Pros and Cons of Investing in Real Estate Versus Other Asset Classes in Nigeria

Sunday, November 21, 2021 / 05:00PM / Alpha Mead / Header Image Credit: Alpha Mead

Investmentis a hot topic. Gone are the days where the subject was limited to a certainage bracket or social status. Now, everyone seems to have a thing or two to sayabout the topic. Financial security is ultimately the reason why more thanever, the hunt for investment opportunities is sky-high; and the glut ofinformation on the internet, where you too are reading this, has been alaudable enabler. But the rise of investment opportunities has coincided withthe infamy of fraudulent investment schemes, hence, the need for due diligenceand adequate subject matter knowledge before committing.

Historically,only three asset classes were recognized by investors and financial advisorsand Real Estate was not one of them. The three are Equities, Fixed Income andMoney Market Instruments or Cash Equivalents. However, many people - investorsand analysts alike - have over time come to classify Real Estate among theAsset Classes that provide a viable means for people to grow wealth.

Nevertheless,investing in Real Estate is quite different in comparison to other assetclasses for some reasons: the barrier to entry, the risk appetite of theinvestor, investment goals and control over investment to name but a few. Inthe next couple of paragraphs, we will be sharing some of the pros and cons ofReal Estate investing.

Pros

PassiveIncome & Cash Flow: No other investment class quite generates the level ofpassive income like Real Estate. As long as you invest in property - commercialor residential - and you place it in the rental market then you will earnpassive cool cash. You know how you spend the better part of the year savingfor your rent only to reluctantly transfer it to one landlord or landlady whenit is due, well, that is how you will feel; only that you will be on thereceiving end with a huge smile on your face. Research shows that most peopleinvest in Real Estate to earn rental income and some people have gone as far asmaking it their retirement plan.

InflationHedge:Real Estate is an enigma of an investment due to its reaction to inflation whencompared to other asset classes. In simple terms, other investment classesstruggle in an inflationary economy and this has negative consequences onportfolios. Treasury Bills, for instance, pay investors so little returns todayin Nigeria due to the high inflation rates which have affected the performanceof the investment. Real Estate, on the other hand, soars during inflation.Rents tend to increase in response to market forces and Real Estate investorsbenefit from this. A counterargument for this point of view is that the valueof 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.

ValueAppreciation:The"buy low, sell high" strategy is one of the most utilised by investors inthe Real Estate sector. It is for this reason that a lot of people would ratherinvest in areas with high growth potentials and wait a couple of years aftermore infrastructural development has taken place in the area before flippingthe asset. This is why places such as Mowe-Ibafo in Ogun State, Ibeju-Lekki inLagos and Oyo State to name but a few are becoming popular amongst investors.And for those who have invested already, the more the road infrastructureimproves, commercial activities such as malls, lounges, gyms and sports centresopen up; and essentials like schools, hospitals etc are on the rise then thevalue of assets will increase.

Cons

Liquidity: For all the cash flow andpassive income gains of Real Estate, it is not an investment class where youcan easily convert your asset to liquid cash like stocks and shares. Thedifficulty of selling developed and landed Real Estate asset dampens theattractiveness of the asset class. Although one can argue that home equityloans can be used as leverage, the process of getting it could be long andonerous.

EntryBarrier:Real Estate is perceived as a rich man's game and why not? In a country likeNigeria where a large percentage of the population earns less than N200,000annually ($340), how then will they stomp up the millions required to own ahome? Mortgages, which ideally should be more accessible, have high-interestrates and generally require about 30% equity on the value of the propertybefore they can be disbursed. And for middle-income earners, the cost of housesat 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 isconsidered a relatively risk-free investment in comparison to other assetclasses such as shares and stocks, which could be adversely impacted by aninvestigative news story. However, in a clime as ours, Real Estate could berisky especially when one is not well knowledgeable in the field. From landsunder governmental acquisition to encumbered C-of-O, dubious agents andincompetent developers, investing in Real Estate could be a daunting task inthe country. It is for this reason that aligning with trusted parties cannot beoverstated before committing.

At AMDC, weunderstand the nuances of investing in Nigeria and have, therefore, developedthe Guaranteed Rental Income Programme (GRIP), especially for investors. WithGRIP, investors who buy with us can earn up to two years' upfront rental incomewhile we take up tenant sourcing and property management on their behalf. Wealso have an array of end-to-end mortgage options starting from as low as a 6%rate to finance their purchase.

Credit: This post first appeared HERE