Analysis Of Commercial Real Estate Market Cycles In Lagos Island

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Background To The Study

Real estate is an essential commodity and an expensive one, but the construction industry is one of the most important components in the structure of the country’s GDP as construction of real property creates high additional cost and a large number of jobs that influences purchasing power of population and price level as a whole. The real estate asset class represents a substantial portion of a nation’s wealth; it is an essential part of a nation’s overall economy. For example, the real estate sector in the second quarter of 2017 contributed 7. 21% to the real GDP of Nigeria (NBS, 2017). As such, changes in the real estate market influences other sectors of the national economy – for instance, the global economic meltdown of 2008 started in America from the problem of subprime mortgage, the US housing market dragging down the global economy when mortgage dealers issued mortgages with terms that were unfavourable to borrowers – and if this is the case, it wouldn’t be out of place to take time to study how this major player in the country’s economic growth can be better understood and its behaviour correctly predicted.

Real estate can be defined as a particular type of good which is land and the resources embodied in land (agricultural estates, virgin land, residential houses, offices, shops and industrial buildings) according to the College of Estate Management, CEM (2006). Real estate is property made up of land and the buildings on it, as well as the natural resources of the land, including uncultivated flora and fauna, farmed crops and livestock, water and mineral deposits. Real estate can be grouped into three broad categories based on its use: residential, commercial and industrial. Examples of residential real estate include undeveloped land, houses, condominiums and town houses; examples of commercial real estate are office buildings, warehouses and retail store buildings; and examples of industrial real estate include factories, mines and farms.

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Real property on the other hand is “…generally described as land and buildings. These are things that are immovable. You are not able to just pick them up and take them with you as you travel. The definition of real property includes the land, improvements on the land, the surface, whatever is beneath the surface, and the area above the surface. Improvements are such things as buildings, houses, and structures. These are more permanent things. The surface includes landscape, shrubs, trees, and plantings. Whatever is beneath the surface includes the soil, along with any minerals, oil, gas, and gold that may be in the soil. The area above the surface is the air and sky above the land. In short, the definition of real property includes the earth, sky, and the structures upon the land. In addition, real property includes ownership or rights you may have for easements and right-of-ways” (Mares, 1998). It also refers land and any property attached directly to it. It is any subset of land that has been improved through legal human actions; it entails the right of use, control and disposition of the land and its attached objects. Real properties can include buildings, ponds, canals, roads and machinery, among other things and owning real property involves the bundle of rights transferred from seller to buyer upon the sale of a property. These rights typically dictate the use, transfer and/or sale of real properties. These real estate rights include the right of possession, control, exclusion, enjoyment and disposition. They are forms of property that can be owned by persons or/and institutions, the ownership of “property rights” referred to as “interest” in landed property. So, as other goods change hands in other markets, so also are these goods traded in the real estate market.

The real estate market doesn’t necessarily refer to a geographical location in particular. In fact, it is an abstract place where interests in real estate are exchanged by way of sales, purchase, leases and the like. The real estate market could in this light be consequently described as “…the arrangement that brings together buyers and sellers of real estate or property to settle on a price at which the particular property right owned can be exchanged. ” (CEM, 2006). Individuals or corporate bodies could secure an interest in a house or property for occupation as residents, for office use, for use as shops, or for industrial purposes. In view of the seemingly global nature of the real estate market, the commercial real estate market seems to be developing as a distinct real estate submarket. Abolade, Omirin and Dugeri (2013) put forward that commercial properties are planned, constructed and operated for use other than residential or manufacturing. The commercial real estate market is that segment of the real estate market that deals in commercial property (Dugeri, 2011). They are classified as office space, malls, retail stores, shopping centres, industrials and multi-family buildings. Others are banks, healthcare properties, and hotel/lodging accommodation. Activities in the real estate market and the accuracy of related decisions by different sector participants will likely affect other sectors such as the construction industry, the financial sector and other related sectors; it could slow down or quicken the pace of development in these sectors.

A decrease in real estate value would result in a decrease in construction, finance, and other related sectors, and increase in unemployment (Maier and Herath, 2009)The real estate market exhibits certain behaviours from time to time, with some trends becoming apparent over an extended period of time. One of these behaviours is the seemingly cyclical behaviour of the real estate market, and its effect(s) on consumer behaviour. It is startling how there have been little research work done in this area, seeing how much sway it holds and how the gravity of its effect in the real estate market and consequently, the national economy. In contrast to developed nations, like the United States, or the United Kingdom, research on real estate market cycles in Nigeria is almost non-existent, or exists to a very limited extent. The concept of market cycles is based on a ‘boom-and-bust’ succession; where there is a period of sustained rise in the rental and capital value of properties, followed by a period of sharp decline in the prices of these properties, usually as a result of external factors. There is a growing recognition that macro, regional and local economic factors exert important influences on the cyclic behaviour of real estate markets.

