Mr. Frank Okosun is the Senior Partner and Chief Executive Officer, Knight Frank Nigeria. He spoke with CHINEDUM UWAEGBULAM on how to ensure enforceable property rights and effective registration systems, challenges of standards in built environment and CBN’s intervention fund in the real estate sector.
The Federal Government has taken fiscal measures to douse tension created by COVID-19 pandemic. What has been the effect of the CBN’s intervention fund on the real estate sector?
While the real estate sector did not necessarily benefit directly from the COVID-19 stimulus packages, there may have been indirect impacts on the sector. For example, the stimulus may have reached workers that help in constructing homes or people that work within buildings to keep them clean or safe. It could also have reached businesses and business owners, who either rent or recently bought property, thereby supporting them financially to be able to transact in real estate.
However, in my opinion, no real direct impact of the stimulus packages has been recorded on the real estate sector. The insecurity problems have caused a steady rise in the cost of building materials and logistics, primarily transportation of goods and workers. Intervention is seriously needed in these areas.
With low rates of money market instruments, do you think real estate is the alternative investment outlets for investible funds? If yes, why? What are your expectations in residential property values in that regard?
While the rates were low for most of 2020 due to the rate cuts by the debt management office in the fourth quarter of 2019, bond rates have since come back up in 2021, consequently, the benefits were relatively short-lived.
In 2020, the low rate regime may have fuelled some of the interest shown in residential real estate, but I do not think that was the primary reason and it is definitely no longer the case as bond rates are once again high. I understand treasury bill rates are still low, however since bonds are high, this still gives a strong money market option.
By raising bond yields and not treasury bills, it is evident the government is trying to stimulate long-term lending to it as against the 90-day or 180-day short term borrowings of treasury bills.
However, since real estate is a long-term investment, it compares more to bonds than treasury bills and that is why the rise in bond yields is negative for the real estate sector. Bonds are typically seen as risk free as such, this puts pressure on real estate to give better returns than bonds currently offer and that’s increasingly difficult in the current economic terrain.
In Knight Frank’s inaugural Africa office market report for the first quarter 2021, prime office rents remained stable. Do you foresee low investments in the office segment of the market this year? How do property owners or investors overcome the headwinds?
While the Africa report highlights a fairly stable office market, it is also expected that new developments into that market segment will slow down due to reduced mobility and demand necessitated by the pandemic. However, it is important to highlight that this is not the case in all segments of the office market. In the mid to low segments, new developments are expected to spring up. Low to mid rise offices with single or fewer occupiers can be expected to be seen more. This is yet another effect of the pandemic, where organisations want relatively cheaper offices, which they solely occupy or occupy with few other companies, can open and shut as they will, depending on any external factor, including a potential disease outbreak.
Consequently, developers and investors may do well to invest in smaller format offices, which are typically more manageable and affordable to occupiers. Considering the current economic climate, even some blue chip organisations do not necessarily want to work out of A-Grade development, if they can secure safe and well built B-grade options that are in good locations.
This helps them manage their operational expenses in the tough times. However, A-grade office managers are also offering very considerate incentives to bluechip occupiers, which will continue to inform some level of patronage for A-Grade buildings. The key is to maintain a balance between expected returns and occupany levels required to maintain the buildings in the A-grade space.
The lack of available, reliable data and research has resulted in the perception that Nigeria’s property markets, like other developing markets, are too high in risk to justify the potential rewards. How do we change this perception and encourage foreign investment in real estate sector?
I think the data and research problems of our sector are fast becoming a thing of the past as a number of firms are beginning to rise to the challenge of putting out research that can guide investments. This is not to say we are at the transparency or data sharing levels that is needed, but the right attitude and effort towards data sharing and dissemination is evidently changing and if continued will really put the Nigeria real estate market in good stead.
At Knight Frank, we prepare the Africa report yearly, which is the premier report on the state of the African real estate market. The report gives essential data on yields, average rental and sale prices across most major markets and locations on the continent, as well as the necessary commentary to understand the existing transaction dynamics in the space.
