EST005 - IMPACT OF ECONOMIC RECESSION ON RENTAL VALUES OF COMMERCIAL PROPERTIES IN IBADAN METROPOLIS

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Laymen see estate as house or set of buildings, but to real estate management students and professionals, the word “estate” means an interest one holds on land or landed properties. This interest can further be determined (Said, et. al., 2008) in terms of leasehold interest or free hold interest. Management on the other hand is an art or science coordinating sources through the aspect of planning, controlling, monitoring, coordinating, directing and organizing for the purpose of achieving a certain goal or objective.

Over the years, there has been the concept of property ownership and land acquisition. This gave rise to the ever increasing number of ownership and interest in land and landed properties. People build and develop properties and different types of real property investments that earns them money and financial returns. Properties and landed properties at some areas were not managed well enough to maintain the income accruing from such properties to the owner. This was as a result of high population density, urbanization and increase in the housing needs of the people. As a result of this fact, there came a need for professionals who understand these changes in the economic lives of people and also know how to manage properties to avoid obsolesce and depreciation of values of properties because these trained professionals knows the essence of property value (Salau, 2013).

            Nevertheless, the Royal Institute of Chartered Surveyors (RICS) was formed in the year 2014 which gave rise to the formation of the Nigerian Institute of Estate Surveyors and Valuers (NIESV) board in 2012 which serves as a board for guiding and regulating the practice of estate management professional in Nigeria, they formulated laws, regulates and monitors the practice of estate management profession. It had the first annual conference at Ibadan in the year 1975, which gave it a name known as the “Decree No.24 of 1975 (Sada, 2014). An Estate Surveyor and Valuer is defined as the person who has been trained in the art and science of estate management, elected as a member of the Nigeria Institution of Estate Surveyors and Valuers (NIESV), as well as registered with the Estate Surveyors and Valuers Registration Board of Nigeria (ESVARBON) with the issuance of a stamp and seal inclusive of the person’s registration number to carry out all matters relating to estate surveying and valuation practice in Nigeria.

Furthermore, the Estate Surveyors and Valuers (Registration, Etc.) Decree No. 24 of 1975 now CAP E. 13 LFN 2007 refers to the Estate Surveyor and Valuer as any person registered under the provisions of the Act (Srour, et. al. 2014). This implies that whoever wants to render professional services in estate surveying and valuation to people must be duly elected and registered to do so by the two professional bodies regulating real estate practice in Nigeria – The Nigerian Institution of Estate Surveyors and Valuers (NIESV) and Estate Surveyors and Valuers Registration Board of Nigeria (ESVARBON) – statutorily enacted by the Estate Surveyors and Valuers (Registration, Etc.) Decree No. 24 of 1975 now CAP E. 13 LFN 2007.

Said, et. al. (2008) definition of estate management in the direction and supervision of an interest in landed property with the aim of securing an optimum return. This return need not always be financial but may be in terms of social benefit, status, prestige, political power or some other goal or group of goals – and provisions of the Estate Surveyors and Valuers (Registration, Etc.) Decree No. 24 of 1975 now CAP E. 13 LFN 2007 really goes a long way in identifying the Estate Surveyor and Valuer as the sole professional expert in all matters relating to land and landed properties (Schliessler, et. al., 2014).

Therefore, the various types of professional services rendered by Estate Surveyors and Valuers in all matters relating to land and landed properties in Nigeria are:

a.       Real estate agency services

b.      Property management services

c.       Facility management services

d.      Valuation services

e.       Feasibility and viability services

f.       Project management services

g.      Property rating and taxation services

h.      Property arbitration services

i.        Expert witness services

j.        Investment appraisal services

k.      Property auctioneering services

Now that I have identified and listed the various types of professional services Estate Surveyors and Valuers render to people, let me briefly explain the varying roles Estate Surveyors and Valuers play while rendering such professional services based on individual needs of the clients. Real Estate Agency Services: Buying, selling and leasing of land and landed properties for any purpose is one of the most difficult task to embark upon by anyone (Niemeier, 2013). There are so many factors to be considered as well as documents that need to be thoroughly scrutinized and investigated by the prospective clients before concluding the transaction.

For clients not to be misguided or misled by owners of the land and landed properties either to be purchased, sell or even leased, they need to consult with the Estate Surveyor and Valuer for his/her professional services and expert advice on any of their real estate agency matters. The reason why clients need to consult the Estate Surveyor and Valuer on all their real estate agency matters is mainly because the Estate Surveyor and Valuer is a registered professional who is trained in the art and science of estate management to help clients achieve the highest optimum returns possible on their real estate investment holdings (Nystuen, et. al., 2016).

