Impact of Real Estate Sector to the Economic Growth of Nigeria
Chapter One
OBJECTIVES OF THE STUDY
The following are the objectives of this study:
- To examine the impact of the real estate sector on the growth of Nigeria’s economy.
- To identify the factors limiting development of the real estate sector in Nigeria.
- To determine how the real estate sector can contribute massively to the economic development of Nigeria.
CHAPTER TWO
LITERATURE REVIEW
INTRODUCTION
This chapter gives an insight into various studies conducted by outstanding researchers, as well as explained terminologies with regards to the impact of real sector to the economic growth of Nigeria.
The chapter also gives a resume of the history and present status of the problem delineated by a concise review of previous studies into closely related problems.
THEORETICAL FRAMEWORK
The Lewis Theory of Economic Development
One of the best-known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel laureate W. Arthur Lewis in the mid-1950s and later modified, formalized, and extended by John Fei and Gustav Ranis.3 The Lewis two-sector model became the general theory of the development process in surplus-labor Third World nations during most of the 1960s and early 1970s. It still has many adherents today, especially among American development economists. In the Lewis model, the underdeveloped economy consists of two sectors: a traditional, overpopulated rural subsistence sector characterized by zero marginal labor productivity—a situation that permits Lewis to classify this as surplus labor in the sense that it can be withdrawn from the agricultural sector without any loss of output—and a high-productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred. The primary focus of the model ison both the processof labor transfer and the growth of output and employment in the modern sector. Both labor transfer and modern-sector employment growth are brought about by output expansion in that sector. The speed with which thisexpansion occursisdetermined by the rate of industrial investment and capital accumulation in the modern sector. Such investment is made possible by the excess of modern-sector profits over wages on the assumption that capitalists reinvest all their profits. Finally, the level of wages in the urban industrial sector is assumed to be constant and determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. (Lewis assumed that urban wages would have to be at least 30% higher than average rural income to induce workersto migrate from their home areas.) At the constant urban wage, the supply curve of rural labor to the modern sector is considered to be perfectly elastic. Lewis makes two assumptions about the traditional sector. First, there is surplus labor in the sense that MPLA is zero, and second, all rural workers share equally in the output so that the rural real wage is determined by the average and not the marginal product of labor (as will be the case in the modern sector). Metaphorically, this may be thought of as passing around the family rice bowl at dinner time, from which each takes an equal share (this need not be literally equal shares for the basic idea to hold).
New Growth Theory Of Economic Development
Endogenous growth or the new growth theory emerged in the 1990s to explain the poor performance of many less developed countries, which have implemented policies as prescribed in neoclassical theories. Unlike the Solow model that considers technological change as an exogenous factor, the new growth model notes 2.3 The Evolution of Economic Development Thoughts 19 that technological change has not been equal nor has it been exogenously transmitted in most developing countries (World Bank 2000). New growth theorists (Romer 1986; Lucas 1988; Aghion and Howitt 1992) linked the technological change to the production of knowledge. The new growth theory emphasizes that economic growth results from increasing returns to the use of knowledge rather than labour and capital. The theory argues that the higher rate of returns as expected in the Solow model is greatly eroded by lower levels of complementary investments in human capital (education), infrastructure, or research and development (R&D). Meanwhile, knowledge is different from other economic goods because of its possibility to grow boundlessly. Knowledge or innovation can be reused at zero additional cost. Investments in knowledge creation therefore can bring about sustained growth. Moreover, the knowledge could create the spillover benefits to other firms once they obtained the knowledge. However, markets failed to produce enough knowledge because individuals cannot capture all of the gains associated with creating new knowledge by their own investments. Policy intervention is thus considered necessary to influence growth in the long term. The new growth models therefore promote the role of government and public policies in complementary investments in human capital formation and the encouragement of foreign private investments in knowledge-intensive industries such as computer software and telecommunications (Meier 2000). Although the new growth theory helps to explain the divergence in growth rates across economies, it was criticized for overlooking the importance of social and institutional structures (Skott and Auerbach 1995). Its limited applicability lies in its assumptions. For example, it treats the economy as a single firm that does not permit the crucial growth-generating reallocation of labour and capital within the economy during the process of structural change. Moreover, there are many other factors which provide the incentives for economic growth that developing countries lack such as poor infrastructure, inadequate institutional structures and imperfect capital and goods markets (Cornwall and Cornwall 1994). Policy-makers will therefore need to pay careful attention to all of the factors that determine the changes and their impacts on the aggregate growth rate.
