Lack of data, information deny Nigerian property market access to $6trn inflow

For reasons bothering on lack of data, relevant market information and dearth of professional skills, the Nigerian property market is said to be losing its share of an annual $6 trillion global fund inflow into the African property market.

Market analysts explain that billions of dollars that flow into the continent’s market on daily basis have been eluding Nigeria for long due to the aforementioned reasons and others, including high interest rate, poor negotiation skill, lack of transparency and un-priced risks.

In an interview with BusinessDay on the sideline of a FIABCI International Real Estate Consultant (FIREC) programme hosted by FIABCI Nigeria chapter in Lagos recently, Bill Endsley, Principal at World Citizen Consulting, Chicago, pointed out that an average American investor, for instance, desires to have the necessary information before making any investment decision.

“There are billions of global funds flowing into the property market at the moment, but not much is coming into Nigerian market; investors are unwilling to come to put their money here,” noted Endsley, pointing out that investors wanted market transparency or what he called ‘clean window’.

“Investors would prefer to invest where there is transparency and the risk is priced; there must be market analysis showing what the market wants and how long it will take to recoup an investment; most times this information is not available in Nigeria,” he noted.

Endsley stressed that even though risks are always there for any investor, those risks have to be priced so that an investor that is coming will understand what exactly the risks are, noting, however, that it was difficult now to price the risks in the Nigerian property market because of “unclean window”.

“We need to clean the window so that investors can see the risks,” he advised, adding that lack of data in the market meant the market should be looking at the property laws, the qualification of the professionals and the role of the banking sector in property transaction.

Thomas Cardman, director of operations and finance at Michael Consults, affirmed in his presentation that investors were always looking out for market analysis and the quality of the story behind the numbers before making decisions for real estate investment.

Cardman added that investors also considered return on investment characteristics and cost approach before deciding to invest in a particular property.

Endsley affirmed that there were opportunities in the Nigerian property market and now was the prime time to invest in the market because, as he put it, ‘the country is trying to move away from the commodity-oil economy to a new industry and property is the foundation of everything.”

This explains the need to train Nigerian professionals on international norms for real estate investing and standards so that they can attract more foreign direct real estate investors. According to Endsly, the professionals have to be brought to the level of world class consultants so that they can move Nigeria away from oil economy to the world of investment in property

“We need to push ahead otherwise the whole of us in the entire building industry will be far behind,” Adeniji Adele, President, FIABCI Nigeria chapter, agreed, adding, “we need to begin to gain insightful knowledge and share same.

“That is the essence of this programme. It is about gaining insightful knowledge and keying into international principles and practice; we believe in the continuous education of our members and also in sharing knowledge. We also need to connect with other professionals in the outside world.”

He explained that the business world has become global and the real estate market has been internationalized, saying this has resulted in the need for professionals to transact business with investors from diverse cultures and backgrounds making it imperative for professionals to figure out how to deal with these cultural differences in their negotiations.

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Real Estate Valuation

Basic Valuation Concepts

Technically speaking, a property’s value is defined as the present worth of future benefits arising from the ownership of the property. Unlike many consumer goods that are quickly used, the benefits of real property are generally realized over a long period of time. Therefore, an estimate of a property’s value must take into consideration economic and social trends, as well as governmental controls or regulations and environmental conditions that may influence the four elements of value:

  • Demand: the desire or need for ownership supported by the financial means to satisfy the desire
  • Utility: the ability to satisfy future owners’ desires and needs
  • Scarcity: the finite supply of competing properties
  • Transferability: the ease with which ownership rights are transferred

Value Versus Cost and Price

Value is not necessarily equal to cost or price. Cost refers to actual expenditures – on materials, for example, or labor. Price, on the other hand, is the amount that someone pays for something. While cost and price can affect value, they do not determine value. The sales price of a house might be $150,000, but the value could be significantly higher or lower. For instance, if a new owner finds a serious flaw in the house, such as a faulty foundation, the value of the house could be lower than the price.

Market Value

An appraisal is an opinion or estimate regarding the value of a particular property as of a specific date. Appraisal reports are used by businesses, government agencies, individuals, investors, and mortgage companies when making decisions regarding real estate transactions. The goal of an appraisal is to determine a property’s market value – the most probable price that the property will bring in a competitive and open market.

Market price, the price at which property actually sells, may not always represent the market value. For example, if a seller is under duress because of the threat of foreclosure, or if a private sale is held, the property may sell below its market value.

Appraisal Methods

An accurate appraisal depends on the methodical collection of data. Specific data, covering details regarding the particular property, and general data, pertaining to the nation, region, city, and neighborhood wherein the property is located, are collected and analyzed to arrive at a value. Appraisals use three basic approaches to determine a property’s value.