Commercial real estate markets across cities were not uniformly depressed, suggesting that cyclical behaviour in various geographical real estate markets is asynchronous (Dokko, Edelstein, Lacayo and Lee, 1999). Real estate cycles have been a significant underlying reason for the financial successes and failures of real estate investments throughout history. Cycles are a major determinant of success or failure because of their pervasive and dynamic impacts on real estate returns, risks and investment values over time—impacts that should not be ignored or over-simplified. investment values over time—impacts that should not be ignored or over simplified. Because of this recognition, as well as a growing industry focus on real estate as a distinct asset class that deserves increased portfolio allocations, investors and portfolio managers are placing increased emphasis on the strategic and decision-making implications of real estate cycle theory and analysis (Roulac, 1996). Against this background, this study seeks to examine the trends of real estate cycles and how a better understanding of these cycles can help in forecasting future occurrences and assist Estate Surveyors and Valuers in providing sound judgement when giving professional advice.

Statement Of The Problem

Despite the fact that it is widely recognised and acknowledged that property cycles are a commonplace occurrence in established real estate markets, information about the intricacies and the inner workings, the characteristics, highlights and traits of these cycles for localized areas is not readily available or discussed, neither is it adequately examined (Reed & Wu, 2010). Real estate cycles are difficult to characterise because of differing severity across different real estate sectors, and this lack of uniformity has made it difficult to create a uniform explanation for real estate market cycles (Dokko et al, 1999).

In light of recent events in the world economy it is becoming extremely difficult to ignore the existence of cycles in the general business sector, as well as in building and property. Moreover, this issue has grown to have significant importance in Nigeria, as the Nigerian real estate market has been experienced boom and bust cycles with a negative impact on the overall Nigerian economy in times past. Hence, a better understanding of property cycles can be a determinant of success for anyone working in the property industry. Therefore, a study into this subject can explain the evolution of the nature of cycles and major factors, which generated these changes. A better understanding of these changes (behavioural, institutional, structural, policy, and other) can help to understand the behaviour of the cycles, translate their implications into operational forecasting models, and thus provide a background for any reasonable and accurate forecasting (Solomou, 1998; RICS, 1999). Even though it is generally agreed upon as a sound financial decision to buy, lease or rent a property when the housing cycle is in a downturn (i. e. before it reaches the bottom and then rises) and sell when the housing market is rising (i. e. prior to reaching the top of the market and falls), the cyclical characteristics of each area is not known; the resultant effect of this ignorance is that the investor, or potential investor is not able to make informed decisions, not always for a lack of effort, but for an alarming information void. Some studies on market cycles exist (Mueller, 2001; Rottke and Wernecke, 2002; Jadevicius, Sloan and Brown, 2010; Reed and Wu, 2010; Baum, 2011; Jadevicius and Parsa, 2014; Durkin, 2017). However these studies have their limitations.

Mueller (2001) examined the concept of market cycles in commercial real estate, with clear explanations on the diferent phases of the market cycle. However, this study was majorly descriptive of the market cycle and its impact on commercial real estate, without providing recommendations on its implications for the real estate market. The study of Rottke et al (2002) analysed the theory of market cycles, investigating its causes and providing recommendations for decision making. The study however, was not focused on the Nigerian real estate market. Jadevicius et al (2010) had a particular emphasis on research methodologies and methods, data and data analysis techniques employed, and outcomes of these studies. The research also considered the literature on how regular the cycles were.

Also, Reed et al (2010) reviewed property cycle theory and the relevance of the larger body of knowledge about cycles with reference to the housing market. Their research was done into property cycles in the residential sector. They also provided recommendations on the use of the knowledge of market cycles in ameliorating housing stress. Jadevicius et al (2014) carried out a similar analysis of real estate cycles in the Lithuanian housing market. This study examined the cyclical nature of the Lithuanian housing market, looking out for turning point indicators in the cycle, and providing insight into how investors can make a more informed decision with the findings of the research work. However, this study didn’t distinguish between residential, commercial or industrial real estate. Also, this study was based on the properties of the Lithuanian housing market. Durkin (2017) studied previous real estate cycles based on a sample of investors, occupiers and academics, and provided insight into the understanding of the practical challenges the industry faced in the current cycle. This study looked into the major drivers of market sentiments that cause or underlie market cycles, rather than making forecasts on future occurrence of the cycles. The study, however did not provide recommendations for future behaviour, neither did it make predictions on the expectations of change or otherwise of this behaviour. Likely questions that this study will look to answer include ponderings such as:

