REAL ESTATE FINANCING, INFLATION AND ECONOMIC GROWTH IN NIGERIA.

TABLE OF CONTENTS

CERTIFICATION

DECLARATION

DEDICATION

ACKNOWLEDGEMENT

ABSTRACT

TABLE OF CONTENTS

LIST OF TABLES

CHAPTER ONE: INTRODUCTION

1.1 Background to the study

1.2 Statement of the Problem

1.3 Objectives of the Study

1.4 Research Question

1.5 Research Hypotheses

1.6 Significance of the Study

1.7 Limitation to the Study

1.8 Scope of the Study

1.9 Definition of Terms

CHAPTER TWO: LITERATURE REVIEW AND THEORETICAL FRAMEWORK

2.1 Theoretical Framework

2.1.1 Monetary Theory of Inflation

2.1.2 Keynesian Theory of Inflation

2.1.3 Neo-Classical Theory

2.1.4 Endogenous Growth Theory

2.2 Literature Review

2.2.1 Concept of Inflation

2.2.2 Types of Inflation

2.2.3 Economic Growth

2.2.4 Concept of Real Estate/Property

2.2.5 Real Estate Finance

2.2.6 Problems of Real Estate Financing in Nigeria

2.3 Empirical review

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research Design

3.2 Source of Data

3.3 Method of Data Collection

3.4 Techniques of Data Analysis

3.5 Model Specification

viii
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS

4.1 Data Presentation

4.2 Data Analysis

4.2.1 Descriptive Statistics

4.2.2 Correlation Analysis

4.2.3 Regression Analysis

4.2.4 Augmented Dickey Fuller Test

4.3 Test of Hypotheses

4.4 Discussions of Findings

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings

5.2 Conclusion

5.3 Recommendations

REFERENCES
 CHAPTER ONE

INTRODUCTION

1.1 Background to the study

Shelter is one of the basic necessities of life. Indeed, the housing sector plays a very critical role

in a country’s prosperity as it directly affects, not only the wellbeing of the citizenry, but also the

general performance of other sectors of the economy. The provision of housing has, since the

early 1970’s, engaged the attention of most countries, especially the developing ones, for a

number of reasons. First, it is one of the three most important basic needs of mankind.

Consequently, various programs of assistance in the areas of finance, provision of infrastructure

and research have been designed by government to enhance adequate housing delivery. The

focus on finance has however, been very prominent for the reason that, housing provision

requires huge capital outlay, which is often beyond the capacity of the medium and low income

groups (Central Bank of Nigeria, 2013).

Housing development generally refers to the satisfaction of the basic human need for shelter.

Due to the huge capital outlay involved, government alone cannot provide adequate housing for

its citizens, thus, both government and the private sector are looking for easily accessible

capital that would satisfy both the long and short-term housing development goals. Though the

private sector has taken the delight in complementing government’s effort in housing

development, it is also faced with financial limitations (Odeniyi .V. A &Shwarka M. S, 2017). The

real estate sector offers a great potential source of growth for a country. Until now, the

understanding of its composition and growth has been somewhat limited to its required use in a

country’s national accounts (National Bureau of Statistics, 2015).

The major issue in real estate development and investment is finance. The financing of real

estate, which includes our homes, shopping centers, office buildings, farms, and factories, is

expected to be one of the responsibilities of our financial system. There is no iota of doubt that

funding is an important factor in real estate development and investment. An efficient housing

finance system has significant importance both in meeting the housing needs of individuals and

in reinforcing the development of the construction, finance and other related sectors of an

economy. International experience suggests that, the widespread availability of residential

mortgages has favorable impact on poverty alleviation, quality of housing, infrastructure, and

urbanization (Erbas, 2005). Developed countries currently have very advanced housing finance

systems in which funds flow from people with fund surpluses to the ones that have deficits and

need the funds through the various channels provided by the mortgage markets. The situation in

the developing countries is however very different in that real estate has remained largely

under-developed despite the fact that sectors players recognize the economic and social

importance of the sector. This has been attributed to the unstable inflation rates experienced

and the high level of unemployment (Dolde, 2006). The complexity and to a large extent, its

capital intensive nature demands proper and adequate funding to make it realizable. The terms

and availability of the needed fund, determine the trend of estate operation (P. N. Ezimuo & O.

F. I. Emoh, 2014).

Availability and easy accessibility of estate finance insufficient quantity will definitely

accelerate the development of the sector. Estate financing is concerned with the production of

finance for building houses and office complexes which are basic necessities in a growing

economy like Nigerian (P. N. Ezinmuo & O. F. I. Emoh, 2014).

In Nigeria, one way to enhance and sustain the development of real estate sector is

through the mobilization of long-term finance. Between 1998 and 2001, housing development

alone accounted for between 2.38% and 4.15% of the Gross Domestic Product (GDP) (Central
Bank of Nigeria, 2002). Meanwhile, the global trends for mobilizing long-term funds for

sustainable real estate development have been the use of securitization and unitization

methods. These concepts relate to the process of turning equity interest in real estate, which is

illiquid and lumpy, into tradable securities (Abel. O. 2004).

