In this article:
– Impact analysis of the absence of Real estate hedge funds on Nigeria’s housing sector
Every finger is quick to accuse the oil sector of the country as the principal cause of the nation’s economic recession, forgetting to accord that the housing sector has increasingly accursed the improvement of the nation in its own massive right. The finger-pointing on housing may be fair, bearing in mind that the usual trend is for the housing bubble to precede economic crash and not conversely like in Nigeria’s case today. As would be seen later in this article, housing is a powerful tool when it comes to recovering the economy of a nation, especially that which is suffering from circumstantial economic jeopardy- no matter how unique. Housing is senior, in need, to energy in a nation, and the same priority- irrespective of a mono-economy status- goes for their individual roles in positioning and posing a nation for growth and development.
Historically and very popularly, the collapse of the housing industry in any nation, no matter how developed or otherwise, leads to a ‘Great Recession’. Inferably, improved housing is typically precedential to economic recoveries. As such, the connection between housing and the general state of macroeconomics of a nation is long standing and overtly intimate but can be sometimes immature or cross-dressed. As explained overtime in the school of housing economics: as more people build equity in their homes, they feel freer or comfier to spend disposable income and increase economic activity which will further trigger the recovery or advancement of the economy.
Status-quo of Nigeria’s housing market
Image source: Google.com
Increasingly, a lot of businesses and individuals have lost their homes and assets in a quite timely relationship with the economic crash of the nation. Apparently, Investors didn’t speculate the crash (or the consequences of the crash) of the economy on housing which was why they drove up investments in homes and assets prior to the economic plunge. Whether they speculated it or not, it makes no difference as it is what it is today: ‘a great recession’ for Nigeria.
However, while it is inconclusive that this ignorance or partial ignorance on the side of investors led to inactions or ill-actions and has fueled the loss of homes in the on-going economic recession in the nation, there are a variety of acknowledged factors that have caused the destructive shift in the housing market. Issues spanning on anti-corruption war, forex crisis , fall in oil price, inflation, increased cost at both production and consumption, terrorism, uncertainties, fiscal/monetary policies and bank reforms, role of institutional investors, land policies and mortgage rates among others have all categorically caused the lost and unaffordability of homes in the nation.
As it is today in our nation, truthfully, most homes used as collateral have been forfeited on the basis that the debtors who used them as surety have failed to pay back their loans. In the same vein, most mortgagors are at the mercy of mortgages. further, most investments, especially via subscription (shares) in real estate (REITs), have been strained and cut short, as investors are increasingly disposing their investments at forced sale values or ‘under-water’ value rather than fair market values.
Another truth that occasioned the housing crash that sequenced the economic crash of our nation: most houses funded by the mortgage that was built-to-sell fell short to build-to-rent. This added up to the inventory of homes funded by loans for the original purpose of built-to-rent. Thus, creating a huge dependence of housing on rental revenue streams which was very much responsible for satisfying the investors. However, disruptions in our economy affected the market for rental housing, leading to; longer vacancies, lower returns on investment and sending the entire market reeling.
However, the increase in built-to-rent homes, due to the aforementioned factors, has its advantage in that rental revenue streams prevents mass sell-off of properties – considering that the eventual investor strategy is to sell the homes. In other words, the stretch in renting of properties can be poised to stabilize or regulate the market as the dump of large segments of properties onto the market at once will create a glut in supply which will make investors unable to meet their returns.
It goes to say that there is a massive pool of distressed or foreclosed homes available in the housing market for buyers (investors) to buy. Where or who these investors are; to buy and create effective demands enough to counter-force the increased supply of homes? The answer is that, pathetically, they are more or less absent.
Who are these investors? Hedge-funds; where are they? Very much not around but avoidable absent.