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
This chapter describes the various methods and techniques used to collect and analyze the data gathered for the study to gain a deeper understanding of the topic under study.
The data collection stage is important since the result of the analysis is dependent on the quality of the data obtained. Therefore, the method selected for data collection must be the most appropriate to assist in achieving the objectives of the study:
In this case, it is to be used to determine the real status of employee involvement, causes of low employee involvement or participation in the decision-making process; determine the consequences of low employee involvement in decision-making on the implementation of management decisions.
It is also to be used to identify ways to arrest this problem in order to improve organizational performance and explore how employees can be involved and the result of involving employees in decision-making as well as make recommendations on how to improve the involvement of employees in decision-making.
RESEARCH DESIGN
The type of research design for this study is exploratory and it is conducted because a problem has not been clearly defined. It helps to determine the best research design, data collection method and selection of subjects.
This is the best approach if one aims at clarifying understanding of a problem by three
Primary ways which are Literature Research, talking to experts in the area of study and
DATA COLLECTION METHOD
This study utilizes secondary data extracted from the published annual reports of the commercial bank used for the study. With the secondary data collected, returns on assets and equity for the relevant years were computed.
The secondary source used in conducting this research was based extensively on documentary sources which are textbooks, journals, articles, newspaper articles, paper presentations etc. also it involved Publications of Central Bank of Nigeria and monetary institutions such as CBN bulletins, presentations, slides, commercial bank bulletins etc.
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
This chapter is devoted to the presentation, analysis and interpretation of the data gathered in the course of this study. The data used for this study is secondary data from the central bank of Nigeria 2012 statistical bulletin. The data are been analyzed using regression.
CHAPTER FIVE
FINDINGS, CONCLUSION AND RECOMMENDATION
The objectives of the study was to
- To examine the impact of the real estate sector on the growth of Nigeria’s economy.
- To identify the factors limiting development of the real estate sector in Nigeria.
- To determine how the real estate sector can contribute massively to the economic development of Nigeria.
Findings from the study revealed the following:
The real estate sector significantly impacts on the economic growth of Nigeria.
Land Registration Bureaucratic Process
Top on the list of issues affecting Nigeria real estate industry is the bureaucratic process of land registration. Nigeria is among the worst globally when it comes to registering property, according to the World Bank’s Doing Business 2013 report, which ranks it 182nd out of 185 countries. The registration process can last as long as 6 months to 2 years, taking an average of 12 procedures, and costing about 20.8% of the value of the property.
The lackadaisical attitude to work is the major cause of undue delay at the land registry. Oftentimes, a developer’s application would pass from office to office over several weeks and by the time the necessary approval is obtained, he may have lost his source of funding or incurred huge interest on loan obtained for development.
Hopefully, the new comprehensive Second Lagos State Development Plan (LSDP), adopted in 2013, aims to streamline the regulatory environment and improve incentives for private investment and business; for example, land registration initiatives, the creation of GIS maps and the piloting of an e-approval system for development permits.
High Costs of Property Development
Building a house is very expensive in Nigeria. A three-bedroom house, for example, will cost about US$50,000, compared to US$36,000 in South Africa and US$26,000 in India, according to Finance Minister Ngozi Okonjo-Iweala.
The cost of construction is high for three reasons: high costs of building materials, high skilled labour costs, and costs associated with poor roads and sewerage systems.