Real estate is a source of wealth accumulation as well as a primary factor in national

development a county with a higher saving rate is expected to experience faster growth rate.

Singapore, for example, had a 40% saving rate in the period 1960 to 1996 and annual Gross

Domestic Product (GDP) growth of between 5% and 6%, compared with Kenya in the same

period which had a 15% saving rate and annual GDP growth of just 1% (World Bank, 2008).

1.2 Statement of the problem

Over the years, the government had been the major player in the area of housing delivery in

Nigeria, by providing direct finance for previous housing schemes. This was embedded in the

housing policy of past administrations but today, the dwindling nature of revenue accruing to the

government, coupled with gross mismanagement and misappropriation of public funds and

revenue has prohibited the ability of the government to continue to play her role as before.

Furthermore, the dearth of housing has been attributed majorly to lack or limited access

to finance and the high cost of land registration and titling. For most working Nigerians, the

earning capacity is generally low and makes it practically impossible for the average Nigerian to

save towards owning a house. In addition, the dwindling economic fortunes in Nigeria which

dims the capacity of individuals to own a house. However, with the crash in oil prices in the early

1980s, the economy was thrown into crises and the resultant recession badly affected the real

estate sector. However, most developing countries because of political pressure to develop fast;

adopt ambitious plans of economic growth that often leads to inflationary resources mobilization.

The danger is that these developing countries like Nigeria are also more susceptible to supply
shocks volatility causing high variability in inflation and distorting the consumption, investment

and production behavior.

In Nigeria, notwithstanding the several efforts and initiatives designed and directed by

the government to curb inflation and provide adequate incentives for financing for real estate

development, these efforts have not yielded positive or desired results. This is because the high

price levels and high interest rates continued to cause setbacks in the growth rate of the living

standard of most Nigerians, who are either on fixed income or are unemployed, as these can

negatively affect economic growth. It is to this end that the study work seeks to empirically look

into the nexus between real estate financing and inflation on the other hand and how they rub

off on economic growth of Nigeria.

1.3 Objective of the study

The general objectives of the study are to examine the relation of real estate financing and

inflation to economic growth in Nigeria.

The specific objectives are to:

1. Examine the effect of property price index on economic growth in Nigeria.

2. Examine the effect of consumer price index on economic growth in Nigeria.

3. Examine the effect of base lending rate on economic growth in Nigeria.

4. Examine the effect of commercial bank mortgage lending on economic growth in Nigeria.

1.4 Research questions

The research questions which this study shall proffer answers to are as follows:

1. To what extent does property price index affect economic growth in Nigeria?
2. To what extent does consumer price index affect economic growth in Nigeria?

3. To what extent does base lending rate affect economic growth in Nigeria?

4. To what extent does commercial bank mortgage lending affect economic growth in

Nigeria?

1.5 Research hypothesis

The following hypothesis has been formulated to aid the research work.

1: There is no significant effect of property price index on economic growth in Nigeria.

2: There is no significant effect of consumer price index on economic growth in Nigeria.

3: There is no significant effect of base lending rate on economic growth in Nigeria.

4: There is no significant effect of commercial bank mortgage lending on economic growth in

Nigeria.

1.6 Significance of the study

The result of this study will be relevant to investors and individuals by providing insightful

knowledge on the various sources of real estate finance and its challenges. Policymakers

including government will find the study beneficial in devising policies capable of addressing

challenges, affordability and availability of housing in Nigeria and stimulation of economic

growth. To other researchers who may like to go into this field, the result of the study shall serve

as a buoy for further research.

1.7 Scope of the study

The study covers real estate financing, economic growth and inflation in Nigeria, for the period

2009 to 2019 (ten years). The research work will lay emphasis on both dependent and

independent variables.

1.8 Definition of terms

Real estate financing: The capital required for construction of housing or the resources

required acquiring or accessing housing project by household or the credit supplied by housing

finance institutions against some collateral.

Economic growth: This is the total output of an economy and can be measured using gross

domestic product (GDP) with a finality aim of enhancing standard and quality of life among the

populace.

Inflation: A continuing rise in price as measured by an index such as the consumer price index

(CPI) or by the implicit price deflator for Gross Natural Product (GNP).

Securitization: The fact or process of securitizing assets; the conversion of loans into

securities, usually in order to sell them on to other investors.

Unitization: To convert, package, or organize into one or more units.

Real Property: Property that cannot easily be moved, usually buildings and the ground

they are built on.

Mortgage Lender: Any financial institution that obtains its profit by lending mortgages for the

purchase of property.
1.9 Limitation of the study

Information constraints: This study is very important to many people and it requires the

consultation of many materials in order to have a successful study and to accomplish the aim of

the study. These materials were not readily available.

