What you need to know in hindsight, or on the other hand, before investing in Lekki-Epe Axis
- It ain’t what you don’t know that t gets you into trouble. It is what you know for sure that just ain’t so. – Mark Twain
From conception, the prices of properties in Lekki - Epe axis of Lagos State has risen tremendously and beyond expectation. Against several odds , and despite the ongoing recession in the country, real estate investments continue to thrive in the region as the property market have done fairly not bad in maintaining its resilience against the difficult economic conditions that has challenged the country. Without any atom of doubt, Nigeria's Wall Street is making its property market a nightmare but this axis is seeing less of the bad dreams.
Compared to other fast-emerging property markets across the state and its neighboring geographical area, e.g. Badagry, Mowe, Ikorodu, Agbara and others, the rush of investors into this area has created substantial demand that have driven up prices of properties. Amongst these other geographical areas that are fast-emerging property market, the Lekki- Epe axis experience the highest share of the property- purchases (demand), and prices - to the extent that investors , particularly with speculative motives, compete with one another for the rapidly dwindling inventory properties in this area.
Whilst investment in the nation's real estate sector has been strangulated by the ongoing financial crisis, investments in properties within the Lekki-Epe axis are still attracting growing demands to move forward. Truly, the axis continue to experience jumps in the prices of properties due to increased activities, particularly sales, to the extent that the future projection of the area by many experts is that they expect continued rapid ascension in demands, interest and prices of properties between the next 4-10 years. To say the least, the trend of the property market in this axis has magnanimously re-energized Nigeria's real estate sector since over the past decade. Also, by virtue of increased demand of properties in this axis, individuals and firm who manage properties as a primary vocation are also increasing in this area.
Obvious reasons
On the face of it, it seems clear to people why properties in this region are going so hard when it comes to prices. For the very common and obvious reasons, the Lekki- Epe Express Way, which begins from the major exit of Victoria Island to Ajah and beyond, remains largely responsible for the monumental increase in property prices. Further, massive rapid development, proposed or ongoing, in the Ibeju-Lekki axis such as the Proposed 4th Mainland Bridge, Shoprite siting, Lekki International Airport (Work in Progress), New Sea Port (Work In Progress), Lekki Free Trade Zone, Dangote Refinery Site and the Proposed Lagos Smart City are dubbed to be the major reason why the prices of properties are soaring in this region. In fact, this area has been themed ‘The New Lagos’ and all of the aforementioned massive developments, government focus and improved planning have only further confirmed it. The government is increasingly doing its bit for the axis to live up to its new theme and the people are increasingly responding aright, leading to increase in demand and price in this region.
Hindsight reason: speculative boom
Going forward from the obvious reasons to hindsight reason, one factor that overrides the obvious reasons is that of speculative boom which has steadily greeted the property market in this area. Accordingly, there is not yet enough logical reason why properties prices in this area should have moved-up this steeply based on the fundamentals that are from the factor of speculative investor purchases. In fact, as a practicing real estate surveyor and valuer, I would say that the single largest factor for increased properties prices in this region is based on the speculative buying by investors - in conjunction with developers. It is not quite tied to an eminent economic boom.
Whilst it is good that the future projections of the area by many experts is that they expect continued rapid ascension in demands, interest and prices between the span of next 4-10 years, it is not so cool to know that the prices which the properties are going for today are what they ought to be going for then. That is, people are buying properties in that axis, today, at prices the properties projected to go for in the next 4-10 years. This is bubble or bust-provoking.
The speculative investors are rushing to buy properties in this axis at the so-high prices with a strategy to resell at higher prices or to make high rental revenues in the nearest future after putting up developments. As such, the speculative activities of these investors are the drivers of the prices of properties in this axis, not economics. However, this is not to say that; going by economics, the prices of properties in this axis should be comparatively lower, even though the prices they presently command is over-shot-up - way too high than what economics or fundamentals deliver.
