control
ABSTRACT
The
impact of inflation on direct or indirect is considered one of the primary
financial concerns of long-term investors. Inflation has caused certain
distortion in the economy which made
real estate investors to hedge against the risks rulling to increase in rent and prices of land and landed
properties. The outcome of this is burdened on the occupier (tenants) of the
real estate in any economy. The study aims of the study to evaluate the effect
of inflation on real estate in Uyo metropolis. The objectives are to identify
the cause of inflation and how it can be controlled, to find out how inflation
has influenced change in rent of tenant of real estate and to evaluate the
effect of inflation on real estate investment. To achieve this, the stratified
random sampling technique and descriptive survey design has use. Data was
collected using questionnaire of which 400 questionnaires was distributed to
cover respondents such as estate surveyors and valuers, property investors,
civil servant, tenant and students in four locations to include; Barracks Road, Oron Road, Ikot Ekpene Road,
Uruan Street. Collected data was analyzed with SPSS software in tabular form
and the hypothesis was tested with chi-square technique. Finding shows that
factors such as increase in money supply, wage increment, increase in demand
for property and high population growth are the major causes of inflation
leading to a positive and negative effect on real estate. The positive effect
is on the investors side which maximizes return from its investment by increase
in rent when due, litigation issues and void tenancy. Therefore, recommended
include proper regulation of fiscal and
monetary policy, adequate supply of
affordable real estate, proper tenants consideration and selection, landlord/tenant
relationship and understanding, proper implementation of building and
regulation of prices of imported building and construction materials.
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Inflation is
seen to be persistent rise in the general price level of goods and services in
a country over a long period of time. It can be described as a decline in the
value of money or an increase in the quality of money in circulation, leading
to a decline in the purchasing power of existing money (Zou et al., 2011). To say that inflation
status in most advance economics is moderated to be a single digit level is to
restate the obvious. Considering the emerging economic, inflation is mostly in
a two digit figure (Nwude, 2012). For instance, in Nigeria, which is the
concern of the study, inflation rate averaged 12.34% from 1996 until 2014,
reading on all time high of 17.56 in the beginning of the Year 1996 and a
record low of 2.49% in the beginning Year of 2000 (Trading Economic, 2014).
Currently inflation rate is up to 18.42% in Nigeria. Temgbode (2011) is of the
opinion that this is role that the inflation rate in Nigeria is outstripping
the rate of return on the investments.
Inflation
in relation to real estate are of various type; actual, expected and
unexpected. The actual inflation is the rate of increase in price over a given
period, (Oner, 2012); the expected inflation refers is change in price level
that is expected at the starting time of an asset or when the asset is
appraised. (Appraised Institute, 2008). The difference between the actual and
the expected inflation is seen to be the unexpected inflation which are all
measured using the Consumer Price Index (CPI) and the producer price index (PPI)>
A situation under inflation where the inflation rate of some assets are
higher than the consumer price index
(CPT), it suggests that
those assets are
hedge against inflation and as such real estate investments
is one of them with greater advantage to other investment (Bello, 2004).
Real
estate investment is simply the acquisition, ownership, management, rental and
sales of direct real estate investment (land and building) and indirect real
estate investment (real estate securities) which are the various ways of
investing in real estate (Amidu and Aluko, 2016). According to Garay and Tor Horst (2009),
investment in real estate can be done in different ways; (a) Equity where one
can invest in the equity part of real estate by buying real estate mutual
funds, example, (REITS) (b) debts where one invest in the debts part of real
estate through securitized form and lastly by acquiring real estate physically.
The
ability of real estate invested asset to provide high rate of returns above the
rate of inflation is concerned to investors. This is known as inflation hedge
which is provided when the returns on investment increases at a commensurate or
higher rate than general price level or increase (Glascock et al., 2005). In other words, the investment could be expected to
hedge against inflation through the income produced, capital appreciation or
the combination of both which is predicated on the fact that the two basic
reason why an investor would want to hedge against inflation is first to match
future liabilities that are linked to inflation and secondly to protect the
value of an investment (Martin, 2010).
