in loan

quality in U.S. banks. He felt that an overreaction to problem loans

could create a credit crunch, which could be devastating to the sluggish

economy, hurting bank shareholders and their profits.

The CMBS market is showing surprising resiliency so far in 2001.

Based on year-to-date performance, issuance for 2001 is expected to

reach $75 billion, only $3 billion less than its peak of $78 billion in

1998. This is up from $60.9 billion in 2000 and average issuance of less

than $20 billion in the early to mid-1990s.

The resiliency of the CMBS market is reflected in its ability to adapt.

While the market grew initially with large offerings of Resolution Trust

Corporation assets, it then adapted to incorporate multiasset class pools,

a broader array of property types, international securities, and finally

today more customized offerings with unusual underlying collateral

features including leaseback structures, single borrower loans, and short-

term loans.

With international issuance reaching $12 billion in 2000 as banks

throughout the world restructure their assets, and estimates of $20 to $25

billion of international securities in 2001, this segment has become

important. However, there are still some questions as to whether this

international component of the market will be a long-term feature or

disappear like RTC issues did in the US. during the mid-1990s.

CMBS spreads continue to tighten. AAA spreads over 10-year

Treasuries were 126 basis points as of June 2001, 40 basis points less

than a year ago. This tightening is a result of continuing healthy demand

for CMBS issues by investors and declining 10-year Treasury rates,

which decreased 60 basis points during the same time period.

Noninvestment grade tranches did not see their spreads reduce, as BB

spreads remained constant at 525 basis points and B spreads actually

rose from 815 to 825 basis points.

There appears to be hope for additional B-piece buyers to enter the

market, eliminating a potential bottleneck for CMBS issuers. This is

important because historically the market for the highest-risk CMBS

tranches has been thin, and these investors shoulder the majority of the

delinquency and default risk in CMBS securities. B-piece buyers wield

power despite representing only approximately 5% of a typical pool.

They have had the ability to throw out loans arbitrarily and make other

demands.

There is evidence that new B-piece buyers are entering the marketplace.

With the dot.com meltdown and the high-return expectations in the tech

sector, B-pieces, with 20% to 30% return expectations, are attracting

greater interest. ARCap REIT, Inc., a private trust that is an active B-

piece buyer, completed an offering raising $121.5 million. They also

issued $236 million in senior notes, providing additional capital to invest

in the market. Cremac Capital Partners also recently closed a $100

million fund to invest in subordinate tranches. A team consisting of

Alliance Capital Management and the Global Capital Markets Group of

CB Richard Ellis also recently announced plans to raise approximately

$200 million of equity capital to invest in BB and below quality CMBS.

GE Financial Assurance and Anthracite Capital, Inc., are two other

companies that have recently raised fresh capital for the sector.

The CMBS market is also heading towards greater activity over the

Internet. Recently, a group of companies and organizations led by the

Mortgage Bankers Association (MBA) and the Commercial Mortgage

Securities Association initiated a process to develop standards for

commercial mortgage transactions conducted over the Internet. Another

task force of the MBA and the Commercial Mortgage Securities

Association recently released a report that dealt with the problem of

missing loan documents. This task force spent eight months developing

recommendations to insure fewer delays and more complete reporting in

the mortgage markets.

Finally, the idea of online marketing of bonds is not new. In 2000, five

investment banks including Goldman Sachs, Merrill Lynch, Morgan

Stanley Dean Witter, Deutsche Bank, and Salomon Smith Barney

banded together to launch an online marketplace for bonds. This new

company, called BondBook LLC, is being designed to trade corporate,

junk, and municipal bonds on the Internet. While the CMBS industry is

not quite there yet, the steps being taken and this initiative in the bond

market are leading the way towards greater liquidity in the commercial

mortgage-backed securities marketplace.lR

INTERESTING OPPORTUNITIES IN THE MARKET

Huge opportunities with brownfields (former industrial and commercial

facilities where development is complicated by real or perceived

environmental contamination) have become more realistic given recent

market changes. First, the Brownfields Revitalization and Environmental

Restoration Act passed 99 to 0 in the Senate in April 2001 and is going

to the House. This act provides liability relief for innocent property

owners and increased funding for brownfields cleanup and

redevelopment and recognizes the finality of successful state hazardous

waste cleanup efforts. Bush's budget also makes permanent a special

exception that brownfield sites currently have that allows them to deduct

all cleanup costs immediately, rather than amortizing them over time.

Finally, in a federal district court in San Francisco, the city of

Emeryville received a favorable ruling that they are not responsible for

any cleanup cost because of environmental contamination in a property

they acquired under eminent domain. This ruling enables cities to more

freely use their eminent domain power to push forward brownfield site

redevelopment.

For those people who have longed to buy a cheeseburger at their local

REIT, the IRS in early June issued Revenue Ruling 2001-29, which

clarified an earlier ruling in 1973 that held that REITs were not engaged

in the "active conduct" of a trade or business. This new ruling clarifies

that REITs are engaged in the "active conduct" of a trade or business

providing a "safe harbor" for non real estate companies to distribute or

spin off on a tax-free basis real estate assets in the form of a real estate

investment trust whose shares are distributed to the company's existing

shareholders. This presents opportunities for companies like McDonald's

to spin off their real estate holdings on a tax-free basis.