In other words, properties in these areas are being subjected to demands of speculative investors, who are often in working hand in hand with developers, rather than economics or fundamentals. That is, the rushing of investors and developers to snap-up properties in this axis for speculative investment purposes has greatly increased the prices and accelerated the purchases of properties. These speculative-investors, in conjunction with developers, compete with one another trying to secure as many properties as possible for speculative purposes or potential uses, resulting to over-rated prices of properties in the area.
However, from history, a rapid run-up in prices like that experienced in these areas, absent of real economics is a prelude to a crash. Going by global examples, particularly the U.S., the movie has been seen play over again and again that a sharp run up like this usually precedes, or culminates into, financial crisis and or housing bubble/bust.
What is about speculative boom? :
A textbook definition of a bubble consists of speculation chasing an appreciating asset which is precisely what we have in going on Lekki- Epe axis. Thus, if due to the speculative actions of investors on the property market in this area, the price and demand of properties continue to escalate without substantial reasons tie to the fundamentals of economics, there is a real growing problem for both the investors, the people and the nation as we may be having a market bubble or busting one.
The implication of the speculative boom is that there will be divided prices (market values) of properties in this area; one that is based on the ‘confined' or 'closed- end’ demand of speculative investors/developers while the other that is based on the broader or ‘open’ demand of the market. However, ultimately, when the threshold of the former (which gets reached per period of time) is reached, the driver of the prices of properties in the area will revert back to the latter (broader demand) which represents the fundamental justifications why prices of properties in the area should go up in the first instance. The price based on the broader demand is usually somewhat or effectively lower than the speculative-induced prices
In other words, the real estate market in this area is being polarized as prices of properties go into divided extremes making it is difficult to draw real middle ground or average prices. That is, the market will inherit divided prices which may mis-represent the fair-market values/prices of properties. In other words, the prices of similar properties in the area can be far apart, thereby making it difficult to have a reliable average value or prices of properties. By this, there is room for price to slide steeply between extremes - from an upper extreme to a lower extreme. Thus, subjecting the property market to confusion and distortion that will ultimately lead to destruction or crash of the market.
Nightmares of speculative boom
If the prices of properties in this area continue to go up in this manner and on speculative basis, investors will not be able to meet their returns or will have lower returns as vacancies will be longer. Also, there will be reduced activity (sales or purchases, renting) in the property market of this region. This is so because investors would have bought at high prices (due to high demand that's being triggered by increase in bidding-wars/competition with their counterparts or fellow speculative investors). Whereas, on the hind-side, their investment projections have tendencies to boomerangs when the prices of properties in the begins to get driven by ‘Open Market Demand’. This price, which is usually a lower price than the speculative induced prices, at the end of the day, steps forward to take its rightful place. And it is at this point that we have a bubble-point -what can be likened to a breaking point after the elastic limit of an elastic material has been reached.
In corollary, because of desperate measures by investors to recoup their investment, they insanely increase the rent and sales prices of properties - making it very unaffordable for the buyers to purchase, or renters to lease. They keep seeking high rent and sales prices to the extent that they make life really miserable for renters and to-be owners, especially in the face of not-so-solid tenant/to-be owner’s protection, stagnant wages and tighter mortgage standards in the state and the nation.
Resultantly, there will be reduced demands which will force a reduced-price on properties as the speculative investors will be cornered to a fix to sell or rent out their properties at lower prices, against that which that projected at the inception of their investment.
As being witnessed already, in some part of this area and owed to diverse reasons, many of the properties have effectively failed to command their speculated sales or rental prices. Whilst this is also blamed on the unfavorable macroeconomics condition in the country, the prices or properties in some part of the area has shrinked due to broader demand of the market and other real estate fundamentals. Also many of the properties in this axis have been collected by the bank on debt-recovery basis as pay back has become quite difficult or impossible for investors who used the properties they own in this area to secure loans for their non-real estate business.
Strategically, banks and Real Estate Financial Institutions were quick and confident to give out loans and mortgages to their clients who were ready to use their properties in this axis as collaterals because of the assurance that if their client defaults, they can take possession of their properties via court order and sell off at higher prices capable of offsetting the customers debts - and even having profit margin. They can equally take the receivership of the high rents of the period. These financial institutions are increasingly putting seized homes up for sale or rent but can only successfully sell or rent at lower prices than projected as earlier speculative investors who are not willing to hold-on longer to their properties are also selling at lower prices that are far from meeting returns.
