08 Oct Pros & Cons of Investing in Real Estate Versus Other Asset Classes in Nigeria
Investment is a hot topic. Gone are the days where the subject was limited to a certain age bracket or social status. Now, everyone seems to have a thing or two to say about the topic. Financial security is ultimately the reason why more than ever, the hunt for investment opportunities is sky-high; and the glut of information on the internet, where you too are reading this, has been a laudable enabler. But the rise of investment opportunities has coincided with the infamy of fraudulent investment schemes, hence, the need for due diligence and adequate subject matter knowledge before committing.
Historically, only three asset classes were recognized by investors and financial advisors and Real Estate was not one of them. The three are Equities, Fixed Income and Money Market Instruments or Cash Equivalents. However, many people – investors and analysts alike – have over time come to classify Real Estate among the Asset Classes that provide a viable means for people to grow wealth.
Nevertheless, investing in Real Estate is quite different in comparison to other asset classes for some reasons: the barrier to entry, the risk appetite of the investor, investment goals and control over investment to name but a few. In the next couple of paragraphs, we will be sharing some of the pros and cons of Real Estate investing.
Passive Income & Cash Flow: No other investment class quite generates the level of passive income like Real Estate. As long as you invest in property – commercial or residential – and you place it in the rental market then you will earn passive cool cash. You know how you spend the better part of the year saving for your rent only to reluctantly transfer it to one landlord or landlady when it is due, well, that is how you will feel; only that you will be on the receiving end with a huge smile on your face. Research shows that most people invest in Real Estate to earn rental income and some people have gone as far as making it their retirement plan.
Inflation Hedge: Real Estate is an enigma of an investment due to its reaction to inflation when compared to other asset classes. In simple terms, other investment classes struggle in an inflationary economy and this has negative consequences on portfolios. Treasury Bills, for instance, pay investors so little returns today in Nigeria due to the high inflation rates which have affected the performance of the investment. Real Estate, on the other hand, soars during inflation. Rents tend to increase in response to market forces and Real Estate investors benefit from this. A counterargument for this point of view is that the value of money is lower in an inflationary economy as opposed to a stable one, however, the rule of thumb in Nigeria is that Real Estate never goes down.
Value Appreciation: The “buy low, sell high” strategy is one of the most utilised by investors in the Real Estate sector. It is for this reason that a lot of people would rather invest in areas with high growth potentials and wait a couple of years after more infrastructural development has taken place in the area before flipping the asset. This is why places such as Mowe-Ibafo in Ogun State, Ibeju-Lekki in Lagos and Oyo State to name but a few are becoming popular amongst investors. And for those who have invested already, the more the road infrastructure improves, commercial activities such as malls, lounges, gyms and sports centres open up; and essentials like schools, hospitals etc are on the rise then the value of assets will increase.
Liquidity: For all the cash flow and passive income gains of Real Estate, it is not an investment class where you can easily convert your asset to liquid cash like stocks and shares. The difficulty of selling developed and landed Real Estate asset dampens the attractiveness of the asset class. Although one can argue that home equity loans can be used as leverage, the process of getting it could be long and onerous.
Entry Barrier: Real Estate is perceived as a rich man’s game and why not? In a country like Nigeria where a large percentage of the population earns less than N200,000 annually ($340), how then will they stomp up the millions required to own a home? Mortgages, which ideally should be more accessible, have high-interest rates and generally require about 30% equity on the value of the property before they can be disbursed. And for middle-income earners, the cost of houses at their desired locations automatically rule them out of buying homes. Again, one can say Real Estate Investment Trusts (REITS) was set up to lower this entry barrier, however, the yields are often low and vary between 2 to 5%.
Risk: Globally, Real Estate is considered a relatively risk-free investment in comparison to other asset classes such as shares and stocks, which could be adversely impacted by an investigative news story. However, in a clime as ours, Real Estate could be risky especially when one is not well knowledgeable in the field. From lands under governmental acquisition to encumbered C-of-O, dubious agents and incompetent developers, investing in Real Estate could be a daunting task in the country. It is for this reason that aligning with trusted parties cannot be overstated before committing.
At AMDC, we understand the nuances of investing in Nigeria and have, therefore, developed the Guaranteed Rental Income Programme (GRIP), especially for investors. With GRIP, investors who buy with us can earn up to two years’ upfront rental income while we take up tenant sourcing and property management on their behalf. We also have an array of end-to-end mortgage options starting from as low as a 6% rate to finance their purchase.