Opportunities in the 1031 like-cut exchange marketplace expanded with

a September 15, 2000, IRS ruling which enables "reverse" like kind

exchanges. This ruling, Revenue Procedure 2000-37, enables property

owners to reverse the existing steps in a 1031 exchange, enabling them

to buy a property first, then have 180 days to sell existing assets. This

added flexibility should make the $30 billion 1031 exchange market

even more attractive. To assist this marketplace, LoopNet, in partnership

with Asset Preservation, Inc., Investment Property Exchange Services,

Inc., and LandAmerica Exchange Company, recently launched an online

program for tax deferred investment property exchanges. This exchange

will provide resources, current information, and a variety of tools

necessary for 1031 transactions.

Succession planning and related activities present a huge opportunity for

service providers and investment managers during the next two decades.

Projected wealth transfers during the next two decades are massive.

Twenty-six million estates with an aggregate value of $12 to $18 trillion

will be probated by 2017. Seven to ten trillion dollars of this will go to

personal heirs, as opposed to charities or trusts. The opportunities exist

because of the large amount of this money that will be in the form of real

estate, or real estate companies, as well as the investment opportunities

presented by this wealth transfer. Succession planning has always been a

critical issue for real estate companies, and with many REITs today, it is

an important issue in retaining the confidence of investment analysts.

Another significant growth area to watch is the biotech industry. The

cost of bringing a new drug to market is approximately $400 million,

and biotechnology can significantly reduce this cost. The industry, just

25 years old, has helped a quarter of a billion people, and this number is

expected to grow significantly. Over 350 biotech medicines targeting

200 diseases are in the late stages of development. With substantial

research budgets and growing marketing and business strength, the

biotechnology industry will be a huge user of real estate within the

United States, Europe, and 22other countries.

2.3 ROLES OF BANKS AND OTHER INTERMEDIARIES IN

REAL ESTATE DEVELOPMENT

Housing finance by its very nature is a capital intensive venture which if

it is to be financed through personal financial resources will require slow

and tedious accumulation of savings. However, since housing provides

benefits over many years, long-term credit financing is a more logical

option as it will spread the repayment burden. But this requires

the availability of long-term funding, and for which must be institutional

capacity, structure and mechanism that will allow a convenient and

effective linkage between the savers/investors and the consumers of such

funds.

Federal Mortgage Bank of Nigeria is the apex institution in the mortgage

market in Nigeria.

A committee was set up to produce a draft of National Housing Policy

acknowledged, finance as constituting the centre piece, among other

major pillars, of housing delivery (Abiodun, 1999).

The poor performance of Federal Mortgage Bank of Nigeria (FMBN),

which gave loan to 8,874 out of 10,000 application between 1977 and

1990 was very worrisome. It was very obvious that the FMBN should

undergo serious re-engineering to be able to cope with the

enormous task of housing finance. This re-engineering resulted into a

framework of two – tier financial structure (see fig. 1:)

Fig. 1. Nigeria Two Tier Housing Finance Structure

Source. Authur (From NHP).

Arilesere 1998, summarised the major strategies and guidelines of the

National Housing Policy

(NHP, 1991) on Housing finance as follows:

- Mobilisation of savings into Mortgage Institution

- Provision of incentives for the capital market to invest in property

development

- Provision of policy controls over the allocation of resources between

the housing

sector and other sectors of the economy.

- Facilitation of flow of domestic and international resources into the

priority housing

areas, such as low income housing.

FMBN

Saving banks

Building societies

Credit unions

Housing corporation

- Need for government to establish voluntary schemes, mandatory

schemes and

provide substantial budgetary allocations and financial transfer to the

housing

finance system.

- Establishment of National Housing Fund (NHF) to be administered by

the Federal

Mortgage Bank.

- Ensuring that Commercial Banks, Merchant Banks and Insurance

Companies are

given reasonable conditions to encourage them to invest in mortgage

business.

Without an effective finance system, no housing policy can be

effectively implemented. A financing framework which facilitates

financial intermediation for housing finance consists

of institutions as well as their relationship and the processes involved.

However, the emphasis in this review will be on relevant institutions and

their activities. Indeed the framework must effectively reconcile the

affordability limitation of households with viability requirement of

financial institutions.

In Nigeria, housing is typically financed through a number of

institutional sources:

Budgetary appropriations, Commercial/Merchant Banks, Insurance

Companies, State Housing Corporations and the Federal Mortgage Bank

of Nigeria (FMBN): and now the newly established Mortgage

Institutions all these constitute the formal institutions. In

formal institutions such as thrift and credit societies, and money lenders

who have contributed and are still contributing substantially to the

finance of housing construction also persists.

The impact of these informal institutions however cannot be properly

quantified because they are largely uncoordinated, scattered and varied

in scope and operational depth.

2.4 THE ACTIVITIES OF GOVERNMENT IN FINANCING

REAL ESTATE DEVELOPMENT

For various reasons, the expansion in the external sector of the economy

as well as the consequent expansion in the financial system did not

translate into any significant improvement in the level of financial

intermediation for housing finance. A major reason

has been, until very recently, the nature of Government intervention.

