IMPACT OF GLOBAL FINANCIAL CRISIS ON RESIDENTIAL PROPERTY MARKET
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IMPACT OF GLOBAL FINANCIAL CRISIS ON RESIDENTIAL PROPERTY MARKET
ABSTRACT
The global financial crisis that touched all world economies between 2007 and 2009 was not limited to finance institutions, but had a direct and indirect impact on global property markets from both an investment and ownership standpoint. It should be emphasised that the event had varying degrees of impact on the property markets.
The crisis had a significant impact on the Lagos property market and general real estate practise in Lagos at the time of the crisis, as stated by numerous writers. Despite the immediate impact of the global financial crisis on residential property markets in 2007, the years between 2009 and 2013 saw a growth in rentals and sales in Banana Island residential properties.
As a result, the global financial crisis has had little influence on residential homes in the Banana Island submarket. It is advised that the government immediately expand public infrastructure investment to help the private sector, so increasing diversification and competitiveness in real estate investment and making rentals more accessible to the growing population.
Furthermore, lending rates to real estate investors should be carefully managed in order to avoid predatory lending. This might be accomplished through tax breaks for property investors, which would promote additional investment in real estate development.
CHAPITRE ONE
INTRODUCTION
1.1 Background of the Research
Several local and international news outlets have covered the causes, effects, and implications of the global financial catastrophe. The global financial crisis is a circumstance in which the status quo of the globe cannot be maintained (Ajayi, 2013).
According to Cubis (2009), overexposure of advanced countries’ lending practises “led to a series of complicated issues within the global market economies, resulting in the collapse of numerous banking and other corporate entities, reduced liquidity, and created global recessionary pressure.”
Many economists consider the global financial crisis to be the worst since the Great Depression of the 1930s (Eichengreen and O’rouke, 2010). It threatened the collapse of large financial institutions, which were averted by national government bailouts of banks, but stock markets fell worldwide.
The housing market weakened in many locations, leading in evictions, business closures, and chronic unemployment. The crisis played a significant part in the loss of large businesses, a decline in consumer wealth estimated in trillions of US dollars, and a slowing of economic activity (Williams, 2012).
The collapse of the US housing bubble, which peaked in 2004 (US Census, 2006), caused the prices of assets linked to US real estate pricing to plummet, causing financial institutions around the world to suffer (Michael, 2011).
The interaction between Nigerian banks and worldwide financial systems is not perfect, but it is not non-existent (Nwokah et al, 2009). As a result, these institutions, the Central Bank of Nigeria (CBN), and the country itself are moderately vulnerable to the vicissitudes of the global economy.
Complete or universal financial crises frequently arise when investment booms and rapid credit expansions collapse due to unfulfilled expectations of high future returns. (Alabi, 2010).
It is also worth noting that “where an economic downturn is preceded by a housing boom, the downturn tends to be longer” (Alastair, 2009). The impact of the crisis has increased global economic uncertainty while also increasing the volatility of investment and property markets.
The demise of the sub-prime home mortgage market in the United States of America prompted the global financial crisis as a contributing factor. As the crisis gained traction, major Nigerian property markets such as Lagos and Abuja experienced an all-time high boom between 2007 and the second quarter of 2008.
This activity was easily explained by the operations of Niger Delta Militants, in which oil corporations relocated their offices from Port-Harcourt to Lagos and Abuja, putting a strain on the available housing stocks in Lagos.
It didn’t take long for it to become evident that the fast worsening global economies had established an undesirable feedback loop between financial markets and the real economy.
It should be highlighted that the purpose of this research is not to present a thorough summary of the global financial crisis, which began eight years ago. This has already been done extensively by Fajana (nd), Olaniyi and Olabisi (2011), Sanusi (2011), Fapohunda (2012), Alabi (nd),
and Ajayi (2013), among others, who all describe and analyse the numerous triggers and mechanisms through which the crisis unfolded and spread to the main developed financial market; instead, we would like to focus on the impact it may have had on residential properties on the Banana Island submarket.
Private equity firms have flooded Africa’s real estate sector with millions of dollars in investments over the last year.
Residential property in Lagos, a bustling metropolis of approximately 20 million people, may be among the most expensive in the world, with a two-bedroom home in affluent neighbourhoods costing more than $1 million.
Nigeria has 10.7 million dwellings, which we believe is grossly inadequate given the size of the country (Lamudi, 2015). To that aim, the World Bank estimates that bridging Nigeria’s 17 million imbalance might cost as much as N59.50 trillion.
This massive gap can also be considered as a significant and unexplored investment opportunity in the country’s residential property market.
In recent years, the Federal Government has switched its emphasis from physical policy with a focus on inflation control to a looser policy focused at supporting local economic growth and job creation.
This shift in policy has resulted in the Central Bank of Nigeria lowering the cash Reserve Ratio from 31 to 25 percent, resulting in an estimated N740 billion in liquidity injection to banks.