About 75% of dwellings in Nigeria’s urban areas are built of concrete. Cement prices in Nigeria are about 30-40% higher than in neighboring countries and world market prices. The lack of public infrastructure adds as much as 30% to the total costs of the development.
Collapsing Buildings
Building collapses is also one of the top issues affecting Nigeria real estate industry. From 1974 – 2010 as a result of over 60 building collapse in Nigeria, 401 people have died and several more haven’t been reported or accounted for.
Nigeria is so blessed as a nation that we rarely ever experience natural disasters such as earthquakes, Tsunami, or Tornadoes. But yet, despite the absence of all these collateral damaging natural disasters, our buildings still collapse in Nigeria.
Why? Because of our own man made infrastructural disasters. Since we didn’t have our own natural disasters to bring down our buildings, we simply created our own version through sheer negligence. Privately owned buildings both commercial and residential account for the highest number of collapsed buildings in Nigeria.
Bribery and Corruption
Bribery and corruption is also one of the issues affecting Nigeria real estate industry. The Jones Lang LaSalle 2014 global real-estate transparency index places the Nigeria in the “opaque” category of transparency, meaning Nigeria suffers from elements of corruption, lack of fundamental data and poor environmental sustainability programs when building large-scale properties.
Bribery and corruption have a negative effect on the Nigerian real estate sector. There are instances where developers who have not satisfied the preconditions for allocation of land are granted allocation while those who are qualified are denied.
Taxation
Real estate investors are subjected to multiple taxations, the taxes and levies paid by them include development levy, income tax, building plan approval levy, property tax, land use tax, and we also have cases whereby real estate investors are expected to pay renovation tax whenever they want to renovate their properties.
Devaluation of the Naira
The recent devaluation of naira is also among the top issues affecting Nigeria real estate industry. This is because the Nigerian construction industry is heavily dependent on foreign importation for the raw materials and equipments they use for construction. With a devalued naira, the cost of purchasing these raw materials and equipments will definitely increase.
As a result of the high costs of doing business, property developers to remain profitable will have to pass on these additional costs incurred to the market. According to industry experts, the estimated rise in the costs of housing is 25% – 35%.
The effect of the naira devaluation would have been much milder if construction materials are produced locally thereby cutting down the cost of construction and in turn making properties more affordable for the average Nigerian.
Limited Source of Funding
Nigeria possesses all the key factors for real estate investment — a growing middle-class population, growth in consumption, rapid urbanization and a young demographic compared to more mature economies.
Yet, financing remains a problem both for property developers and prospective homeowners. So whether you’re thinking of investment property financing or securing real estate loans for financing a personal home purchase, you will still have to deal with the familiar problem of insufficient capital sooner or later.
This could be attributed to underdevelopment in our mortgage industry as it generated less than 100,000 transactions between 1960 and 2009. According to World Bank Report (2008) the contribution of mortgage finances to Nigeria’s Gross Domestic Product (GDP) is close to negligible with real estate contributing less than 5% and mortgage loans and advances at 0.5% of GDP.
Lack of Competent Builders/Contractors
There is a dearth of competent and professional builders’ contractors of Nigeria. This is also one of the issues affecting Nigeria real estate industry. Most Nigerian builders/contractors are quacks who place more emphasis on money and the initial mobilization fee instead of getting the right workforce and professionals that will execute the project.
When this becomes the case, the workforce is chosen based on availability and not competence and having the right skills. Experts have blamed incompetent artisans and weak supervision of workmen as one of the major reasons of building collapse.
REFERENCES
- African Economic Outlook (2011) available at http://www.africaneconomicoutlook.org/en/countries/west-africa/nigeria/, accessed February 2, 2012.
- Alithea Capital Investment (2011). Nigeria’s real estate sector: is the storm over? Frontier Market Intelligence, at http://www.tradeinvestnigeria.com/feature_articles/350299.htm, accessed February 2, 2012
- Bruegeman, W. B. and J. D. Fisher (2002). Real Estate Finance and Investment 11th Ed. New York: McGraw Hill/Irwin.
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