With resources allocated by the various development plans especially

the Third and Fourth National Development Plans, the public sector

embarked on the direct construction of mass housing; major housing

projects were financed directly from budgetary appropriations. This

emphasis on budgetary appropriation was mainly during the oil boom

periods of 1973/76 and 1980/81. Little or no role was allowed the

Private sector in Housing Finance.

The results were insignificant impact on housing need and attendant cost

inefficiencies. There were few peculiar features of implementation in the

respective periods of the plans which have had a direct bearing on

Housing finance activities.

(a) Fiscal policy alternated between stringent and liberal control on

imports, depending

on the buoyancy of hard currency earnings. Given the import

dependence on

building materials, cost of housing construction oscillated.

(b) Apart from its regulatory role, government at the Federal and State

level was also

engaged in direct housing construction. For example the new

government of Lagos

State is currently embarking on the provision of 10,000 housing unit per

year for

the next four years of mix development for the people of the state. How

realizable

this scheme is only time will tell. But definitely its all boils down to

finance. It is on record that the State is seeking to obtain 4.0 billion

Naira from the capital

market just to be able to fulfill part of their promise of housing.

(c) Although the Third and Fourth plans placed emphasis on a housing

sector, there

was no adequate allocation of funds.

(d) The institutional structure for mortgage finance did not evolve

beyond rudimentary

stage.

In the event, there was little evidence of financial presence from the

private sector in public sector housing finance activities. In consequence,

the operational dependency and

sophistication which a greater presence from the private sector could

have induced in the Housing finance system did not take place. The

situation was compounded by the strict regulation of credit expansion

which, until the recent deregulation, has compelled the

financial institutions to remain largely in the short-term end of the credit

market.

Inspite of their importance in financing the construction of housing, the

commercial and Merchant Banks have not gone beyond allocating 20%

of their loans and advance into building construction for any year. This

is because of the relative slow rate of returns and the interest rate and

inflation risks inherent in long-term lending.

2.5 THE ROLES OF FINANCIAL INSTITUTIONS IN ENSURING

REAL ESTATE DEVELOPMENT IN NIGERIA.

Insurance Companies

Insurance companies are equally well suited to providing housing

finance because of their stable base of funding and the long-term nature

of their liabilities. They are therefore not only fund mobilizers, but also

important source of capital fund for the economy. Funds from life

insurance companies also provide resources for the financing of the

housing sector in Nigeria. The structure of the loans and advances of the

sector indicates that the insurance sector has been active in mortgage

financing.

Specialized Institutions

The main competing institutions with banks and insurance companies in

the area of housing have been specialized institutions, such as semi-

government agencies, mortgage banks and building societies.

State/Municipal Government Financing

State and Municipal Governments have also been known to be involved

in mortgage financing, albeit, on a limited scale.

The sources of such fund usually include budgetary allocation,

complemented with facilities from development institutions.

Such funds are often channelled through the states’ development finance

institutions such as the Housing Corporations or Investment and

Property Development Corporations for on lending to individuals for

residential building construction. Indeed, the erstwhile regional

governments of the 1960s set up the regional housing corporations, with

clear mandate to provide long term credit for housing development.

Primary Mortgage Institutions (PMIs)

The promulgation of the Mortgage Institutions Decree No. 53 of 1989

provided the regulatory framework for the establishment and operation

of Primary Mortgage Institutions (PMI) by private entrepreneurs. The

FMBN under the decree became the apex institution, which regulates

primary mortgage institutions and was empowered to license the PMIs

as second tier housing finance institutions. The PMIs, under the Decree

were to mobilize savings from the public and grant housing loans to

individuals, while the FMBN mobilizes capital funds for the primary

mortgage institutions. The PMIs were expected to enhance private sector

participation in housing finance.

The Federal Mortgage Finance Limited (FMFL)

The Federal Mortgage Finance Limited was established in 1993 to carry

out the retail aspect of mortgage financing and provide credible and

responsive housing finance services, while FMBN became the nation’s

apex mortgage lending agency.

The FMFL is expected to provide long-term credit facilities to mortgage

institutions in Nigeria to enable them grant comparable facilities to

individuals desiring to acquire houses of their own; encourage and

promote the emergence and growth of primary mortgage institutions

(PMIs) to serve the need of housing delivery in all parts of Nigeria; and

to collect, manage and administer contributions to the National Housing

Fund (NHF) in accordance with the provision of the NHF Decree No. 3

of 1992.

Housing Corporations

The State Housing Corporations operate largely as property developers

and they depend mainly on Government budgetary allocations. The

housing units are usually sold outright as they usually do not provide

mortgage finance to buyers. The number of housing units produced has

not been significant relative to demand. Their role would have been

effectively implemented if they were operating as financial

intermediaries. It has been noted elsewhere that for reasons such as

availability of Government funding, housing corporations do not operate

savings schemes; and those that have such schemes have

marginalized them.

It was in realization of the enormity of the housing problem relative to

declining resources capacity available to the Public Sector, that the

previous Governments decided to facilitate construction by the Private

Sector institutions. Consequently the new National Housing

Policy was established.

