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Enhancing Entrepreneurship in Real Estate through Technology and Innovations Speech Delivered at Federal University of Technology Akure (FUTA) Annual Lecture, Aug. 13, 2015 By Vincent Nwani, Ph,D Director, Research and Advocacy Outline Contest Issues in Real Estate Market Structure Key Enablers Entrepreneurship Conclusion Context • 170 million people growing at 2.6% p.a • Rising urban population with 85% living in rented apartment • Real Estate contribute below 1% to Gross Domestic Product, compared to 24.7% in Malaysia, 29% in South Africa, and 85% in New Zealand, • Short fall is estimated at 17 million housing units, and it will require N49 trillion to bridge the gap based on an estimated average cost of N3.5million per housing unit (Federal Mortgage Bank of Nigeria (FMBN). • Nigeria is currently building less than 100,000 homes a year • The country is one of the lowest cement consumers with 130kg per capita, world average is 300kg • Rate of building degradation is one of the world’s fastest (World Bank Study) Issues in Real Estate Market • • • • • • • • • • Affordable mortgage finance, Property registration, Title perfection and foreclosure issues, Access to construction financing for developers, Poor regulation of the real estate sector in Nigeria. Incidences of obligatory failures in the form of government’s delayed payment to construction contractors. Standards, safety issues and arbitrary regulations High cost of construction Land use Act and obsolete regulations Poor workmen leading to poor finishing and delivery Poverty and weak demand due to affordability The Real Estate Market A review of the global markets revealed the following business models within that industry: Property Development / Property Trading Model Real Estate Development / Property Investment Model Property Financing Property Marketing, Management and Maintenance Model Integrated / One Stop Shop Model Business Models Property development / Property Trading Model In this model, real estate companies undertake the development of property with the sole intention of selling them on completion thereby deriving revenue from theirTechnology trading activities Customer as against rental income. leverage Satisfaction Property Development / Property Investment Model In this model, real estate companies on completion of development hold property from which rental income is earned. They typically do not sell on completion of development. However, it is not unusual to have a development company operating as trading and Financial investment company. Services Property Marketing / Management & Maintenance Model Industry Reforms These are companies involved in the sales and letting of property so far constructed. Most of them often times are realtors while others are property companies and agents. They usually manage and maintain the estates so let out by them. Top players in this category include; Knight Frank and Rutley, Nigeria, Jide Taiwo & Co, etc. Real Estate Business Models Property Financing In this model, well capitalized real estate companies undertake to finance real estate development, finance mortgages, etc. In the Nigerian environment, this area is still dominated by financial institutions especially banks. In connection with this model, property companies are also exploring the possibility of running virtual mortgage finance companies alongside their core businesses with the likelihood of incorporating these companies as full fledged mortgage finance companies. Integrated/One Stop Shop Model This model involves a combination of the whole spectrum – where a firm acts as the developer, trader, financier and manager of real estate Nigerian Real Estate – Industry Segmentation Residential Real Estate •Luxury Apartments (High Income Earners) •Block of Flats (Middle Income Earners) •Mass Housing (Low Income Earners) Commercial Real Estate •Office Space •Retail (i.e. shopping malls, restaurants, gift shops, etc) •Industrial (ware-houses, factories, etc) •Hospitality (hotels), health centres Specialty Real Estate •Students Accommodation, worship & trade centres •Military and Police Barracks etc. Critical Success Factors in Real Estate Market These are the industry success factors which are broadly similar both globally and locally 1 • Access to Off-take Finance 2 • Land Acquisition & Prime Location 3 • Quality, Pricing & Packaging of Final Products 4 • Quality Management & Business Knowledge 5 • Brand Name or Equity 6 • Strategic Business Alliances Ensure operational and market effectiveness Other Success Factors Globally the following factors are also key: 7 • Diversification 8 • Time to Market (Political & Economy driven) • Differentiation 9 10 • Raw Material Availability & Affordability 11 • Operational Efficiency Emerging Success Factors for Real Estate Entrepreneurs • Quality, pricing and packaging of final products • Bespoke products and services • Value based pricing • Friendly and flexible customer payment options • Clarity of overall vision/strategy ( well articulated and shared) • Quality Management and Business Knowledge • Executional effectiveness - Courage/decisiveness - Speed - Willingness to take responsibility • Innovativeness • Full grasp of industry issues, challenges, opportunities, trends, etc. Emerging Success Factors for Real Estate Entrepreneurs Cont’d • Brand Name or Equity • Business Alliances • Ability to build up value in a brand through; • Effective promotion of the brand • Consistently meeting and exceeding customer expectations • Increase brand equity by continuously increasing the perceived value of the company’s products to the customer. • Ability to build alliances to leverage the following • Technical expertise • Technology • Funding • Reach Off-Take Finance…as a critical success factor With emerging markets like Nigeria, there is significant shortage of finance for house purchase and construction. Thus; Current problem Funding gaps Caused By Short-term Solutions • Banks as only main source of mortgage finance • The set up of the NHF • Introduction of Primary Mortgage Institutions (PMIs) • Improved impact of Building Societies/ Cooperatives • Short-term re-payments and High interest rates • Improved mortgage facilities and terms due to increased competition in the banking sector Government’s Expected Role • Create environment to stimulate private sector participation in long-term housing finance • Develop sound property rights • Reforming the Land Use Act Decree to aid easy access to land • Restructure Federal Mortgage Bank of Nigeria (FGBN) • Co-operatives and credit institutions should be encouraged to service low-end market • Private sector to be encouraged to provide bulk of actual investment funds for MIPs, HIPs and HNWIs Improvements Off-Take Finance…the way forward The development of a variety of instruments for the mobilization of