Real
estate investment asset have long been recognized as a good hedge against
inflation. (Feng et al., 2003; Down
2009, Bello 2004; Debera 2014). The direct real estate investment provide a
good hedge against inflation than the indirect real estate investment (Amidu
and Aluko 2006; Georgier 2012; Yobaccio 1995; Amidu et al., 2008; Karley 2009; Miles and Mahoney 1997). Others view
that the indirect also provides an hedge against inflation. (Maorer and
Sebastian 2002, Lu and So 2001; Chatrath and Long 2008).
Real estate investment
has its own risk and return profile as such an investor has to be rational in taking
decision that safeguard the investment under inflation period so to ensure
proper control of the outcome effect on the investor and the consumers of the
investment based on the fact that it involves huge outlay of both human and
capital input to carry out. The direct effect of inflation on real estate
investment which are not necessarily positive on the real value of housing is
that it induces nominal capital gains which are not real gains but are more the
less fixed when houses are sold. Another is that it affect housing process
particularly over the long term. Although rising housing prices can make it
look like the real estate market is improving. Prices, generally rise due to
the outcome of inflation where house that appear to appreciate in value with
time actually remain much the same when one consider the effect of inflation.
(Yobaccio et al., 1995). According to
Piazzesi and Schneider (2007), other effect of inflation on real estate
investment is in form of rising interest rate (Mortgage rate), housing prices,
effect of supply and demand, inflationary construction and effect on new effect
of higher rent.
The
effect of inflation could be positive or negative or both on the side of the
investor and the occupant or tenants. This is what the research seeks to find
out which is to analyze the effect of inflation on direct real estate
investment and how it influences the rent of tenants/occupiers of the
investment on Uyo metropolis of Akwa Ibom State.
1.2 STATEMENT OF PROBLEM
The present
state of the Nigerian economy caused by inflation has brought a deep concern to
many. This is based on the fact that inflation has led to the incessant
increase in the general price of goods and services within the country few
years back under inflationary trend up to the present day of which Uyo
metropolis is not an exemption from this.
In
relation to real estate development, inflation has contributed to increase in
prices of land and landed properties, cost of building materials, cost of land
documentation and processing by investors and developers in the country. As
such resulting to incessant high cost and variation in rent on developed
properties in different areas within the metropolis, And tenants who happens to
be the occupier of most of this developed properties are likely to face or
suffer the burden of high rent as a result of with inflation irrespective of if
they can afford it or not.
Therefore,
the research seek to evaluate the effect inflation has on rents of
tenants/occupier of direct real estate investment in Uyo metropolis.
1.3 AIM AND OBJECTIVES OF THE STUDY
1.3.1 Aim
The purpose of
this study is to analyze the effect of inflation on direct real estate
investment and how it influences the rents of tenants/occupier of the
investments in Uyo metropolis.
1.3.2 Objective
The
main objectives of the research shall includes;
i.
To identify the causes of inflation and
how it can be controlled
ii.
To find out how inflation has influenced
changes in the rent of tenants/occupier of direct real estate investment and their
response to such change.
iii.
To evaluate the effect of inflation on
direct real estate investment.
1.4 RESEARCH QUESTIONS
This study
brings up some vital questions that should be answered during and at the end of
the research. They includes;
i.
What are the causes of inflation and how
it can be controlled?
ii. Does
inflation influences changes in the rent of tenants/occupier of direct real
estate investment and what are their responses to such change?
iii. What
is the effect of inflation on direct real estate investment?
1.5 RESEARCH
HYPOTHESIS
A
research hypothesis is simply a statement that shows if these is a relationship
with the different variables considered in the research. The variables to be
considered in the research are inflation, types of direct real estate
investment and rental value.
Null
hypothesis ():
Inflation has no effect on
direct real estate investment in Uyo metropolis.