2.6 THE EFFECT OF POLICY ON REAL ESTATE

DEVELOPMENT

Realizing that the enormous public sector efforts have not effectively

addressed an expanding housing deficit and escalating construction

costs, and that such efforts must be substantially collaborative with the

Private Sector, Government decided to establish a framework within

which such collaboration can effectively address the housing problem.

This was articulated in the National Housing Policy in 1988. The policy

attempts inter alia; to create a new housing finance system, encourage

the linkage of the housing sector to the capital market, establish a

National Housing Fund, and expand Private Sector role in the

housing delivery system.

The most significant differences between the new policy and the

previous ones are firstly, that housing is now seen in context of the

overall national development. Previous policies had tended to regard

housing as a social service and a natural fall-out of the national

economic development. Secondly, the policy has identified the fact that

different household both within and between income groups tend to have

different demand for housing. This is evident from the ultimate goal of

the policy which is, “to ensure that all

Nigerians own or have access to decent housing accommodation at

affordable cost by the 2000 AD” Thirdly, the focus of the policy seems

to be to remove all barriers to the supply

of housing and to provide incentives to all parties involved

(governments, private sector and individuals) in the housing delivery

system.

2.7 SUSTAINABLE HOUSING DEVELOPMENT IN NIGERIA

The rate of urbanization in Nigeria has witnessed tremendous increase in

the past decades. Census in the early Fifties showed that there were

about 56 cities in the country and about 10.6% of the total population

lived in these cities.

This rose dramatically to 19.1% in 1963 and 24.5% in 1985. Today, the

national population is now estimated to be about 120 million with the

urban population constituting about 30%. The rapid growth rate of urban

population in Nigeria since the early seventies was mainly due to

immigrating induced by the concentration of the gains from the oil

sector in the urban areas.

Given the expected increases in Urban population, the magnitude of

housing problem in

the country is enormous. According to the National Rolling Plan (NRP)

the national housing requirement is between 500,000 and 600,000 units

considering the prevailing occupancy ratio of between Three and Four

persons per room. If this estimated annual requirement was to be

provided at an average of N500,000 per unit (rather conservative) the

costs would be enormous and indeed unrealizable. The cost of

providing housing alone would be between N250 Trillion and N300

Trillion (excluding the cost of infrastructural development). This is the

macro perspective of the housing problem.

This is to say that the Government and Mortgage Institutions will need

this much as capital base to effectively tackle the housing situation.

The phenomenal rise in population, number and size of our cities over

the past few years have manifested in the acute shortage of dwelling

units which resulted in overcrowding, high rents, poor urban living

conditions, and low infrastructure services and indeed high

crime rates.

On the micro-level, it has been observed that house ownership is one of

the first priorities for most households and it represents the largest single

investment for most (between 50% and 70% of household income). This

observation becomes very significant when it is

realized that per capital income in Nigeria has been on the decline

(currently N3,000.00) as well as the real income of the average Nigerian.

The rapid up-swing in the prices of building materials in the last five

years has further reduced the affordability for most

Nigerians. Relating annual requirements for housing with the Gross

Domestic Product of N82.53 billion in 1988 and 85.82 billion estimates

for 1989, and over 88 billion in 1991 as well as per capital income of

N3,000.00, financing becomes a major factor of the housing

problem especially long term funding. Except the problem of how to

finance the construction of housing for all income groups is effectively

addressed, the housing problem is bound to further escalate.

The objective of this paper therefore is to give you an insight into the

financing option for the construction of housing in Nigeria given the

existing financial structures. Construction materials and housing design

play a crucial role in this overall financial play.

2.8 HOUSING IN THE NATIONAL ECONOMY

One may perhaps be tempted to ask why emphasis is being placed on

housing. Firstly of all man’s basic needs, housing arguably, constitutes

and indeed poses the greatest challenge.

Secondly, a vigorous and buoyant housing sector is an indication of a

strong programme of national investment and is indeed the foundation of

and the first step to future economic growth and social development.

The gross housing delivery is therefore a major factor in the nation’s

gross domestic product (GDP) and indeed this reflects the mirror and the

barometer of the state of health of the Nation.

Economic activities are well known to encompass all aspects of human

endeavor that are directed towards the creation of wealth. It is also

known that one of the basis of human needs is to seek to enhance our

self worth by improving our living standards.

Economic growth is therefore a natural pursuit in any human set-up as

such improvements is expected to lead to increased wealth and

prosperity both for individuals and the whole nation.

In order to moderate the acute shortage of shelters in the country, the

NHP for the period spanning 1994 to 1998 was expected to build

121,000 housing units. In addition, the number of Licensed Primary

Mortgage Finance Institutions (LPMFI) rose from 251 in

1993 to 276 in 1994. However, by the end of 1998, it has declined to

115. Similarly, the Federal Government capital expenditure on housing

increased by over 500 per cent to N4818.3 million in 1995 from N776.7

million in 1988, but declined slightly by about to per cent to N722.0

million in 1998 (CBN 1994 and 1998). The Federal and the State

Government were expected to spend N2.7 billion on housing provision

during the 1996-98 NRP. Over N3.0 billion was expected to be spend by

the two levels of governments during the 1999-2001 NRP (NPC, 1998

and 2000) Despite all these interventions and huge investments in

housing provisions since the colonial times and to date, Nigeria’s

housing problems still remain intractable. In fact, access to decent

shelter has worsened for increasing segments of the urban population in

Nigeria. For instance, it was reported that out of 121,000 housing units

slated to be built between 1994 and 1995, only 1,014 houses were

completed (CBN, 1994 and 1998; and Vision 2010 Main Report). Also,

it was estimated that about 85 per cent of urban population live in single

rooms, and the number of occupants per room range from 8 to 12 with

adverse effects on sanitation and health. The deteriorating housing

situation in Nigeria, especially at the urban centres is too critical to leave

for government to redress alone.