Method 1: Sales Comparison Approach

The sales comparison approach is commonly used in valuing single-family homes and land. Sometimes called the market data approach, it is an estimate of value derived by comparing a property with recently sold properties with similar characteristics. These similar properties are referred to as comparables, and in order to provide a valid comparison, each must:

  • Be as similar to the subject property as possible
  • Have been sold within the last year in an open, competitive market
  • Have been sold under typical market conditions

At least three or four comparables should be used in the appraisal process. The most important factors to consider when selecting comparables are the size, comparable features and – perhaps most of all – location, which can have a tremendous effect on a property’s market value.

Comparables’ Qualities

Since no two properties are exactly alike, adjustments to the comparables’ sales prices will be made to account for dissimilar features and other factors that would affect value, including:

  • Age and condition of buildings
  • Date of sale, if economic changes occur between the date of sale of a comparable and the date of the appraisal
  • Terms and conditions of sale, such as if a property’s seller was under duress or if a property was sold between relatives (at a discounted price)
  • Location, since similar properties might differ in price from neighborhood to neighborhood
  • Physical features, including lot size, landscaping, type and quality of construction, number and type of rooms, square feet of living space, hardwood floors, a garage, kitchen upgrades, a fireplace, a pool, central air, etc.

The market value estimate of the subject property will fall within the range formed by the adjusted sales prices of the comparables. Since some of the adjustments made to the sales prices of the comparables will be more subjective than others, weighted consideration is typically given to those comparables that have the least amount of adjustment.

Method 2: Cost Approach

The cost approach can be used to estimate the value of properties that have been improved by one or more buildings. This method involves separate estimates of value for the building(s) and the land, taking into consideration depreciation. The estimates are added together to calculate the value of the entire improved property. The cost approach makes the assumption that a reasonable buyer would not pay more for an existing improved property than the price to buy a comparable lot and construct a comparable building. This approach is useful when the property being appraised is a type that is not frequently sold and does not generate income. Examples include schools, churches, hospitals and government buildings.

Building costs can be estimated in several ways, including the square-foot method where the cost per square foot of a recently built comparable is multiplied by the number of square feet in the subject building; the unit-in-place method, where costs are estimated based on the construction cost per unit of measure of the individual building components, including labor and materials; and the quantity-survey method, which estimates the quantities of raw materials that will be needed to replace the subject building, along with the current price of the materials and associated installation costs.


For appraisal purposes, depreciation refers to any condition that negatively affects the value of an improvement to real property, and takes into consideration:

  • Physical deterioration, including curable deterioration, such as painting and roof replacement, and incurable deterioration, such as structural problems
  • Functional obsolescence, which refers to physical or design features that are no longer considered desirable by property owners, such as outdated appliances, dated-looking fixtures or homes with four bedrooms, but only one bath
  • Economic obsolescence, caused by factors that are external to the property, such as being located close to a noisy airport or polluting factory.


  • Estimate the value of the land as if it were vacant and available to be put to its highest and best use, using the sales comparison approach since land cannot be depreciated.
  • Estimate the current cost of constructing the building(s) and site improvements.
  • Estimate the amount of depreciation of the improvements resulting from deterioration, functional obsolescence or economic obsolescence.
  • Deduct the depreciation from the estimated construction costs.
  • Add the estimated value of the land to the depreciated cost of the building(s) and site improvements to determine the total property value.

Method 3: Income Capitalization Approach

Often called simply the income approach, this method is based on the relationship between the rate of return an investor requires and the net income that a property produces. It is used to estimate the value of income-producing properties such as apartment complexes, office buildings, and shopping centers. Appraisals using the income capitalization approach can be fairly straightforward when the subject property can be expected to generate future income, and when its expenses are predictable and steady.

Direct Capitalization

Appraisers will perform the following steps when using the direct capitalization approach:

Gross Income Multipliers

The gross income multiplier (GIM) method can be used to appraise other properties that are typically not purchased as income properties but that could be rented, such as one- and two-family homes. The GRM method relates the sales price of a property to its expected rental income. (For related reading, see “4 Ways to Value a Real Estate Rental Property“)

For residential properties, the gross monthly income is typically used; for commercial and industrial properties, the gross annual income would be used. The gross income multiplier method can be calculated as follows:

Sales Price ÷ Rental Income = Gross Income Multiplier

Recent sales and rental data from at least three similar properties can be used to establish an accurate GIM. The GIM can then be applied to the estimated fair market rental of the subject property to determine its market value, which can be calculated as follows:

Rental Income x GIM = Estimated Market Value

The Bottom Line

Accurate real estate valuation is important to mortgage lenders, investors, insurers and buyers, and sellers of real property. While appraisals are generally performed by skilled professionals, anyone involved in a real transaction can benefit from gaining a basic understanding of the different methods of real estate valuation.

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