This increase in liquidity is expected to lead to more lending by banks to the real economy, with the intention of lowering the high loan rates currently prevalent in the property market.
Other than to the bank’s selected customers, lending rates in the local market remain stubbornly high at 20% and higher. Such high rates are unsustainable for real estate development, which typically requires at least two years before any rental profits begin to accumulate.
It should also be emphasised that a lack of clear petroleum policy, a halving of oil prices, and a shift from onshore to deep water drilling have all had a detrimental influence on International Oil Companies’ personnel strengths, with a significant knock-on effect on demand in the real estate submarket.
According to the National Bureau of Statistics, the third quarter Gross Domestic Product GDP increased by 2.84 percent year on year in real terms. This was 0.49 percent more than the 2.35 percent growth recorded in the previous quarter, but less than half of the 6.23 percent figure achieved in the same quarter of 2014.
The economic slowdown has been attributed to the sharp drop in oil prices at the beginning of 2014, as well as the resulting drop in oil earnings. In the third quarter of 2015, real oil sector growth climbed by 1.06 percent year on year, while the sector contributed 10.27 percent to national GDP growth.
Agriculture, financial services, telecommunications, and trade, among other activities, contributed significantly to non-oil sector growth. The non-oil sector expanded by 3.05 percent in real terms in the third quarter of 2015, accounting for 89.73 percent of GDP growth in the year preceding the third quarter.
According to the MCO Real Estate Investment Report (2015), despite significant investor interest, international investors who have the most influence on large-ticket real estate transactions have spent the year waiting for greater clarity on the status of the economy.
Local trades, on the other hand, with little or no currency risk, have thrived. Development in the middle market residential space, middle market retail space, and local hotels continued to sustain the real estate and construction industries, despite the fact that the consumer’s buying power was reduced owing to the economic crisis.
1.2 Statement of the Research Problem
In general, the global financial crisis has had a significant influence on the economy’s real estate industry.
Prior to 2007, loans to the real estate sector was substantial and increased, resulting in the booming and emergence of modern real estate development (Oladele, 2014).
The financial crisis stems from credit contraction in the banking sector as a result of various flaws in the US financial system. The issue that began in the United States and extended to Europe has now become a worldwide phenomenon.
The early stages of the financial crisis were most visible in subprime mortgages, as households struggled to make larger payments on modified mortgages (Soludo, 2009).
Due to the deterioration of balance sheets, financial institutions in the United States used credit contraction to tighten their requirements.
The influence of the global financial crisis on the residential property market offers a solid foundation for further investigation.
As a result, there is a need to investigate the influence of the global financial crisis on the residential property market in the research region.
Residential property is one sort of property that has traditionally been seen as a legacy left to children by their parents. With the realisation that real estate is a significant source of capital appreciation and a solid inflation hedge, the real estate sector is gaining prominence and importance in the money and capital markets.
As Nigeria approaches the establishment of a secondary mortgage market in order to mobilise capital market finance for the primary market, the importance of providing real estate investors and professionals with information on the impact of the global financial crisis on the residential property market cannot be overstated.
Although various studies have concentrated on the impact of the Global Financial Crisis on Nigeria’s financial sectors, little can be stated about its impact on the residential property market.
It is acknowledged that a more focused investigation is required to uncover the condition in the study region. As a result, it is vital to inquire, “What is the impact of the global financial crisis on the study area?”
What was the performance of the residential property submarket in the research area between 2005 and 2015? What are the external elements influencing the performance of the study area’s residential property sub-market?
This thesis was designed to investigate these issues, thereby contributing to empirical studies on the impact of the global financial crisis, with a special focus on the residential property sub-market.
1.3 Research Questions
1. What are the external elements influencing the performance of the Residential property sub-market in the study region between 2005 and 2015?
2. What was the performance of the residential property sub-market in the research area between 2005 and 2015?
3. What were the rental and sale patterns in the research region from 2005 to 2015?
4a. What is the impact of the recession on the study area’s residential sub-market?
4b. What are the causes of the global financial crisis, and how do they affect real estate value?
1.4 Goals and Objectives of the Study
The purpose of this research is to look into the impact of the Global Financial Crisis on the premier residential property sub-market on Banana Island. The following aims will help to attain the stated goal:
1. To investigate the external elements impacting real estate value in the residential sub-market in the research area between 2005 and 2015.
2. To assess the performance of the residential property market in the study area from 2005 to 2015.
3. To investigate the market trends in the research field between 2005 and 2015.
4a. To investigate the impact of the recession on the study area’s residential sub-market.
4b. To investigate the causes of the global financial crisis and their impact on real estate value.
1.5 Significance of the Research
Globalisation is an unavoidable phenomena in human history that has brought the world closer together through the flow of products, goods, knowledge, information, and culture.