  1. Does a particular geographical location have only one cycle or multiple real estate market cycles?
  2. Which trend or trends herald the beginning of a new cycle, or announce the end of one?
  3. Which methods have so far been employed in the prediction of the cyclical market behaviour?
  4. Is there a link between the commercial real estate market cycles and the respective investment returns?
  5. Will an adequate understanding of real estate market cycles help in predicting the emergence of future cycles and help safeguard future investments? This dissertation seeks to provide answers to these questions and make recommendations from findings.

Aim And Objectives Of The Study

The aim of this study is to examine commercial real estate market cycles, with a specific emphasis on the Lagos Island market, with the intent of employing findings from the study to aid Estate Surveyors and Valuers in their advisory roles in investment decisions of clients. The specific objectives of the study are toexamine whether Lagos Island has only one recurrent cycle or multiple real estate market cyclesexamine the trend or trends that herald the beginning of a new cycle, or announce the end of oneto analyse the methods hitherto employed in the prediction of the cyclical market behaviour in the study areaexamine and establish a link between the commercial real estate market cycles and the respective investment returns in the study areaexamine whether an adequate understanding of real estate market cycles can help in predicting the emergence of future cycles and help safeguard future investments in the study area.

Justification For The Study

The significance of the study can be viewed in two parts:The first is that there is a sparsity of studies on real estate market cycles in Lagos State. This suggests that there is a gap in literature in this regard. This study will study the trends of the apparent real estate market cycles in Nigeria, and therefore reduce the dearth of studies in this area and add to the pre – existing body of knowledge by bringing out the features of the Lagos Island real estate market and the phenomena the define or mark the phases of a market cycle. Also, this study will provide relevant information that will aid Estate Surveyors and Valuers in their advisory capacities in investment decisions. It will provide relevant information on the dynamics of a real estate market cycle and thereby help professionals in making good and accurate decisions with respect to timing of market entry and exit. This study is also important because it reveals the growing but fragmented body of knowledge on cycles and suggests an opportunity for researchers to develop a cohesive theoretical and analytical framework for evaluation of cycles; and it provides academics and practitioners with a basic body of knowledge summary and reference list for future research on the subject, whether that research is macro or micro, theoretical or empirical, or analytical or anecdotal in nature.

Study Area

The study area for this research is Lagos. Lagos is seen as the most populous urban centre and the most active real estate market in Nigeria with the average property value and stock investment (Abolade et al, 2013). The population of the study area as at the last population census was 9,013,534 (NPC, 2006) with a projection of over 21 million by 2015 and 22,700,000 for 2017 by the Lagos Bureau of Statistics. Lagos Island as a whole comprises Lagos Island Local Government and Eti-Osa Local Government, with a combined area and population of 308. 36km2 and 497,222 respectively as at the 2006 population census. Lagos Island is one of Nigeria’s business centre of banking and commerce, with major Nigerian and international corporation headquartered on the Island.

Scope Of The Study

Since studies, no matter how ambitious, cannot be all encompassing, it follows that study limits should be defined explicitly. The intention of this section is to provide an insight into such limitations in clear terms. Real estate markets are of different types based on the type of property traded, such as, the residential real estate market, the commercial real estate market, the industrial real estate market, the land market and others. For this study, the commercial real estate will be the focus, due to the relative availability of data. The study area is a predominantly commercial city, and this means that there will be a lot of commercial activities that will require the use of commercial properties, therefore information should be more accessible. This study involves the collation and analysis of data, as well as an investigation into previous information on previous studies of market cycles in Nigeria. The validity of the data gathered will be therefore, be based on the authenticity of the responses provided in the questionnaire and direct interview.

Limitation Of The Study

The time constraint encountered in carrying out this study is a major bane to the possibility of extending the scope of this study and carrying out a more intensive study. The subject of real estate market cycles is one that ideally should be studied methodically and meticulously. However, there is a time restriction of this particular study. Also, there is currently a dearth of existing literature in this subject with specific reference to the Nigerian market. The literature examined has to be studied carefully, with necessary adjustments taken into consideration before application to this study; the resultant effect of this is that valuable time was expended in going through and carrying out extra studies for the Nigerian market. Willingness of the respondents in filling the questionnaire, and the integrity of the information provided is also another area of concern. Coupled with the costs incurred in the transportation to the study area, this proves to be a limitation in the course of carrying out this project.


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