Nigeria is the 6th largest producer of crude oil in the elite league known

as OPEC, whose members account for over two –third of the worlds

total supply of this commodity. Also the country’s estimated reserves of

natural gas runs into billions of metric tonnes and the

first train of the liquified Natural Gas (LNG) has recently being shipped

out with the production all fully committed to purchase’s from abroad.

In terms of revenue earning capacity and potential, it is worth

mentioning that Nigeria to date has realised over US200

billion from crude oil sales. For a country that could boast of such huge

amount of resources, it is very saddening and disturbing to note that very

little of the earnings have been put into use to boost the fortune

of the Housing Industry and infrastructure. The industry should have

seen a lot more activity and government support, in large scale

development schemes, and improvement and providing of infrastructure;

provision of large scale social housing, creating and

expanding new towns.

A cursory look at the present state of the housing provision tells a

glaring tale of a huge paradox - A paradox of achieving so little with so

much endowment! An indictment of the government that ought to

provide the lead. And so today the housing provision is in a state

of comatose, neither dying nor living!!!

One major serious aspect of urban problem with respect to housing is the

poor state of the infrastructures. For instance Table 1 indicates the

proportion of urban households in

Nigeria with water supply.

National Sites and Services Programme

The National Sites and Services programme was adopted by the Federal

Government in 1986 as a viable alternative for housing delivery through

increased supply of serviced plots at affordable costs. The aim of the

programme was to create easy access to develop land, which had for

long hindered home ownership. The programme involves the provision

of serviced land for housing development and commercial activities in a

well laid out and planned environment. Such services include roads,

drains, water supply, electricity and other municipal services. Since the

commencement of the Programme in 1986 only about

20,000 plots have been allocated in about 20 states of the federation. In

the 2001 fiscal year, contracts are currently being packaged for Kuje and

Gwarinpa both in the FCT for the provision of roads and drains.

Summary of percentage (%) of work done as at the end of 1999.

Description % of work done

- Site clearance and earth works 75%

- Roads and car parks 20%

- Storm water drainage 75%

- Water supply 1.5%

- Sewer main drain 56.5%

- Electrical distribution & street lighting 2%

- Telecommunication Nil

- Layout and demarcation of plots 90%

Amount required to complete the on-going sites and services projects are

estimated at

N6.986 billion.

2.9 New Structure for Housing Finance in Nigeria.

The new housing policy has established a two-tier housing finance

structure, with FMBN as an apex institution and a decentralized network

of Primary Mortgage Market institutions such as building societies,

housing co-operatives, home savings and loans associations.

This structure aims to streamline processes and organizational

relationships within the housing finance system and encourage

expansion in private initiative. In this regard, the legal framework for the

organization and implementation of the apex role of FMBN has

been defined by the Mortgage Institutions Decree No.53 of 1989.

National Housing Fund (NHF) – was established in 1992

The concept of the National Housing Fund as proposed in the National

Housing Policy is to ensure a continuous flow of long-term funding for

housing development and to provide affordable loans for low income

housing. The promulgation of the National Housing Fund Decree

heralded the emergence and establishment of a battery of mortgage

finance institutions in Nigeria. Quite a number of them had been in

operation for the last 12 months. Good as the intention of the scheme

appear, the technicalities and modalities of releasing the loan to the

mortgage institutions to unlend to the members of the public have not

been worked out and as such most potential clients have been frustrated

by the high interest rate and cost of funding. Most of

the mortgage institutions on their own have been mobilizing funds by

accepting deposits and savings at very high interest rate in a highly

competitive marketing environment. Most customers on the other hand

are prepared to wait for the National Housing Fund than take

loans at high interest rate which is presently being dictated by the money

market condition.

2.10 STRATEGIES FOR EFFECTIVE RESOURCE

MOBILIZATION IN REAL ESTATE

The strategies offered in the national Housing Policy are classified into

voluntary schemes, mandatory schemes and government budgetary

allocations. The Voluntary Schemes: Include encouraging individuals to

save and borrow at low interest rates. Contractual savings schemes as

well as Central Bank guidelines will be employed to facilitate the

contributions of individual, and commercial/merchant bank

respectively. The Mandatory Schemes: Consist of the National Housing

Fund (NHF), schemes for commercial/merchant banks and insurance

companies. The N.H.F. will take two and a half per-cent contribution

from the monthly salaries of workers earning N3,000.00 and above.

It will attract 4% interest rate but contributions can be withdrawn as

retirement benefit with commercial rate of interest paid when

contributors do not use the housing loan facilities.