funds from the capital market through “securitization” of mortgage portfolios. Financing through Real Estate Investment Trusts (REITS) which uses the pooled capital of investors to purchase and manage income property or mortgage loans. Selling of securities backed by a pool of mortgages. These securities are created through the aggregation of mortgage loans with similar features into pools of securities for issuance to investors through the capital market. Invested Funds Real Estate Industry Recently, the Nigerian Securities and Exchange Commission released guidelines for the operation of REITs in Nigeria. More activity in this regard is thus; expected in the short-term. REITs: REITs gives an investor a practical and effective means to professionally managed real estate in a diversified investment portfolio. TYPES OF REITs: Equity REITs, it owns and operates income-producing real estate. Equity REITs have become the primarily real estate operating companies that are involved in a wide range of real estate activities, including leasing, development of real property and tenant services. Mortgage REITs lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities Hybrid REITs are a combination of an equity and a mortgage REIT. As the name suggests hybrid REITs own properties and make loans to real estate owners and operators. Benefits of REITs The following are the various benefits of utilizing REITs as a form of take-off finance: They allow individuals share in the ownership of relatively expensive real estate Liquidity: REITs offer the most liquid way to invest in real estate. REIT shares are traded daily on a national exchange, so, unlike actual real estate, they can be bought and sold at any time. They provide long-term financing to property developers of real estate REITs are total return investments that typically provide high dividends plus potentials for long-term capital appreciation (upon asset disposal) They are attractive additions to investment portfolios as there is relatively low correlation between them and publicly traded real estate stock returns and the returns on other market sectors. Inflation hedge: As an investment in tangible hard assets, REITs can provide an inflation hedge. Deferral of income taxes: No tax is payable on REITs until they are sold. At that point, profits are taxed as capital gains, not as ordinary income. Market Segmentation Individual Market Segments Characteristics High Net Worth Individuals (HNIs) Typically Price insensitive once convinced of value Typically focused on quality of service Seek wide range of services preferably bundled High Income Professionals (HIPs) Class conscious Relatively price insensitive Quality conscious Medium Income Individuals Price sensitive Sensitive to quality of service Higher credit risk relative to other classes Low Income Employees (LIEs) Price sensitive Relatively insensitive to quality of service Higher credit risk relative to other classes Self Employed Professionals (SEPs) Price sensitive Relatively insensitive to quality of service High credit risk relative to other classes Key Buyer Values for Real Estate Location of Property Speed of Service Quality of Service Buyer Values Value-Added Services Variety of Products Financing Options Accessibility Entrepreneurship – Which area do we play in Business Area Niche Opportunities Market Entry Property financing • Increased funds flow into the banking system post consolidation from pensions reform Act and ultimately into housing and real estate development; • The emergence of a bond market will transform the mortgage industry Difficult Property Development Explosion of property development and commercial development primarily focused in major cities are on the increase Fairly Easy Building & Construction • Extensive opportunity abounds in real estate development and renovation and refurbishment of various property Fairly Easy M & M Specialists • Though highly fragmented, with the increased need for residential & commercial property development especially by HNWIs, HIPs & MIPs, there is increased opportunities for Maintenance Specialists to function Fairly Easy Related Industry players • The burgeoning real estate industry in Nigeria, is throwing extensive opportunities for players in this group as the demand for equipment (lease & purchase), tools and raw materials are on the increase Easy Who are our main competitors? • What are they doing to achieve their strategic objectives? The main competitors within in the Industry can be identified below: •1a Top Property Developers UPCN, HFP Engineering, LSDPC, CityScape International, Lkki Gardens •1b Recognized medium sized developers with at least one successful scheme Grant Properties, Solid Homes, Cornerstone Construction, Dormant Property Investment Company •1c New developers proposing development schemes Northern foreshore, Megamond Property Investment • Maintenance Specialists Jide Taiwo & Co, Diya Fatimileyin & Co, Ebosi Eleh & Co, Knight, Frank & Rutley Nigeria • Financial Institutions Banks and mortgage finance institutions • Building & Construction Companies C & C Construction Company Limited, Cappa & D'Alberto Plc., Ames Construction, H.F.P Engineering Nigeria Limited, Inter-Bau Construction Limited, Jagal Nig Limited, Kerldbert Holdings Limited. • Related Industry Players Dangote, WAPCO, Stabilini, Bagco Nigeria Plc, Tractor & Equipment, Tower Aluminium, Askar Paints, DN Meyer, Berger Paints, Nigerite, Kolorkote, Aluminum City Limited. Riding on technology and Innovations Invest significantly in R&D Identify costs in the construction sector that can be eliminated from the building process Standardisation is surely needed in the industry in a way that allows talented construction industry players Design IT & Social media – Networking and marketing We all have a role to play University - R&D Private Sector – Finance, PPPs, Trade associations advocacy Government – Regulation, Land use reform, property registration and title papers Conclusion Nigerian construction remains rudimentary and wholly inefficient. There is high cost of building materials and poor workmanship and these fuels housing shortage The entire construction space is calling for: new ideas – technology and innovation Global best practices and standards which enhance safety, boost efficiency and bring down costs at the same time. Positioning for new real estate market – top material manufactures will soon become builders Fix the land issues – Review Land use Act. 1979, establish Land Bank managed by the private sector Vincent Nwani Ph.D Director, Research and Advocacy at The Lagos Chamber of Commerce and Industry Commerce House: 1st Floor 1, Idowu Taylor street Victoria Island, Lagos, Nigeria. Mobile: +2348033827944 Email: [email protected] [email protected] Website: www.lagoschamber.com … We will Translate this Plan from Words into Actions and Results