In America for instance, during a rise in loss of homes, hedge funds are known to scoop up properties in the hardest-hit areas, promising high returns for the rental revenue streams and starting bidding wars that have driven up some prices well above national averages. Conversely, in Nigeria, the absence of real estate hedge funds is costing and accusing our economy regardless of the fact that equity contribution has risen up in the country on the basis that the Third- sector Organizations (TSO) and Development Finance Institutions (DFIs) are being increasingly joined by Global Institutional Investors (GII) who are far more focused on higher than the former. An example of Global Institutional Investors includes such as pension funds and insurers).
In Nigeria for instance, as the total value of pension fund assets (an example of GII)with licensed Pension operators rise to about N5.6 trillion, the National Pension Commission has urged stakeholders in pension administration to utilize the provisions of the Pension Reform Act, for more infrastructure and real estate development in the country. Accordingly, the new Pension Reform Act (PRA 2014) has made provisions for states and local governments to embark on Pension Fund investments in the housing sub-sector, unlike the 2004 act which only included the federal government service. This is a quite practical example of the willingness and involvement of the Institutional Investors establishing their support for the mortgage finance sector in the country.
However, in spite of the increase in these Institutional Investors, there is a huge gap in the role hedge-fund plays in the various markets of the economy, particularly in the housing market.
Real estate hedge funds in Nigeria
Image Source: Google.com
Hedge funds, which characteristically have their leverage uncapped by regulators when compared to mutual funds, are purposed to maximize investor returns and are normally invested in liquid assets as they are usually willing to take on more risk via instruments of risk elimination method. Notably, hedge fund managers have been adding real estate to their lists of nontraditional investments- birthing the name “real estate hedge funds.”
Real estate hedge funds invest heavily in real estate, but the way in which they invest capital and make high returns varies by managerial strategy. From one angle, commonly in advanced economies, real estate hedge- funds invest capital and the publicly traded stock of existing real estate companies, mainly real estate investment trusts (REITs). From another angle, characteristically, real estate hedge-funders are known to raise massive amounts of capital to buy distressed or foreclosed homes, often in bulk, at bargain prices or forced sale prices. That is, customarily and universally, the hedge-fund strategy is to buy distressed or foreclosed homes, often in bulk, at bargain prices and convert them to rental units for a while before reselling them when prices appreciate. By this, they minimize their risk, by taking the opportunity of low price homes and ensuring the security of high returns of the properties.
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Given the increased churn-out of foreclosed homes and other properties owned by the lenders, by virtue of their obligor’s indebtedness, there are unmet demands for these supplies in the market. This slack in the housing market between demand and supply is always either impregnating a housing bubble or busting one.
However, this situation we have in our real estate market is one that ordinarily attracts hedge-fund to the extent that they speculate and stimulate massive loss of homes so that they can buy these properties at low prices (forced sale or bargain prices) and convert the investments into high returns in short periods via variety of their conversion strategies.
Sadly, the absence of hedge funds in the country has further shortchanged our housing industry. There are no hedge fund firms to buy or shop properties in the hardest-hit areas, promising high returns either for the rental revenue streams or capital revenue. By implication; if there is a heavy absence of demand, there will be rundown or flat-lined prices, less purchase and no bidding wars which has translated into an unhealthy market.
However, sometimes, the superficial or thin-ice demand created by speculative investor purchases ( via their bidding wars and competition to invest in lost homes) leads to a price run up without a real economic boom and may further culminate into a renewed speculative bubble which is a prelude to a housing crash.
This has become a growing issue in the wake of increased concerns of if the incipient housing recovery itself is artificial, driven by increase speculative investment in housing.
These concerns do not go on deter, undermine or counter the performance of hedge funds when it comes to picking up blighted property caused by the foreclosure wave as it is held that the funds could theoretically help the market, as well as heal the communities. Acknowledgeable, as hedge-funders move into blighted neighborhoods and commit capital to their revitalization, the prices rise in the neighborhood will go up.
That is, Hedge funds can address the danger here which is; sometimes, the prices go up based on the subjection of a particular neighborhood or home-type to the demands of investors rather than the market which might facilitate a housing bubble. A textbook definition of a bubble consists of speculation chasing an appreciating asset.
