Research Reveals Correlation Between Investment, Money Laundering, Public Sector | Independent Newspapers Limited
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Real Estate

Research Reveals Correlation Between Investment, Money Laundering, Public Sector

Posted: Apr 27, 2016 at 8:09 pm   /   by   /   comments (0)

Nkasiobi Oluikpe


Lagos – While developers and builders are decrying the counterproductive impact of excessive housing supply unit without demand, the real estate Vacancy Factor Index (VFIX) reports of Financial Derivatives Company Limited for the Lagos metropolis, has lend credence to their worries.

Since some of these structures are not built with mortgages, their remaining fallow and unoccupied cost the investors nothing.

Vacancy Factor Index is a measure of the strength of the real estate rental market; a useful tool of analyses for developers, agents, tenants, landlords and policy makers.

The report, which used Ikoyi, Victoria Island and Lekki neighbourhoods, had January 2015 as its base month, highlighted the anomaly in the Lekki supply gut.

According to the report, In March 2016, the index increased only marginally to 165 from 160.7 in January, having climbed substantially in earlier months. What this implies is that the number of properties that were vacant in March 2016 was 65% higher than in the base month in January 2015. Vacant properties were higher in Lekki (64%) followed by Victoria Island (35%) and Ikoyi (24%).

Admiralty Way in Lekki has the highest vacancy ratio, which is not surprising giving the challenges that businesses face in the current macroeconomic environment; most properties on the street are offices and commercial spaces. Nevertheless, rental prices of vacant properties in these high-end locations have remained sticky downwards. For example, an office space in Lekki phase 1 costs N30,000 per sq.m in TBC building. To rent a 1,250 sq.m house in the same area will cost you about N8- 10 million per annum on Admiralty Way and N5-6 million per annum in other Lekki streets.

The FDC report also substantiated the common belief of a strong correlation between the investment, money laundering and public sector corruption, which is one of the reasons why rents remain stubbornly high despite the supply glut.

“Empirical evidence reveals that approximately 90% of Nigerian investors hold real estate as an asset class in their portfolios. The locations of their real estate investments are principally in Lagos, London, Dubai, New York, Atlanta and Accra. There is however a dearth of data, analysis and information about the Nigerian market. The sector has become enigmatic because of the strong correlation between the investment, money laundering and public sector corruption.

Comparatively, Lagos, which is said to be among the 10 most expensive cities in the world of luxury properties, still ranks lowest as against the rest. In Cape Town South Africa, $1million is said to be able to purchase 255sq.m while in Lagos the same amount can purchase 1,250sq.m of prime property in Churchgate and FF Towers in Victoria Island; making it five times less expensive than in South Africa.

“Persistent macroeconomic headwinds in recent times have led to lower demand for prime properties in Lagos. Stock broking firms, investment banks, insurance companies, airlines and oil companies that usually rent these properties for office space or residential use are experiencing a business downturn.

“In March 2016, the VFIX for residential and commercial properties was 177 and 148 respectively. The year to date comparison shows that the indices have increased significantly by 77% and 48% respectively, compared to January 2015.

The FDC research indicates that compared to February 2016, the indices remained flat, due to the lagging effect of the VFIX. Supply of units increased in excess of demand. Residential VFIX is much higher than commercial VFIX because of the rigidity costs incurred by businesses.

The report showed that because of the economic situation, the commercial index remained stagnant from January to March, causing developers to wait on the sideline in anticipation for improved economic condition before embarking on new projects.

For every property that was put for sale, about 2.3 were available for rent indicating that the economic severities have had limited impact on property owners. The FDC research suggests that a sustained slowdown in the economy would drive up the ‘for sale’ side of the ratio.

Highlighting the impact of the macro-economic on the VFIX, it was stated that the jump in the inflation from 8.2% in January 2015 to 9.6% in December 2015 reduced the purchasing power of individuals within the economy.

“As a result, the value of individual incomes has declined both in nominal and real terms. Given that this research focuses on luxury areas, a decline in income is expected to reduce the demand for housing. Following, the real estate industry is used as a hedge against inflation. This is because real estate assets are long-lived assets that adjust to inflation, which explains the increased supply of housing. Specifically, inflation increases the value of the housing property, which provides incentives for new initiatives in the real estate market.”

Comparing the impact of unemployment on the VFIX, it was indicated that the increasing trend of the VFIX is in tandem with the unemployment rate which increased from 7.5% in the first quarter of 2015 to 8.2% in the second quarter of 2015.

“The effect of unemployment on VFIX should take about nine months before realized as the adjustment process takes time. Specifically, the unemployed cannot afford to pay for the current housing and will most likely move out to cheaper options, or in some extreme cases back into parents’ homes.”


From the report, because the Nigerian Stock Exchange (NSE) index has fallen by 13.94%, reducing the returns to investors and stock brokers, which in turn has also reduced the attraction for international investors, the demand for office spaces and housing also reduced.

“This fall in returns has reduced the attraction for international investors, thereby reducing the demand for office spaces and housing, and increasing the current VFIX. This is because the status of the market affects the psychology of investors. If investors notice that the downturn in the market is as a result of lack of government policy, the level of uncertainty in the market increases. Therefore investors would rather hold on to their money, which puts the real estate market in a state of disequilibrium.”

Conclusively, with the passage of the budget, the report hopes to see a reduction in the VFIX.

“However, given that the index is lagging, the effect may only be seen from June. We should also expect a decline in house prices if the economic headwinds persist. Specifically, we should also expect a switch in real estate pricing from dollars to naira, as landlords now realize the effect of the economic challenges faced and will be forced to change if they want to remain profitable. Therefore, the VFIX today is expected to affect the development and leasing decisions in the second quarter.