Time Constraints: In this study, a lot of time has been spent reading through journals, textbooks,

internet and others, sourcing for relevant information that will be useful in this study.

Financial constraints: The fact that the source of data collection is secondary does not mean

that it does not require money, although it is not as expensive as a primary source of data

collection.

However, the researcher was able to overcome them by being persistence and patience enough

to gather the required data, and as such this study was properly carried out, even though lots

time was wasted, thus, the conclusion derived from this research is purely based on the

information available.
 CHAPTER TWO

THEORETICAL FRAMEWORK AND LITERATURE REVIEW

2.1 Theoretical framework

2.1.1 Monetary Theory of Inflation

This theory was developed by Milton Friedman (1867- 1960) who held that only money matters

and, as such, monetary instruments are more potent to instruments of price and economics

stabilization than fiscal policy.

According to this theory, inflation is always, and everywhere, a monetary phenomenon which

comes from rapid expansion in quantity of money than the expansion in the quantity of output.

That is, if money supply rises faster than the rate of growth of national income then there will be

inflation. Monetarists employed the familiar identity of exchange equation of Fisher. That is,

Quantity theory of money (Fisher Version).

MV=PT

Where M=Money Supply; V= Velocity of circulation; P= price level; T= transactions.

T is believed to measure output and as such is often substituted for Y(national income). The

above equation must hold (MV=PY), that is the rate of expenditure must equal the value of

output. However, it is argue that it is unwarranted increases in the money supply that manifest

in inflation.

2.1.2 Keynesian theory of Inflation

This theory was propounded by John Maynard Keynes (1883-1946). John Maynard Keynes and

his followers were of the view that increase in the aggregate demand is the source of demand

pull inflation. Demand pull inflation is where the total demand for goods and services is in
excess of the aggregate supply and provisions of goods and services in the economy. The

aggregate demand in this sense comprises of consumptions, investment and government

expenditures. According to the teory, policies that causes the decrease in each components of

total demand is effective in reduction of pressure on demand and invariably inflation. This

basically involves reduction in government expenditures, increase in tax as well as controlling

the volume of money.

2.1.3 Neo- Classical theory

This theory was built on foundations laid by classical theorists Adam Smith (1723-1790) and

David Ricardo (1772-1823).Neoclassical economists believe that a consumer's first concern is

to maximize personal satisfaction. Therefore, they make purchasing decisions based on their

evaluations of the utility of a product or service. This theory coincides with rational behavior

theory, which states that people act rationally when making economic decisions. Further,

neoclassical economics stipulates that a product or service often has value above and beyond

its production costs. While classical economic theory assumes that a product's value derives

from the cost of materials plus the cost of labor, neoclassical economists say that consumer

perceptions of the value of a product affect its price and demand. One of the key early

assumptions of neoclassical economics is that utility to consumers, not the cost of production, is

the most important factor in determining the value of a product or service. This approach was

developed in the late 19th century based on books by William Stanley Jevons, Carl Menger, and

LéonWalras. Neoclassical economics theories underlie modern-day economics, along with the

tenets of Keynesian economics. Although the neoclassical approach is the most widely taught

theory of economics, it has its detractors. Finally, this economic theory states that competition

leads to an efficient allocation of resources within an economy and the forces of supply and

demand create market equilibrium, thereby leading to economic growth.

2.1.4 Endogenous Growth Theory

This theory was propounded by Paul Romer(1988) and Robert Lucas (1989). Endogenous

growth theories describe economic growth which is generated by factors within the production

process, for example; economies of scale, increasing returns or induced technological change;

as opposed to outside (exogenous) factors such as the increases in population. In endogenous

growth theory, the growth rate is depended on one variable: the rate of return on capital.

Variables, like inflation, decrease that rate of return, which in turn reduces capital accumulation

and decreases the growth rate. One feature accounts for the foremost difference between the

endogenous growth models and the neo-classical economies. In the neoclassical economies,

the return on capital declines as more capital is accumulated. In the simplest versions of the

endogenous growth models, per capita output continues to increase because the return on

capital does not fall below a positive lower bound. The basic intuition is that only if the return on

capital is sufficiently high, will people be induced to continue accumulating it. Models of

endogenous growth also permit increasing returns to scale in aggregate productions, and also

focus on the role of externalities in determining the rate of return on capital. Endogenous

Models that explain growth further with human capital develop growth theory by implying that

the growth rate also depends on the rate of return to human capital, as well as physical capital.