Alternate hypothesis ():
Inflation has effect on direct real
estate investment in Uyo metropolis.
Null
hypothesis ():
Inflation has effect on rents of
tenants/occupier of direct real estate investment in Uyo.
Alternate hypothesis ():
Inflation
has effect on rents of tenants/occupier of direct real estate investment in Uyo Metropolis.
1.6 SCOPE OF THE STUDY
The
direct real estate investment to be considered are basically commercial and
residential estate investment such as open hall, office space, and shops for
commercial investment and single room, two and three bedroom flat for residential
investments within four (4) locations in Uyo metropolis which includes:
Barracks Road, Oron Road, up to 4 lane, Uruan Street and Ikot Ekpene Road up to
Fly over.
1.7 SIGNIFICANCE
OF THE STUDY
The study would be significant to Government,
landlord/ property owners, real estate investors, tenants/occupiers,
researchers and general public.
Government:
Government would benefit with the understanding of inflation and how it affect
the rent of tenants/occupier of property. This will guide their decision to
develop policy that would control rent and also inflation (monetary and fiscal
policies) in the economy to boost the growth of not only the real estate
investment but the economy as well.
Real Estate Investor:
Real estate investor would have a pre-knowledge that would guide their decision
to be prudent in understanding the rudiments surrounding when and how to invest
or borrow to carry out real estate investments in an inflationary economy in
order to make profit from the investment.
Landlord/Property Owners: They
would equally benefit with the enlightenment on how to manage their
tenants/occupant of their property when taking decision on the placement of
rent change in order to hedge inflation and its effect as well as to avoid long
term vacancy on their property due to liability to pay rent by the tenant under
an inflationary economy.
Tenants/Occupier:
The
tenants/occupier would benefit with the knowledge on what transpire on real
estate investment in an inflationary economy mostly especially on the price and
rent of housing which would enable them to plan ahead of time in payment of
rent or investing in real estate.
General
Public: The general public would be enlighten on what
inflation is about, its causes and effect on real estate investment as well as
the economy so as to enable them understand and to adapt to changes that may
occur in the real estate market.
Researchers/Student:
The
outcome of the research would be useful as additional information as well as a
source of reference to researchers and students of the estate management
profession whom would carry out further research into related topic of its kind
regarding inflation and real estate investment, inflation and its effect on
rents of tenants, inflation and the nature of property market etc in the
future.
1.8 STUDY AREA
Initially, Uyo
was a small village with a dispersed settlement pattern typically of the area.
It was thinly populated by peasant farmers. The advent area of Uyo was small as
at then covering not more than 16 square kilometer (Akwa Ibom State, 1989). Uyo
has a Local Government Headquarter in Cross Rivers State, Nigeria. With the
creation of Akwa Ibom State as a South-south geopolitical entity on 23rd
September, 1987, Uyo then assured the status of a state capital. This
transformation brought increase in population, human and economic activities
with gradual changes and increase in real estate development as a result of
rapid rate of urbanization.
Thestudy are of Uyo, Akwa Ibom State, Nigeria is located between
(112,000ms-118,000mn) and (604,000m – 610,000m) in the UTM zone of 32 and lies
between latitude 4o591- 5o05N and longitude 7o54
– 8o00E and the present Uyo urban area covers a total of 115,856 square
kilometer (Uyo Town Planning Authority, 2015) and bond by Nsit Ibom, Etinan and
Ibesikpo Asutan Local Government Area on the South, Uruan, Nsit Atai in the
East, Itu and Ibiono Ibom on the North and Abak as Ibiono Ibom on the West. The
area is located on an elevation of about 60.96 metres (209ft) above sea level.
The
territory is centrally located and has a special radial road system which
terminates at what is known as Ibom Plaza. The major roads from this system
spread through the main heart of the city giving rise to minor roads, streets
and paths. It is clearly accessible from other location, due to the renew
government investments on roads, travel line has been considerably reduced.
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