That is, contrary to their expectation, there has been increase in default of mortgage payment in relation to properties in this area and the banks and other Real Estate Financial Institutions have not been able to sell or rent as quickly as they expected. Also, they have not being able to make capital revenues, as fast as they expected, enough to offset their clients debts and still make marginal profit. In other words, through quick-sales driven marketing strategy, these investors are increasingly agreeing to sell their properties in this area, at loss to their investment. As such, these financial institutions are forced to sell or rent at lower prices or even keep the properties out of use until there are evidences of a boom in the property market that is based on economic or fundamentals.
An additional reason why investors may not meet their ear-marked high returns is because of the increased life-cycle cost of properties in this area. Most of the land in this area are waterlogged and have to be sand-filled before developments. Another cause for sand-filling is that most speculative investors bought their land before many roads in the axis were constructed, making their plots depressed below the roads level. Construction, operation and maintenance costs of the properties are also high due to the water factor as the factor is increasing making properties in this axis to suffer from structural integrity.
Incipient property market boom: Tale of boon, bubble and bust
The attitude of real estate investors is that they have always been sweeping the property market in this axis with a predominant speculative strategy which has been giving birth to a mix of boon, bubble and bust of the property market per period of time. And, sincerely, the speculative boom keeps growing in this axis.
This also answers the question of whether the incipient property market boom in this area is artificial. That is, if it is being driven up by the speculative boom. Accordingly, we have to remind ourselves that; from time or ab-initio, the prices of properties in this area were over-appreciated as a result of the earlier speculative/investors or owners who hoped to sell at high prices by this maturity period.
It goes to say that in part of this axis, there is somewhat of bubble/bust in the property market that is traceable to an incipient speculative boom.
How speculative boom is disadvantaging millennial
While on one hand, few millennials with means are scooping up properties in this axis because of their promised high returns, a good number of millennial are disqualified from buying properties because of their huge prices that have been triggered by the activities of speculative-investors.
It is quite unfortunate that a good number of millennials are with no or less means but are increasingly aware that not owning a property, particularly in this axis, may inevitably be their single biggest or costliest denial in the quest of creating wealth for themselves. That is, they cannot own properties in the axis because their high prices. Accordingly, whilst millennials in the country are doubling down their faith in real estate by prioritizing property ownership/investment - particularly within this area, many of them are priced-out by the activities of speculative investors. In other words, most millennials are becoming increasingly aware that owning a property, particularly in this axis, is an escalator to wealth but are disable from hopping on this escalator because high prices of properties in the areas due to activities of speculative investors.
Brighter side of speculative boom
It has become a common observation that when other factors other than economics are driving the markets, a bubble is either in the making or busting. For instance, a report authored by Bloomberg and published on the 11th Day of January, 2017 by ABOKIFX raised alarm of market bubble or crash when it says that; the three worst currencies of 2017 show that politics, not economics, are driving markets.
In this context, the rush of speculative investors into Lekki – Epe area is trumping the role effective economics on the property market in this region - making either a bubble and or bust. That is, the run-up in prices due to speculative investors but absent of economic boom has the potential to unleash a new wave of declining property prices if the demand created by speculative investor fail to somewhat or effectively connect to the 'open' (free and fair) demand of properties the axis. That's there could be chaos in the prices of properties in this area if the activities of speculative investors preside-over or overtakes that of economics, in determining the prices of properties in this region.
However, sometimes, demand or price rise based on such other factor(s) may effectively or somewhat connect to economics or fundamental basis. By implication, there will be a more concrete basis for demand or price rise of properties in this region which may birth a sustainable market that is free of bubble and able to meet investors’ returns. Whenever this happens, it is a win –win and a joyous slide in the property market, particularly for investors. The connection has the potential to seemingly augur a long-awaited recovery and boom to the nation’s macro economy. In other words, the eventuation of circumstance in the market can theoretically and practically help the housing market in this axis, as well as heal the nation's real estate sector.