The rate of return on all forms of capital must be equal in the balanced growth equilibrium. A tax

on either form of capital induces a lower return. When such endogenous growth models are set

within a monetary exchange framework, the inflation rate (tax) lowers both the return on all

capital and the growth rate. Some versions of the endogenous growth economies find that the

inflation rate effects on growth are small. Gomme (1993) studied an economy similar to the one

specified by Cooley and Hansen; that is, an inflation rate increase results in a decline in

employment. According to Gomme’s research, efficient allocations satisfy the condition that the

marginal value of the last unit of today’s consumption equals the marginal cost of the last unit of
work. A rise in inflation reduces the marginal value of today’s last unit of consumption, thus

inducing people to work less. With less labor, the marginal product of capital is permanently

reduced, resulting in a slower rate of capital accumulation. Gomme found that in this economy,

eliminating a moderate inflation rate (for example, 10percent) results in only a very small (less

than 0.01 percentage point) gain in the growth of output. Alternative models examine how

inflation might directly affect capital accumulation and hence output growth. Thus, an inflation

rate increase drives down the return to deposits, resulting in deposits being accumulated at a

slower rate. Since capital is a fraction of deposits, capital accumulation and output growth are

slow.

2.2 Literature review

2.2.1 The concept of inflation

Inflation is one of the most frequently used terms in economic discussions, yet the

concept is variously misconstrued. There are various schools of thought on inflation, but there

is a consensus among economists that inflation is a continuous rise in the prices. Simply put,

inflation depicts an economic situation where there is a general rise in the price as measured by

an index such as the Consumer Price Index (CPI) or by the implicit price deflator for Gross

National Product (GNP). Inflation is frequently described as a state where “too much money is

chasing too few goods”. When there is inflation, the currency losses purchasing power.

The purchasing power of a given amount of naira will be smaller over time when there is

inflation in the economy. For instance, assuming that N10.00 can purchase 10 shirts in the

current period, if the price of the shirts doubles in the next period, the sum, N10 can afford 5

shirts. In the definition of inflation two must be borne in mind. First, is aggregate, which implies

that the rise that constitutes inflation must cover the entire basket of goods in the economy as

distinct from an isolated rise in the prices of a single commodity or group of commodities?
 The implication here is that changes in the individual prices or nay combination of prices

cannot be considered as the occurrence of inflation. However, a situation may arise such that a

change in an individual price could cause the other prices to rise. An example is petroleum

product prices in Nigeria. This again does not signal inflation unless the price adjustment in the

basket is such that the aggregate price level is induced to rise. Second, the rise in the

aggregate level of prices must be continuous for inflation to be said to have occurred. The

aggregate price level must show a tendency of a sustained and continuous rise over different

time/ periods. This must be separated from a situation of one off rise in the price level.

2.2.2 Types of inflation

Kenynesian economies proposes that changes in money supply do not directly affect

prices, and that visible inflation is the result of pressures in the economy expressing themselves

in prices. There are three major types of inflation; as part of what Robert. J. Gordon call “triangle

model”.

Demand-pull inflation: This is caused by increases in aggregate demand due to increased

private and government spending, etc. Demand inflation encourages economic growth since the

excess demand and favorable market conditions will stimulate investment and expansion.

Cost-push inflation: This is also called “supply shock inflation”. It is caused by a drop in

aggregate supply (potential output). This may be due to natural disasters, or increased prices of

inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can

cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on

the consumers in the form unexpectedly high losses, either legitimate (catastrophes) or

fraudulent (which might be particularly prevalent in times of recession).

Built-in inflation: This is induced by adaptive expectations, and is often linked to the

“price/wages spiral”. It involves worker trying to keep their customers as at higher prices,
leading to a vicious circle. Built-in inflation reflects events in the past, and so might be seen as

hangover inflation.

2.2.3 Economic growth

According to Dwivedi (2004), economic growth is a sustained increase in per capita

national output or net national product over a long period of time. It implies that the rate of

increase in total output must be greater than the rate of population growth. Another

quantification of economic growth is that national output should be composed of such goods

and services which satisfy the maximum want of the maximum number of people. Economic

growth is the quantitative increase in the monetary value of goods and services produced in an

economy within a given year. Economic growth is measured as a percentage change in the

Gross domestic Product or Gross National Product (Dwivedi, 2004).

2.2.4 Concept of Real Estate/property

Property connotes land or immovable as it is sometimes called and other objects known

as chattels or movables (Megarry, 1982). Legally, these are known as real property and

personal property respectively. Property is the exclusive right to possession, enjoyment and

disposition of anything which can be the subject matter of ownership; and it also includes the

exclusive right to the future benefits of an economic good, be it material or non-material, as

determined by law. The above rights constitute a bundle of rights (Denman, 1968). Real

property refers to the interest, benefits and inherent right in the ownership of the physical land

(real estate).

But for the purpose of this study, real property means land and buildings, which are

categorized into different types according to the various uses to which they are being put and for

which they are designed. These include residential, commercial, industrial, agricultural,

recreational properties, etc.

2.2.5 Real Estate finance

Real estate finance can be looked at, as the fund needed to carry out real estate

development and other related operations. It is an essential ingredient in modern day real estate

development and most large-scale without substantial credit. The housing finance system in

Nigeria is not viable and this makes mobilization of finance and credit for housing development

difficult. Finance constitutes a fundamental center piece in any real estate development; the

ability of a developer to mobilize enough funds for the project determines largely, the success of

the project. Finance is an all-important factor, a sinequanon and very crucial ingredients to

projects, no matter their nature. It is basically the fulcrum, which sustains the lever for

development projects.