There are reasons to believe that the run-up in institutional investor demand does somehow connect, or transform to the future housing demand. In fact, it is very repetitive in housing history: In subsequent years, investors (hedge-funds) have made a percent of all home purchases, a figure or value that was right in line or coincides with the housing bubble in precedent years. Thus, this shows that Hedge-fund can hunt or speculate for the lost homes during an economic crash to augur a long-awaited recovery to the economy. That is, the activities of hedge-fund in the country may guarantee a bullish outlook for housing which would further seemingly augur a long-awaited recovery to the nation’s overall economy. With a real estate hedge fund, the chemistry between the housing bubble and national financial crisis can be fun, too – as the activities of hedge funds can create new and existing home sales, housing starts, and price jump.
Real estate hedge funds in Nigeria: Auctioneering
Although, a broader scope of the professional services rendered by the Estate Surveyor and Valuer are created by statutes, business practices and development in the field of Estate Management/Land Economics from time to time, auctioneering is very much absent in the country even though it is listed as part of the professional services rendered by the Estate Surveyor and Valuer in the country. In fact, it is positioned last on the list created by on The Nigerian Institution of Estate Surveyors and Valuers (NIESV)- as shown on their website. This says a lot about our country and the institution’s regard for auctioneering (a sub-subject in Real estate hedge funds) in relation to real estate practices. However, encouragingly, the Faculty of Estate Agency and Auctioneering of the institution recently held a business workshop themed: Fundamentals of Property Auctioneering in Estate Management Practice and presided over by ESV. Akin Olawore (FNIVS). A lot more needs to be addressed on auctioneering in our housing sector.
The very much apparent absence of hedge-funds in our real estate sector has suppressed the growth and development of auctioneering as Hedge-funds usually seek out foreclosed properties at public auctions, or purchase them through short sales, where a bank agrees to let an underwater buyer sell the home for less than the balance of his or her mortgage. By implication, investors compete with one another for the rapidly dwindling inventory, outbidding themselves and other home shoppers, thereby making it difficult for home buyers and shoppers looking to get into the market. That is, the investor groups compete with one another and try to secure as many properties as possible before the window closes. This competition brings about rising prices which will further accelerate the purchases of home. However, if prices continue to escalate in these markets, the competition will get to a breaking point where investors will not be able to meet their returns and will look to sell more quickly.
This shows how and explains why the activities of real estate investors and the response of the housing market prep auctioneering as an effective method to market these properties.
In closing, what is logically responsible for the prolonged adjustment or recovery of our housing market is actually the absence of hedge-fund, even outweighing factors of housing fundamentals like stagnant wages and tighter mortgage standards. In the same way, the absence of good auctioneering and bidding process in our country is continuing to propagate and cultivate a wave of declining home prices – housing bubble.
Government policies must help federal and private mortgage institution giants to establish pilot programs or platforms (like auctioneering) to sell their foreclosed properties for rental conversion and later on for sales when home prices go up. In the same vein, private equity firms are urged to have their strategies in the space of real estate hedge-funds investment in the nation. Also, bearing in mind that hedge-fund is an alternative investment; the fund is indeed one of the means to be devised of ensuring massive investments in housing for Nigerians as there is a dearth of investable assets for institutional investors ( like hedge-funds) in the country.
David D. Your Landlord Works on Wall Street: New Republic; February 2013.
Evan T. How do real estate hedge funds work? : Investopedia; November 2015.
Victor G. How surveyors can boost real estate with Pension fund: Guardian Newspaper; July 2016.
NIESV Events. Business Workshop on Fundamentals of Property Auctioneering in Estate Management Practice: The Faculty of Estate Agency and Auctioneering); November 2016.
Adeyemi, a practising Estate Surveyor and Valuer & graduate in Estate Management from the University of Lagos.
Email: [email protected]