We also prepare a quarterly Lagos Property Monitor, which gives current information on the Lagos market, segmentally such as office, residential, retail and hospitality segments. Outside of Knight Frank, there are now a good number of multi-listing sites, which leverage technology to aggregate and show the current asking prices of properties in different locations.
Consequently, there’s a lot of information readily available online, as against over 25 years ago when I started my career. While more can be done, and more is definitely being done, I think a lot of people do not search and they do not know a lot of information is already available.
In Nigeria, land tenure arrangements that are supported by clear legal title remain problematic or contested and often place constraints on the ability of property markets to develop. How do we ensure enforceable property rights and effective registration systems in the country?
In most states, land title management is still very manual and consequently subject to human error and/or manipulation. This has been the case since the creation of the country and though efforts have been made to achieve improvements, the system is still imperfect.
This in part is due to the multiplicity of title types that exist, but the more prevelant issue is the management of titles. If titles are well documented, stored and easily/securely confirmed, most of the title issues would have been dealt with. Consequently, it has become critical that land titles are truly digitised and electronically saved.
This way, it can be retrieved easily and securely, as well as for confirmatory purposes. I am aware there are agitations for the adoption of blockchain technology, however, a lot of the existing data is flawed, it may be unwise to put them on a blockchain, because it then becomes difficult to alter.
However, we can start by truly digitising the process as is done in Abuja, though that also has room for improvement, but is still the best we have in the country and can be emulated by Lagos and other states. Once a complete (or near complete) digital registry is fully set up and running, putting it all on blockchain can be considered in five to 10 years after which the integrity of the system would have been tested, data flaws and electronic bugs resolved.
The legislation surrounding professional designations and roles in the built environment in Nigeria varies considerably. What are the challenges in the attainment of standards that are globally benchmarked?
I don’t think we have too many professional designations in the built environment, what we don’t have enough of, is enforcement of standards in each profession. In other parts of the world, you can’t practice any aspect of real estate without a licence, however in Nigeria, there seems to be no entry barrier. It’s a free for all affair and of course that has led to a lot of fraud and unprofessional behaviour even by the supposed professionals also, seeing there’s little enforcement.
However, this is a challenge across the entire economy so I would rather not dwell on this. What’s critical is that we need better enforcement of existing standards. Professional bodies need to understand that not enforcing standards and discipline within its membership leaves room for outsiders to lack regard for the profession. That has become the problem across the real estate and construction value chain.
As global as global standards may be, they must be accepted and enforced locally. Nigeria is a sovereignty, and no one can come from outside to govern us, not as a nation and not within the professions. We must self-govern, self-regulate and self-discipline. But we’ve failed at these for so long; indiscipline and inappropriateness is the order of the day within our professions even though they may be tagged as noble.
However, nobility is not in word alone, but in truth and deed. I fear our professions need to go back to their noble roots and let honesty and integrity truly be our watchwords. When things get reset within professions, we will then be able to tackle the issue of non-professional practising our professions.
Many state governments have not exploited the use of property tax in generating revenues. What are the issues? How would property tax benefit state governments?
You can only exploit property taxes when there is an active property market and there is sufficient purchasing power by residents to pay. In Nigeria, the most active property markets are in just about eight or nine states – Lagos, Abuja, Rivers, Kano, Kaduna, Ogun, Oyo, Benin and Enugu. These are states where people actively trade in real estate. In most others, ownership of property resides in families and are transferred across generations, so there are relatively few commercial transactions. Even in some of the states with active real estate markets, people can’t afford to keep up with income taxes talk more of property tax payments, so the government looks elsewhere.
There is a cost to tax generation for the state governments, so they need to consider carefully the chances of actual tax collection before they proceed to charge and drive collection.
As the citizens of the states get more buoyant, more real estate transactions will happen, and as that progresses, rating and collection of property taxes will follow. Take Lagos for example, it was just about 20 years the state declared property as its oil having seen the boom in property within the state.