The performance of any housing finance system will depend primarily on the volume and

nature of funds within the economy and the proportion of it that can be spread, mobilized or

even dedicated for housing. Real estate finance can be viewed as the borrowing of money to

carry out real estate development.

Sources of Real Estate finance

The major issue in real estate development and investment is finance. There is no iota of

doubt that funding is an important factor in real estate development and investment. The

complexity and to a large extent, its capital intensive nature demands proper and adequate

funding to make it realizable. The term and availability of the needed funds determines the trend

of estate operation. Availability and easy accessibility of estate finance in sufficient quantity will

be definitely accelerating all forms of property development. Estate financing is concerned with

the production of finance for building houses and office complexes which are basic necessities

in a growing economy like Nigeria.

 The sourcing of funds for investment in real estate development poses a great deal of

problem for the developer. This is largely due to economic instability and stringent measures

imposed by most financial institutions. This is compounded by the fact that the interest rate

structures have had an unfavorable impact on funding the development of real estate. Since the

financing of real estate development is a long term project, it has necessitated the high interest

rate that is being charged on the funds provided for such development purposes. Hines (1995)

revealed that six major real estate financing methods are used across the world namely; joint

venture, equity and debt financing, sale-lease back financing Advance Payment of key money

and sale of securities.

As a result of the huge capital outlay needed for real estate development, developers

usually source for fund in order to complement their equity capital. Large developers will usually

have multiple funding arrangements with a variety of financial agencies. Nevertheless, the field

is becoming so complex and competitive that effective project management is increasingly

concerned with the way in which control over a particular scheme will be influenced by the origin

an nature of development finance. There are various sources through which the developer can

get fund to finance real estate development. Traditional funding of real estate is either by Equity

funding (Equity funds), Loan capital (Debt funds) or a combination of both. The well established

and tested methods of funding real estate are as follows: Equity capital, Loan capital, Mortgage

funding, Debenture and Contractor funding (Omuojine, 1993).

Equity capital: This is the funds realized from personal savings and family savings. It is usually

low because of low per capital income, unequal distribution of income and high population in

each family unit resulting in excessive consumption, low savings and low investment in Nigeria.

Traditionally, real estate development was based on equity funds. Equity funds wholly

generated and owned by one and to which there is no attachment. The chief source of equity
fund is savings and these saving arise out of that part of income of individual or corporate

organization. Equity funds sources could be private or public. Private equity may be drawn from

individuals or corporate savings, that is, retained earnings, assets stripping, for cash or revenue

reserves of companies over a period of time and accumulated savings of individual; from

employment and/or profit from business enterprises. Other sources of private equity funds apart

from savings include funds from family sources, friends, Tsusu system and thrift system. Public

equity on the other hand is derived from invitation extended to the public to subscribe to the

equities/ownership of a real estate company set up for that purpose. Some examples of this are

capital issues, equity warrant issues, securitization and unitization. Since this equity capital is

usually small, it is prudent for him to decide on a mixture of equity and debt capital which will not

only guarantee the highest expected return but also not impair the viability of the development.

A developer’s ability to borrow will be enhancing by the size of equity capital at his disposal.

Direct loans: These are the loans gotten directly from the various lenders such as banks and

other financial institutions for a specific period. They are classified according to their duration,

short, medium and long terms.

Short term loans: The conventional method of raising funds for the acquisition of land and the

subsequent development of potential investment property over a two to three year period is by

way of short term finance. The traditional sources of short term finances are the commercial and

merchant banks as well as finance houses. The terms on which these loans are provided are

usually very stringent and the interest charged are usually on variable interest basis and 2

percent to 6 percent above basic rate. In the past, joint stock or clearing banks have also

been involved in this kind of loan.

One advantage of loans in commercial banks is that a substantial proportion tends to

mature within 1-5 years. Most times, the forms of collateral security demanded by the banks are
not quite satisfactory and prospective borrowers are deterred by these rather inflexible

demands. Merchant banks too have the same maturity patterns as commercial banks but are

even more concerned with liquidity.

In an effort to mobilize funds into residential housing sector, commercial and merchant

banks were directed by the central bank of Nigeria to treat the residential sector as a preferred

sector and allocate at least 7 percent of their loanable fund into the sector. The guidelines

further stipulated that where the total housing loans granted by the banks in any given year is

lower than the level prescribed by the central bank, the short fall will be taken from the banks

and on-lend through the central bank to the federal mortgage bank. Loans for residential

building construction were for a minimum period of 15 years. However these guidelines have

not been strictly complied with as the banks are structured to accommodate comfortably short

term lending’s. Property companies also provide short-term loans to developers.