However, the rate of global interpretation has accelerated dramatically over the years, owing to enormous advances in science, technology, communication, industry, and transportation.
The impact of these improvements is easily visible in the availability of information on market performance, notably in real estate investment.
Following the 2008 global financial crisis, we were told by the administration of our former economy that the Nigerian economy was hedged against the global financial crisis. This was due to the fact that we had recently emerged from the euphoria of bank consolidation,
which had lifted the capital base of operational banks to a minimum high of N25 billion, as well as our massive investment in foreign reserves. In the face of the worldwide crisis, which raised concerns about the future of our weak local economy,
Professor Chukwuma Soludo, Governor of the Central Bank of Nigeria, proclaimed, “We will not have economic recession.” However, as can be seen later, current patterns have proven different.
The purpose of this study is to determine the extent to which the crisis has influenced the real estate market, specifically the residential property sub-market of Banana Island.
The relevance is established in the providing of an understanding of the scope and nature of the impact in the periods preceding and following the property boom, as well as the provision of information relevant to investors in the Lagos property market.
This study also fills an empirical gap in our understanding of the impact of the global financial crisis on the premier residential property sub-market in Banana Island. There is also a need to comprehend the market’s and its participants’ reactions to the financial crisis.
1.6 Scope of the Research
A study of this nature should ideally include all of the prime residential areas in Lagos, but time and money will be severe obstacles in attempting to do so. As a result, our research has been limited to Banana Island’s top residential region. These are the areas in Lagos with the highest property transaction values prior to the global financial crisis.
The scope of topics to be investigated in this study includes property prices (sales and rentals), a set of macroeconomic indices such as Foreign Direct Investment (FDI) data, Consumer Price Indices, interest rates in effect during the study period, and so on.
Stakeholder perceptions in Banana Island’s designated residential property submarket will also be considered. Estate Surveyors and Valuers with properties in the study area, institutional investors, fund managers, high-class tenants in the study areas, lending institutions, and property developers in the area are among these players.
1.7 Research Area
Banana Island is located in Lagos State, and Lagos is one of the world’s largest cities. It has a population of over 15 million people and is growing at a rate of roughly 6% each year. It is home to Nigeria’s main commercial seaport and airports, and it is home to more than 45% of the country’s professional workers.
Lagos State is roughly located between the longitudes 2042E and 3042E and the latitudes 6022N and 6052N. The state’s southern boundary is the 180-kilometer-long Atlantic coastline, while its northern and eastern limits are shared with Ogun state.
The Republic of Benin borders the boundary on the western side (Balogun, 1999). Lagos metropolitan takes up 2,910 square kilometres of the state’s total land area of 3,577 square kilometres. Lagos Metropolitan has the largest manufacturing sector and employs more than 45% of the country’s skilled labour (World Bank, 2002).
It is the hub of all kinds of transportation (air, water, road, and rail), with vehicle transit being the most prevalent and widely used within the city (Oni, 1992). According to reports, Lagos is anticipated to become the world’s third largest city by 2015, with 25 million inhabitants rising at a 6% annual rate.
Banana Island is a man-made island off the coast of Ikoyi, Lagos, Nigeria. Tafawa Balewa Square is 8.6 kilometres east of Banana Island. Eti-osa is a Lagos Local Government Area in central Lagos. According to Punchng.com (2013), it is noted for having a rich, cosmopolitan society and some of Nigeria’s most costly real estate. It has one of the greatest concentrations of millionaires within its borders.
Banana Island is a man-made island in Lagos, Nigeria, with a slightly curved shape similar to a banana. It is situated in Lagos Lagoon and is linked to Ikoyi Island by a dedicated road that connects to the existing road network near Parkview Estate.
According to thisdayonline.com(2..) and chagouryconstruction.com(2006), the Island was built by the Lebauese- Nigeria Chagoury Group I in collaboration with the Federal Ministry of Works and Housing and is on par with Paris’s 7th Arrondissement, San Diego’s La Jolla, and Tokyo’s Shibuya and Roppongi neighbourhoods.
The island occupies a sand-filled area of roughly 1,630,000 square metres and is divided into 536 plots (ranging in size from 1000 to 4000 square metres) that are primarily oriented in cul-de-sacs, thus enhancing Ikoyi’s historically residential aspect.
The Island is a planned, mixed-use development with parts designated for residential, commercial, and recreational activity. On the residential side of the island, dwellings with more than three stories are not permitted.
According to chagourygroup.com (2014), residents have access to world-class utilities such as an underground water supply network, underground electrical systems (rather than the overhead cabling common throughout Lagos), a treatment plant, a central sewage system, satellite telecommunications networks, and street lighting.
Ocean Parade Towers (a set of 14 luxury tower blocks strategically situated at one end of the Island to take advantage of 180 degree panoramic views overlooking the lagoon) is one of several high and residential constructions on the island.
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