However, it is yet unclear if this connection would unfailingly see the light of day but it can be partly said that demand or price rise that is based on speculative boom or such other artificial factor(s) is growing to connect with the of demand or price rise based that is on fundamentals and economics.
Way Forward: Ensuring and Harnessing the Brighter side of speculative boom
Structural Integrity: Due to the fact that this geographical area is challenged with water, only buildings with adequate structural integrity are on the way to meet investors return. Properties with poor structural strength (but with superficial repairs) that are not quite quick to be sold or rented will have their delayed period expose their weakness or defects. This is will further forced down the prices of the properties, leading to bad investment.
Investors have to be mindful of the fact; regardless of high cost over owning buildings in this axis, the properties must be structurally fit and not just facially fit before it can sustainably command high prices that are capable of making high returns in a short period of time. That is, leaving the properties in sub-standard structural conditions but good-looking conditions will only cut short the investment and kill the dream of making high-profit margin. At the end of the day, the buyers or investors suffers a huge loss if they were unable to spot the structural flaws of the buildings at the point of purchase as the flaws would eventually manifest in a short period. .
In the same way, investors must equally give adequate maintenance and upkeep of their properties so that they can keep commanding high prices. Durability and up-to-date of properties in this region will ensure high turns. One way investors can ensure structural integrity and adequate maintenance and upkeep of their properties is by cutting their coats according to clothes. That is, not purchasing and developing properties over a wide geographical area they can barely manage effectively.
Professional property managers: Also certified property management companies are to be engaged to deal with day-to-day operations of properties in a way high returns will be guaranteed. Also tenants prefer to occupy buildings whose Landlords are absent from the property premises or vicinity. One of the things that have changed in the phase of property management in Nigeria is that tenants are no longer cool with occupying the same compound with their Landlords. Tenants prefer to occupy homes miles away from where their Landlords stay as it is has been observed that vacancies of properties where the Landlords reside stretch longer than properties where their Landlords are absent. Tenants simply tend to stay in properties and neighborhood where their landlords have no history. A few properties that the tenants and landlords stay within the same compound do have definite internal boundaries. In most of this case, the Landlord does not manage the homes or the tenants but outsources it to estate manager or care takers.
Professional property valuers: Today’s Investors or to-be home-owners who may want to minimize the potential loss of their investments in this region should endeavor to purchase or rent at prices based on economics and not that based on speculative boom. Inevitably, these people would need a professional valuer with vast and solid knowledge of the axis, who works with the hind-sight revealed in this piece, to guide on the prices or values of properties they may want to own or invest in. On the other hand, their services will also needed to advise on the most appropriate rental and sales values, for those investors who want sell-off or lease-off their properties. That is, only valuers of this resume can produce a value (price) that is workable and fair between a seller/lessor who is gunning for a high and the buyer/lessee who is gunning for lower price.
Millennials: Buy at low prices: Millennials, particularly those with mere means, wishing to invest or own a property in this axis should get into the market by buying at low prices. This way, at least, it would be easier for them to build equity in their properties, enough to make them feel freer to spend their disposable income and increase economic activity. It will also make them really clear on their goals and they won’t just assume or conclude within themselves that they can never afford a property in this axis. Millennials should realize that buying their first property should not about buying their desired-property, rather it is should be able buying into the market. That is, it should be for investment reason and based on investment principles, before any other reason or principle. As such, millennials looking forward to buying the properties in this area but have found it difficult to compete, as they have been getting priced-out by the speculative-investors, should not be discouraged but endeavor to buy properties at lower prices.
Government: Government should do more to sustainably regularize the property market in this region as the government and real estate financial institutions should explore options, much in the way that they can ramp up capital/ revenues in the bubble years that may come uninvited or unexpectedly.
Inherent Supporting factors of speculative boom
Firstly, the speculative strategy of investors shouldn't be strange to us bearing in mind that it is an inherent quality of real estate to appreciate in price over time. Commonly, real estate investors’ strategy is to purchase properties at low prices and hold-on to them for a while before reselling when prices further appreciate.