Medium term loans: These are loans granted for periods not exceeding 10 years. They are

normally obtained by direct loan or overdraft from the commercial banks. Such loans are

frequently raised while arrangements are being made for long term loans. The banks are free to

lend to whom they choose. Loans are repaid in a lump sum or by arrangement, and are subject

to recall by the bank at any time.

Long term financing: Long term development finance as its name implies is finance that is

redeemable within 20 to 30 years or even mre and usually at a relatively lower rate of interest.

The greater equity participation providers in Nigeria are the federal mortgage bank of Nigeria,

various states’ property Development Corporation and Insurance and Assurance companies,

etc. their lending services or activities are concentrated mainly in the residential housing sector.

Long-term development finance has traditionally been raised either by mortgage or

particularly in terms of credit squeeze by sale and lease back. Another aspect of long term
financing is the forward sale, which is normally provided by the insurance companies and

pension funds. These companies tend to exercise extremely tight control over the entire project,

including land acquisition, design, construction and sale or letting of the project.

Existing strategies of financing for Housing Development

The common sources of housing finance in Nigeria are as follows;

a. National housing fund (NHF): Due to the large quantities of housing need, coupled with

the huge amount of funds required to meet such need, the government mobilized for a special

fund to exclusively tackle the housing problem through a form of savings required by law. Thus

the National Housing Fund (NHF) was envisaged to mobilize resources (mandatory savings)

from the workers, private and public employers of labor, statutory allocation by the federal

government and building societies under a broad policy formulated and regulated by

government to provide shelter for Nigerian workers (Ibimulua and Ibitoye, 2015). The NHF was

expected to add stability to the housing finance system by reducing reliance on government

interventions (Adedokun, Akinrandewo, Adegoke, Abiola-Falemu, 2015). It requires that the

three tiers of government (Federal, State and Local Governments) contribute at least 2.5% of

their annual revenues into the NHF as the policy works mainly by pooling resources from both

the public and private sectors. The law provides for 4% interest on workers contribution to the

fund. This low interest rate has been attributed as one f the reasons why other financial

institutions are reluctant to invest in the fund since it makes it competitively less profitable. So

far, the NHF in Nigeria has been assessed to have performed unsatisfactorily in the provision of

housing (Adedokumi, Akinradewo, Adegoke and Abiola-Falemi, 2012 & Adetiloye, 2013).

b. Formal financial institutions: These include mortgage financing, loans from commercial

banks, merchant banks, thrift and credit societies and insurance firms. Mortgage lending is

primarily used to finance private ownership of residential and commercial property, while loans
from other financial institutions like commercial and merchant banks are usually preferred for

other forms of new construction projects. The traditional source of obtaining finance housing

development has been through bank loans which can be long term, medium term or short term

or even as overdrafts. However, many persons, especially corporate real estate developers

have been confronted with challenges in efficient and sustainable credit delivery to the housing

development from these financial institutions (Waziri & Roosli, 2013). These challenges include

the demand to meet strict loan requirements and collaterals thus become an impediment to

financial assistance. In addition, the firm is expected to pay interest on loans at very high rates

since most banks consider it administratively expensive and risky to lend to construction firms

and estate developers (Nedwick & Burnet, 2015). These stringent lending conditions are felt

more by new firms with no established track records and thus suffer more setbacks in seeking

external financing. The banks in turn face higher risk of lending to small borrowers and makes

lending at higher costs in small amounts. Eventually, this causes the banks to lose edge in an

increasingly competitive market filling up with other non-bank lenders (Kolawole, 2014).

c. Project financing strategy: This is a financing strategy that is especially attractive to the

private sector since firms can fund major project off the balance sheet. It is a loan structure that

relies primarily on the project's cash flow for repayment, with the project's assets, rights and

interest held as secondary security or collateral. Basically, it is the financing of long-term

infrastructure development based on a non-recourse or limited recourse financial structure, in

which debt and equity used to finance the project are paid back from the cash flow generated by

the project (investopedia, 2016). The lenders' recourse is limited primarily or entirely to the

project's assets, including completion and performance guarantees and the bonds; incase the

project company defaults.

2.2.6 Problems of real estate financing in Nigeria

Commercial banks as well as real estate investors face several problems in financing of real

estate lending risky, as it is vulnerable to loss of capital sum and expected interest income and

thus not attractive to commercial banks thereby constraining the development of real estate.

• Problems encountered by banks; According to Moyaderu (1998) some of the problems

of real estate from the banks perspective include: Fraudulent information by mortgagor, Default

on the part of mortgagor, the land use act, unanticipated request by mortgagor, economic

instability and undue lengthy legal process.

• Fraudulent information by mortgagor: One of the commonest problems commercial

encounters with beneficiaries of loans is the' provision of false information by the mortgagor.

Most often beneficiaries of loans pledge the same security to two or more commercial bank,

consequently resulting in litigation amongst the banks.