The fund is to be administered by FMBN. Commercial/Merchant Banks

are expected to invest 10% of their loans and advances in FMBN at

concessionary interest rates. Insurance companies are also to invest a

minimum of 20% of their non-life funds and 40% of their life funds in

real estate development; not less than 50% of these allocation must be

channeled through FMBN. All these noble aim of Government are

presently being hindered by criticisms from Insurance companies and

Banks. While the mandatory contribution from employers is trickling

into FMBN at small pace thereby making the scheme presently

ineffective. This scheme is not working. For example to date only 969

out of the 1.8 million contributors have so far applied for loans, while a

total of N5.8 billion has been collected into the fund since its inception

in 1992 to September 2000. Out of the total amount collected,

N13million has been refunded to 4019 contributors who have attained

the age of 60 years or become incapable of continuing their contribution.

Only N375 million of the total fund of N5.8 billion in the kitty have

been disbursed through 20 primary mortgage institutions to 631

contributors to enable them buy or build their own houses.

2.11 EVALUATION OF HOUSING/MORTGAGEFINANCING IN NIGERIAAn appraisal of mortgage financing in Nigeria shows that these

measures have produced some salutary impact on the housing sector.

Available information reveal that about N1.065 billion was granted as

loans and advances by the insurance companies to the housing sector

between 1990 and 1998. This represented an average of 39.4 percent of

their total loans and advances during the period. The analysis of the

PMIs operations also indicate that loans to customers amounted to

N5.987 billion within the period 1992 – 2001, just as the number of

operators rose steadily to a peak of 280 in 1995 before it declined.

Available information also reveals that the supply of credit by the

Federal Mortgage Bank of Nigeria is grossly 14 inadequate to meet the

growing demand. With regard to cooperative societies and

state/municipal governments, evidence seem to suggest some increase in

the level of funding although, there appears to be a lull in recent times

owing to inadequate funds.

In terms of fund mobilization, the national housing scheme recorded

modest achievements as contribution to the scheme increased to over

N20, 073.0 million by December 1997.

As at end September 2000, FMBN mobilised a total of N5.8 billion from

1.8 million contributors to the NHF while it granted N375 million loans

to 631 contributors through 20 PMIs for the construction of houses.

Overall, there is evidence of declining activities in housing

finance generally. The average share of GDP invested in housing

declined from 3.6 percent in the 1970s to less than 1.7 percent in the

1990s. In addition, between 1992 and 2001, the volume of savings and

time deposit with the banks and nonbank financial institutions grew by

604.94 percent from N 54 billion to N 385.2 billion. However, the

proportion held by the housing finance institutions declined from 1.4

percent to 0.22 per cent in 1998, indicating a fall in the flow of funds

into the housing finance sector.

2.12 LINGERING OF MORTGAGE FINANCING IN NIGERIA

The statistics given above is worrisome and underscores the existence of

some lingering problems, which constrained adequate and efficient

credit delivery to the housing sector.

They include the following:

• Low Interest Rate on National Housing Fund The low interest rate

level stipulated by law on investment on NHF makes the banks and

insurance companies reluctant to invest in the Fund especially, as

there are some more profitable investment avenues.

• Low Level of Participation in the NHF

The number of contributors to the NHF has been relatively small

compared with the national work force.

There are about 9 million workers who are yet to be registered and are

therefore not making any contributions. There are also alleged cases of

diversion of workers contributions to the fund by employers to other

investment purposes.

• Macroeconomic environment

The hitherto high inflation rate negatively affected the macroeconomic

environment. There is need to continue to keep the rate of inflation

moderate as high inflation rate and structural bottlenecks in the economy

do not encourage contribution toward the fund.

• Non-Vibrancy of some PMIs

The loss of focus by some PMIs in favour of non-core activities such as

trading as well as the slow disbursement of NHF to the PMIs, made

some of them to be competing with the banks in sourcing for funds for

purposes other than mortgage financing.

• Cumbersome Legal Regulatory Framework for Land Acquisition

The existence of a cumbersome process of title documentation of land

ownership which is reinforced by inadequate cadastral system makes

mortgage financing very difficult. This has been seen as one of the

factors responsible for slow disbursement of NHF.

• The Structure of Bank Deposit Liabilities

This is preponderantly short term, therefore, the deposit money banks

tend to avoid fund mismatch i.e. borrowing short but lending long,

which is required in mortgage financing. The key issue that emerges

therefore revolves around how to ensure adequate long term lending by

financial institutions rather than the current short term

lending practice. This requires significant intermediation efforts,

especially, since housing finance is very sensitive to inflationary

environment. Another related issue is the inability of the financial

institutions to mobilize resources effectively for low-income housing.

REFERENCES

SUSTAINABLE HOUSING DEVELOPMENT IN NIGERIA – THEFINANCIAL AND INFRASTRUCTURAL IMPLICATIONJoseph Segun AJANLEKOKO, Nigeria

Assessing the Causes and Consequences of Loan Defaults and Workouts Forte, Joseph Philip.  Real Estate Finance.  New York:Fall 1992.  Vol. 9,  Iss. 3,  p. 11 

Capital market diversity challenges borrowers, lenders, and investors Muldavin, Scott R.  Real Estate Finance.  New York:Spring 1995.  Vol. 12,  Iss. 1,  p. 8 (4 pp.)