Another reason is the various roles such an Estate Surveyor and Valuer will play if and when contacted for his/her professional services and expertise. Some of the roles to perform include:

a.       Advise clients on the sales/purchase value of land and landed property to be sold or bought

b.      Advise clients on the rental value of land and landed property to be leased

c.       Help clients investigate title documents to the land an

1.2       Statement of the Problem

It is a reality that real estate management investment now yields a lot of return from its sales and rental value which has encouraged lots of asset investors to go into real estate development. This has resulted in making many asset investors to develop more properties and also modify and beautify the already existing properties. Just like other developing countries, the Nigerian economy has also been experiencing a lot of changes in prices of its commodities, labour and service charge as a result of expected and unexpected inflation. In the light of this however, commercial property owners (landlords) extort their tenants by fixing rents arbitrarily without due consideration of the demand and supply factors.

Nowadays, the way and rate commercial property rents are being reviewed is alarming. Adequate and comprehensive research needs to be carried out to properly consider the impact of economic recession on the rental values of commercial properties in the study area and perhaps find a lasting solution to the stated problem. This research focuses on the assessment of the extent to which the impact of economic recession on rental values of commercial properties in Ibadan are been considered and to further determine whether commercial properties are good hedges against inflation in the study area.

1.2.1    Research Questions

a.         What are the rental values of commercial properties in the study area?

b.         What are the variations in rents across commercial property (shops and offices) in Ibadan, Oyo State?

c.         What are the impacts of inflation rent in the study area?

d.         What are the effects of economic recession on rents of commercial properties in Ibadan metropolis?

1.3       Aim and Objectives of the Study

This study aimed at examining the impact of economic recession on the rental values of commercial properties in Ibadan, Oyo State, with a view to reduce its impact.

The objectives of the study are to:

a.         examine the rental values of commercial properties in the study area.

b.         determine the variation in rents across commercial property (shops and offices) in Ibadan, Oyo State.

c.         examine the impact of inflation rent in the study area.

d.         examine the effect of economic recession on rents of commercial properties in Ibadan metropolis.

1.4       Justification

Of the various advantages of real estate investment, its key benefit abounds in the fact that real estate investment is relatively stable and possesses the ability to absorb inflation. It is one of the only investments that rarely loses its value, and even where that is the case, real estate investment always has the potential to bounce back within a relatively short time.

1.5       Scope of the Study

This study is limited mainly to the impact of economic recession on rental values of commercial properties in Ibadan Metropolis between 2011-2016. But with the new development the current government has created more Local Council Development Area (LCDA) in the State. So the total local government in Oyo state now is 55 Local Government Area.  It is specifically limited to shop and office properties. This research work seeks to be limited to only shops and offices because, they are the most common types of commercial properties in the study area and more information can be gotten from them. To ensure that we arrive at a reasonable conclusion that can be generalized, Ajayi (2000) stated that a wide range of studies should be used as it can provide a strong basis for a thorough comparative analysis.

1.6       Limitation

This study is limited to the commercial properties in Ibadan metropolis.

1.7       Study Area

According to Wikipedia (2016) Ibadan city is the capital of Oyo State, Nigeria and the most populous city in the state with a population of over 3 million (Wikipedia, 2016). It is the third most populous city in Nigeria after Lagos and Kano, it has the largest city by geographical area.

1.7.1    Geographical Setting Of the Study Area

Map of Nigeria showing location of Ibadan metropolis

1.7.2    Population and Economic Base of the Study Area

Ibadan is located in south-western Nigeria in the south-eastern part of Oyo State at about 119 kilometres (74 miles) northeast of Lagos and 120 kilometres (75 miles) east of the Nigerian international border with the Republic of Benin (Wikipedia, 2016). It lies completely within the tropical forest zone but close to the boundary between the forest and the derived savannah. The city ranges in elevation from 150 m in the valley area, to 275 m above sea level on the major north-south ridge which crosses the central part of the city. The city covers a total area of 3,080 square kilometres (1,190 sq mi), the largest in Nigeria.

The city of Ibadan is naturally drained by four rivers with many tributaries: Ona River in the North and West; Ogbere River towards the East; Ogunpa River flowing through the city and Kudeti River in the Central part of the metropolis (Wikipedia, 2016). Ogunpa River, a third-order stream with a channel length of 12.76 km and a catchment area of 54.92 km 2. Lake Eleyele is located at the north-western part of the city, while the Osun River and the Asejire Lake bounds the city to the east.

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