• Default on the part of the mortgagor: Most times beneficiaries of loans either intentionally

or other reasons default in repaying loans granted for real estate development or other uses.

This has become phenomenon in bank credit lending and has greatly constrained commercial

banks desire to lend for real estate or other purposes. A loan default occurs when the mortgagor

is unwillingly to honor his installment loan repayment and this makes the loan 'highly vulnerable

as bad and doubtful debts which by law has to be provided for in the bank's financial accounts

thereby reducing the banks' profits. When default occurs from lower than anticipated rents, then

the problem is a minor one.

However, if the default is a result of diversion of rent, which were pledge for payment, and

servicing of the loan, then the mortgage the bank has a genuine reason to be apprehensive and

be shown resentment towards future credit lending for the finance of real estate.
• The land use act: The freedom to pledge land, or to assign interest in land or purchase

land no longer belongs to the individual by the land use act. Certificate of Occupancy (C of C)

are very much under the control and surveillance of the state and Local Governments which

allocates such rights of occupancy. Usually. Banks find it a safer security for lending for real

estate. However, in recent times, the procedures of obtaining the certificate of occupancy have

been unduly lengthy and tortuous.

The emphasizes on C of C by banks for lending for real estate or other purposes has also

resulted in the incidence of forged C of C. Also, the procedure of conducting search as to the

authenticity of C of C at the Land Registry is also cumbersome. These ail act as a disincentives

to banks for finance of real estate.

According to Omuojine (2001) the land use Act intended to streamline the land tenure system in

the country vests the ownership and radical title to all land in the federation on the Governors of

the respective states for purposes of easy management. However, the Contentions issues of

Governor's consent for any subsequent transaction in land and the intractable government

bureaucracy have made the procurement of land problematic, unnecessarily expensive and

unquestionably out of the reach of the poor.

• Unanticipated request by mortgagor: It is common today for the mortgagor to

make an unanticipated request for an extension or renewal of terms of mortgage prior o or' at

maturity. This constitutes a serious problem to banks and may discourage them from lending for

re estate development.

• Economic instability: The prevailing instability in the economic is also a major problem

faced by banks in lending for real estate development.

Most loans are obtained with the expectation of future returns on investment. However, with the

instability in the economic, most financial projection do not come to fruition with the consequent
that borrowers are unable to meet their loan repayment obligation to banks. In such

situations, the bank stands the risk of losing capital including expected interest on such loan.

This eventually erodes the banks' profits. Consequent upon such occurrences, banks find it

difficult to grant loans for real estate development, which is usually futuristic with long gestation

periods and highly susceptible to vagaries in the economy. According to Bichi (2001) much of

housing finance problems experienced today are an unequivocal expression of cumulative

distortions from policy weakness in the past. He asserted further that with the introduction of

the Structural Adjustment Program (SAP) in 1986, it was mandatory for banks to lend for

housing a prescribed minimum percentage of their loanable funds. All such loans were at

prescribed concessionary rate of interest. Thus, lending institutions like state housing

corporations, and commercial banks felt compelled to reduce their exposure to mortgage

lending due to the relative non-profitability of the prescribed interest rate level". It is instructive to

say that even though interest rates were increased in later years, systemic distortions had been

induced. Consequently, the combined effect of SAP measures was that the growth of the

housing finance system was subdued for several years, as the flow of savings into the system

suffered and financial institutional development became progressively dependent on

government patronage for long term loans.

Problems Encountered by Beneficiaries: Potential investors in real estate also encounter

several problems in- securing loans from the banks. Some of the problems arise from the rather

stringent conditions usually stipulated by the bank. Other problems include: Level of applicant’s

income, ignorance, high interest rate charge on loans and High cost of constrictions.

Level of applicant's income: One of the important considerations is considering an applicant for

loan by the bank is the applicant's income level. According to a study conducted by World Bank,

the average Nigerian earn less that's US$350 per month and this is one of the lowest among
countries of the world-Consequently, with the low level of income, the average Nigerian finds it

difficult to secure loan from the bank for real estate development.

Ignorance: Most applicants come with building designs that are too grandiose to be visible if

developed. This is because from the Estate Surveyor's point of view, the basis of

recommending any particular applicant for consideration for loan is hinged on revenue earning

capacity of the development. Most often building designs presented for loan contain

unnecessary things like uneconomic use of floor spaces. This escalated the costs of

construction. The amount the bank will therefore be willing to grant will not be able to cover the

total cost of the project thus making the project unfeasible.

High Interest Rate: Nigeria is one of the countries in the world with very high interest rate. Until

recently in November 2002 when the Central Bank issued a circular to commercial banks

pegging interest rates-maximum lending not exceeding 25% lending rates were as high as 45%.

High interest rate has been a major constraint to the development of vital sectors of the

economy like-manufacturing, agriculture, solid mineral, oil and gas and housing development.