Secondly this attitude of speculative investors shouldn't be weird to us because potential or futuristic value of properties is integral and common to developers’ calculations of/for any investment project they are working to vie into. That is, when it comes to investment in properties; it's difficult to separate developers from potential value as they prefer to deal with potential value than amongst other values. Even investors themselves often prefer to look at investment or projects from a future perspective.
As such, it is hard to find any property investors on the planet that does not utilize a speculative strategy in the property market. However, if well managed and sustained, the speculative strategy imbibed by investors could luckily connect to a robust property market and economic boom.
Final words
In as much as these speculative- boom activities are showing signs of revitalizing the property market, it can equally 'exterminate' the market. The increasing prices and demands of properties in this axis, created by a lopsided demand that is powered by speculative investors can, from behind, 'bubblize' the property market. For the many obvious reasons, founding assets on speculation is quite risk as the driver of the high prices is so thin-iced and can melt into water at any sudden change in the economy temperature. That is, any economic downturn is capable of sending the entire property market down casted.
As such, it is high-time demanding that property buyers/shoppers asked questions about the long-term viability of investments in this area, rather than just keep the money flowing into this space as a strategy to wealth. Buyers of properties in this axis, working with a mindset of absolute assurance of high returns in a short period of time should realize that it is not enough of them to have increasingly raised massive amounts of capital to invest in properties in this axis - buying at high prices which are created by the demands of speculative investors. Rather, they should equally question the drivers of the high prices of properties and if the drivers are connected or will connect to economics or fundamentals. Again, they need to question what kind of boom is going on in the property markets, given that it is strange to have a boom that consist more of speculative-investors who are increasingly purchasing properties in this axis - by pricing-out majority of others who are trying to own properties but cannot because of the high prices that have been created by the demands of the speculative investors.
We ought to have learnt from history, and as shown in this article, how speculation has earned itself a large palace in the economy of the world- as among the causes that are typically known for driving the markets (property) unto a crash. Going by many true stories and the explanations given in this article, there seem to be substantial warning signs of a renewed and continuing speculative bubble written on the wall of Nigeria's property market in this axis. Without mincing words, the run up in price of properties in this axis may represent a bubble, as the capital and rental revenue streams that is promised or projected to satisfy investors may not see the light of the day as and when due. On the heels of the big run-up in prices, there could collapse that is capable of sending the entire market reeling, particularly if demand collapses to the point of depressing prices and putting the economic recovery at a far distance.
Real estate practitioners and experts that have articulately seen several movies of this kind of boom before, testifies that most of the previous videos ended rather badly. And the movie script of the ones that have seen and that of the present property market of the Lekki-Epe axis are eerily similar. As such, though unwanted, investors need to accept this similarity and brace up to it - rather than allow its feel strange or untrue to them.
Finally, as a practicing valuer, I would advise real estate investors in this axis not to shrug off pointers of a bubble or bust in the property market, caused in part by speculators chasing crazy profits. In the same light, I shall enjoin my co-professional colleagues, who are the business of arriving at values of properties for different purposes, to have at the back of their minds that speculative boom created by demands of speculative investors and developers is more or less the single largest driver of the prices of properties in this region
PS: Via this article, it is my intention is to communicate to everyone, particularly the millennials, through alchemy of property analysis; what you need to know, in hindsight or on the other hand, before investing in Lekki-Epe axis. It is my hope that, on account of the information shared in this article, there is far less excuse for anyone, organization or the nation to be a victim of a property market bubble or bust.
References
David D. Your Landlord Works on Wall Street: New Republic; February, 2013.
Kathleen E. Self-Made Millionaire: Not buying a home is the single biggest millennial mistake: CNBC; January, 2017.
Abokifx. The Three Worst Currencies of 2017 Show That Politics, Not Economics, Are Driving the Market-Bloomberg: www.abokifx.com : January, 2017.
About Author
Adeyemi is a graduate in Estate Management from the University of Lagos, a practicing Estate Surveyor & Valuer and the author of The perfection and imperfection of 4th Mainland Bridge 1 & 2 published on June 23rd & 21st, 2016 in The Guardian Newspaper, Nigeria.
Email: [email protected]