Financing choice by equity REITs in the 1990s Chinmoy Ghosh,  Raja Nag,  C F Sirmans.  Real Estate Finance.  New York:Fall 1997.  Vol. 14,  Iss. 3,  p. 41-50 (10 pp.)

Adeniyi, E. O. (1996). “Housing in Nigerian NationalDevelopment” in Housing in Nigeria by Adepoju Onibokun

Bichi K.M. (1997). “Housing Finance in the Context of Vision2010”. Housing Today.

Enuenwosu, C.E. (1985): “The Federal Mortgage Bank ofNigeria: Its Objectives and Future Prospects”. Central Bankof Nigeria Bullion July - September

Falegan, S.B. (1980): “Problems and Prospects of the FederalMortgage Bank of Nigeria”. Central Bank of Nigeria BullionApril – June.

Federal Republic of Nigeria (1990) - National Housing Policy -Federal Ministry of Works and Housing. Feb.

Okonkwo O. (1999). “Mortgage Finance in Nigeria”. EsquirePress Ltd.

Onabule, G.A. (1992). “Mortgage Banking in Nigeria

Yesterday, Today and Tomorrow”. Housing Today.

FED. GOVT. OF NIGERIA (1992) National Housing Funds Decree

The evolving structure of the commercial real estate capital Brueggeman, William B.  Real Estate Finance.  New York:Winter 1995.  Vol. 11,  Iss. 4,  p. 12 (6 pp.)

Recent trends in real estate finance Muldavin, Scott R.  Real Estate Finance.  New York:Winter 1995.  Vol. 11,  Iss. 4,  p. 7 (5 pp.)

The new world of real estate finance Scott R Muldavin.  Real Estate Finance.  New York:Summer 2001.  Vol. 18,  Iss. 2,  p. 73-79 (7 pp.)

The old and the new dominate real estate finance today Scott Muldavin.  Real Estate Finance.  New York:Winter 1998.  Vol. 14,  Iss. 4,  p. 85-91 (7 pp.)

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 INTRODUCTION

This chapter contains the method by which the data utilized in the

study was sourced and analyzed. Among other things, it explains the

sampling procedure/design and the questionnaire design.

3.2 RESTATEMENT OF RESEARCH QUESTIONS

In relation to this topic, the relevant research questions include:

What are the long-term effects of financing real estate

development to the nation?

Are there Nigerian banking institutions established for the sole

purpose of financing real estate?

Has there been sustainable development in real estate over the

years?

Are there other effective sources of financing real estate in

Nigeria?

How does real estate development lead to economic growth in

Nigeria?

3.3 RE-STATEMENT OF HYPOTHESES

To further give direction to the study and with due recognition to

the statement of the research problem, the following hypothesis is

formulated as stated below:

Ho: Financial institution do not have a significant impact on the

financing of real estate development in Nigeria.

H1: Financial institutions have a significant impact on the financing of

real estate development in Nigeria.

Ho: Real estate development will not have a significant effect on

economic growth of the country.

H1: Real estate development will have a significant effect on economic

growth of the country.

3.4 SAMPLE DESIGN

The population study is made up of secondary data obtained about the

major institutions involved in financing real estate development in

Nigeria. From past researches, it has been shown that it is practically

impossible to survey all the mortgage financing institutions.

3.5 DATA COLLECTION PROCEDURE

The researcher used secondary data in carrying out this research

to a reasonable conclusion. In collecting the data the researcher visited

the Nigerian Stock Exchange to use their library to obtain information

on the relevant companies been researched. The survey would be done

by obtaining data from central bank of Nigeria’s annual bulletin 2011.

Also data from publications, journals , articles in the news papers and

also documents from the internet.

3.6 METHOD OF DATA ANALYSIS

Data collected would be presented in tabular form and, the tables would

show figures reflecting the economic indicators used in the course of this

study. The study covers the period of 2001-2010, financing real estate

development, the roles of banks and other financial intermediaries.In the

course of analyzing the hypothesis, ordinary least square regression were

used to analyse the first and the second hypothesis.

3.7 Limitations of the Methodology

I. Inadequate fund to carry out the project effectively

II. Inadequate data

III. Time constraint

REFERENCES

Asika, Nnamdi.(2009) “Research methodology in behavioural sciences”

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 DATA ANALYSIS

The data used for the analysis was obtained primarily from the National

Bureau of Statistic (NBS). This was supplemented with information

obtained from the publications of the Central Bank of Nigeria (CBN)

and World Bank.

The period of the analysis was between 2001 and 2010 which implied

that 10 years of financing real estate in Nigeria was conducted in the

course of this study. The study aimed at validating the a priori

explanations for the variables by determining the causal relationships

between the exogenous and the endogenous variables.

The traditional test of significance of the parameter estimates is the

standard error test, which is equivalent to the student’s t–test. The

correlation coefficient (R) shows the relationship between the variables.

The relationship could be of a direct, indirect or an outright zero

correlation. The Durbin Watson test for conducted to verify the

autocorrelation of the variables.

The standard error is obtained by taking the inverse of the variance of

the estimate. The standard errors for the estimate of ρ, ß and þ will be

dealt with in this project, while the standard error for the estimates δ, Ø

and ∂ are left out.