With the prevalence of high interest rate, investors in real estate development are discouraged

from borrowing from the banks. Even when they are able to secure loans at such high interest

rate, the costs of development becomes very high and in some cases such project are not

completed and become abandoned. ,

High cost of construction: Due to the high cost of construction-building materials, labor cost,

professional fees, potential; investors in real estate development find it difficult to obtain

sufficient finance as loans from the bank to cover the total cost of the project. This has greatly

impeded the development of the real sector in Nigeria.

2.3 Empirical review

There are several studies conducted on real estate financing, economic growth and inflation in

Nigeria. However, good parts of the study were carried out in Nigeria. Thereby recommending

that record of past transactions regarding borrowing and lending of finance for real estate

development should be kept so as to assist others who would want to o into such transactions in

future.

Most empirical study on inflation and economic growth in Nigeria was carried out by Jeremiah

and Emmanuel (2015). Using ordinary least square logged multiple regression technique they

found that inflation rate in line with a priori expectation was negatively related but was not

statistically significant and cannot be said to be having significant impact on economic growth in

Nigeria. However, they both concluded from the empirical results of the study that inflation is

inversely related to economic growth in Nigeria within the period of study. That there should be

fiscal discipline in such a manner that expenditures of the government should yield desired

results and not just about making too much money flow without it being channeled to productive

purposes.

Questionnaire survey and interview methods were employed by Okafor (2016) in investigating

the problems of Real estate financing in Nigeria. The findings of the results of the analysis he

carried out showed that commercial banks are not an ideal or suitable medium for financing real

estate development because whereas commercial banks deposits are short-term in nature, real

estate is for long-term which is usually vulnerable to vagaries in the economy. He recommended

that government should provide commercial banks guarantee for loans obtained by real estate

developers1 who are dully registered and approved by the National Institute of Estate Surveyors

and Valuers. This way commercial Banks will be encouraged to lend to the real estate sector.
A study by Umaru and Anono (2012) employed Augmented Diskey-Fuller technique and

Granger Causality test of causation to examine the effect of inflation on the growth and

development of the Nigerian. Economy, using GDP as a proxy for economic growth and INFLA

as proxy for inflation rate. The scope of the study spanned from 1970-2010. The results of unit

root suggest that all the variables in the model are-stationary and the results of causality

suggest that GDP causes inflation and not inflation causing GDP. They concluded that a good

performance of an economy in terms of per capital growth may therefore be attributed to the

rate of inflation in the country. A major policy implication of their result was that, concerted effort

should be made by policy makers to increase the level of output in Nigeria-by improving

productivity/supply in order to reduce the prices of goods and services (inflation) so as to boost

the growth of the economy.

Wallace (1995) evaluated affordable housing finance in the United State using descriptive

statistics. The study revealed that the affordable housing gap is yet to be filled in the United

State of America. Also, Herbert, Karenb, Chatterjee (2009) studied financial literacy, risky

mortgage delinquency in the US during the financial crisis. The studied make used of Probit

analysis to analyze survey result of US home owners. It was discovered that borrowers with little

understanding are more likely exposed to risky mortgage and also fails to meet the mortgage

payment.

In UK, Eric and Pryce (2011) studied the dynamic of spatial inequality in housing wealth using

Monte Carlo simulations. The result obtained indicated that there is evidence of cycles in

housing wealth inequality but no evidence of an upward trend. Furthermore, the cycles in

inequality are found to be very large and this may have important effects on consumption, work

incentives and business formation. It was found that the entire distribution of house values has

shifted which is likely to imply a growing gulf in housing wealth between owners and renters

over the period considered.

Conversely, Tivari and Moriizumi (2010) investigated the efficiency in housing finance and

carried out a comparative study of mortgage instrument in Japan using regression analysis. The

Estimated error correction models for fixed rate mortgages of Government Housing Loan

Corporation indicate that there is a long-term relationship between mortgage rates and risk-free

ten year government bond yield, however, there are also short-run adjustments and the

adjustment speed depends on the risk perceived by lenders. It was further found out that the

house mortgage lenders that are the government housing loan corporation have not adequately

addressed housing finance risk and that there is no secondary market, where risks could be

addressed in pricing of mortgages.

Asabere, McGowon and Mooklee (2014) investigated the link between financing and economic

development in Africa. The studied employed ordinary least square (OLS) method and the result

shows that there is a significant positive correlation between the size of mortgage market and

level of GNI per capita. Odi (2014) investigated the implication of mortgage financing on housing

for all in Nigeria by year 2020 using the ordinary least square method to analyze the data

gathered. The study found out that there is an existing positive relation between supply of

housing and roof gage credit.

In Ghana, Amos Gadazkpo and Amankwah (2015) investigated challenges of real estate

development from the developer's perspective, the study used quantitative analysis and they

found out that the challenges of real estate development from the developer's perspective, the

study used quantitative analysis and they found out that the challenges are the problem of

development and building permit approvals.

 CHAPTER THREE

RESEARCH METHODOLOGY

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