The coefficient of determination (R2) is used to determine the overall

significance of the regression model i.e. to determine the extent to which

the variations in the dependent variable can be attributed to changes in

the explanatory variable. This test shall be used to measure the extent of

the claimed relationship between the real estate developers, financial

institutions and gross domestic product in Nigeria

TEST OF HYPOTHESIS 1

Objective 1- To find out, if there is a significant impact of financial

institution on real estate development in Nigeria

Research Question 1- Is there a significant impact of financial institution

on real estate development in Nigeria?

Hypothesis 1- Financial institution do not have a significant impact on

the financing and development of real estate in Nigeria.

TABLE 4.1 MODEL SUMMARYModel R R Square Adjusted R Square Std Error of the Estimate

1 .606 .368 .356 0.232Source: Researcher’s Field Summary Result (2011)a. Predictors: (Constant), Financial Institution Financing

Table 4.1 is the model summary. It shows how much of the variance in

the dependent variable (Real Estate Development) is explained by the

model (Level of Financing). In this case the R square value is .368.

Expressed by a percentage, this means that our model (Level of

Financing) explains 36.8% of the variance in real estate development.

The adjusted R square shows .356, while the standard error of estimate

indicates 0.232 which signifies the error term that was not captured in

the model.

TABLE 4.2 ANOVAb

Model Sum of Square df Mean Square F Sig.

1 Regression 474.855 1 474.855 30.802 0.000

Residual 817.072 53 15.416

Total 1291.927

a. Predictor: (Constant), Fin Financing

b. Dependent Variables; RED Real Estate Development

Source: Researcher’s Field Summary Result (2011)

a. Predictors: (Constant), Level of Financing

b. Dependent Variable: Real Estate Development.

Table 4.2 shows the assessment of the statistical significance of the

result. The ANOVA table tests the null hypothesis to determine if it is

statistically significant. From the results, the model in this table is

statistically significant (Sig = .000) and hence, the null hypothesis

should be rejected

TABLE 4.3 Coefficients

Model Unstandardized Coefficients Standardize Coefficient t Sig

B Std. Error Beta

1 Constant 17.456 1.892 9.226 .000

Financing .243 .044 .606 5.550 .000

-----------------------------------------------------------------------------------------------------------------------------------------

Source: Researcher’s Field Summary Result (2011)a. Dependent Variable: Real Estate Development

Table 4.3 also shows which of the variables included in the model

contributed to the prediction of the dependent variable. The study is

interested in comparing the contribution of each independent variable;

therefore beta values are used for the comparison. This means that

financial institution makes about 37% the contribution to explaining the

dependent variable which is real estate development.

Interpretation of results

Findings from this research showed that financial institution have

significant on the financing of real estate in Nigeria.

TEST OF HYPOTHESIS TWO

Objective 1- To find out, if real estate developers have significant impact Nigeria economy

Research Question 1- Do real estate developers have significant impact

on Nigeria economy?

Hypothesis 1- Real estate developers have significant impact on Nigeria

economy.

on

TABLE 4.4 MODEL SUMMARYModel R R Square Adjusted R Square Std Error of the Estimate

1 .521 .311 .3309 0.249Source: Researcher’s Field Summary Result (2011)a. Predictors: (Constant), Real Estate Developers

Table 4.4 is the model summary. It shows how much of the variance in

the dependent variable (Nigeria economy) is explained by the model

( real estate developers). In this case the R square value is .311.

Expressed by a percentage, this means that our model (real estate

developers) explains 31.1% of the variance in Nigeria economy. The

adjusted R square shows .356, while the standard error of estimate

indicates 0.249 which signifies the error term that was not captured in

the model.

TABLE 4.5 ANOVAb

Model Sum of Square df Mean Square F Sig.

1 Regression 474.855 1 474.855 30.802 0.000

Residual 817.072 53 15.416

Total 1291.927

a. Predictor: (Constant), RED Real Estate Developers

b. Dependent Variables; NE Nigeria Economy

Source: Researcher’s Field Summary Result (2011)

a. Predictors: (Constant), Real Estate Developers

b. Dependent Variable: Nigeria Economy.

Table 4.5 shows the assessment of the statistical significance of the

result. The ANOVA table tests the null hypothesis to determine if it is

statistically significant. From the results, the model in this table is

statistically significant (Sig = .000) and hence, the null hypothesis

should be rejected.

TABLE 4.6 Coefficients

Model Unstandardized Coefficients Standardize Coefficient t Sig

B Std. Error Beta

1 Constant 16.456 1.592 8.221 .000

Real Estate Developers .213 .044 .521 4.990

.000

-----------------------------------------------------------------------------------------------------------------------------------------

Source: Researcher’s Field Summary Result (2011)a. Dependent Variable: Nigeria Economy

Table 4.6 also shows which of the variables included in the model

contributed to the prediction of the dependent variable. The study is

interested in comparing the contribution of each independent variable;

therefore beta values are used for the comparison. This means that real

estate developers can makes about 31% the contribution to explaining

the dependent variable which is Nigeria economy.

Interpretation of results

Findings from this research showed that real estate developers have

significant impact on the Nigerian economy.