There seems to be disquiet in the real estate market, as some online property marketing platforms display over 5,000 distressed residential and office buildings, which they are seeking buyers for their owners.
The rise in distressed property listings in major cities such as Lagos, Abuja and Port Harcourt has raised concerns about the status of the real estate market and Central Bank of Nigeria’s raft of changes in financial policy on the sector, as the housing market had slowed down before the general elections.
According to Guardian, the number of homeowners selling properties under distressed conditions has risen since interest rates began to increase, about five in every ten sales transactions. The exact figures are hard to predict accurately due to the lack of a central database for the property market, since most property owners opt for a more private way of selling off their assets.
Experts acknowledged that a distressed sale involves the sale of an underlying asset valued below its intrinsic value. The asset owner sells the asset for a price less than market value and bears the loss to liquidate investment. It may also be an old, damaged, run-down property with broken structures, damaged interior and not fit for end-use without significant renovation.
Among the properties on the platforms are some of the 349 distressed buildings, which the Lagos State government issued 90-day-ultimatum to their owners either to re-engineer or remove in Oshodi, Orile, Surulere, Yaba, Eti-Osa, Badagry and others.
The government through its Ministry of Physical Planning and Urban Development and the Lagos State Building Control Agency (LASBCA) signed by the General Manager, LASBCA, Gbolahan Oki, urged the owners of buildings exhibiting various signs of distress to conduct integrity test and carry out the recommendations of the test.
The government advised owners and developers of the affected buildings to conduct a non – destructive test on the structures to ascertain their structural stability and where the structures turn out to be unfit for habitation, a demolition permit should be obtained from its planning permit authority to remove the structures in the interest of public safety.
“Where the structure is recommended for re-engineering/renovation, the buildings to conduct a Non-Destructive Test (NDT) on the structures to ascertain their structural stability and where the structures turn out to be unfit for habitation, a demolition permit should be obtained from the Lagos State Physical Planning Permit Authority (LASPPPA) to pull down the structure in the interest of public safety,” Oki said.
Experts expressed divergent views on the nature of distress in the market. Senior Partner/ Chief Executive Officer, Knight Frank Nigeria, Frank Okosun, told The Guardian that “this is ultimately the decision of the property owner to declare a property for a distressed sale.
Nevertheless, a property can be foreclosed by a lender and offered on a distressed sale when the obligor has defaulted on a mortgage or a loan obligation. Such properties will be offered at a sales price, which is below what is ideal under a normal market situation, which allows for a reasonable market period of three to six months.
“The residential market (developed and undeveloped properties) among others has had a fair share of distressed sales. This is because of the exposure level of residential property owners to the economic realities and the rental return on residential properties in some sub-markets.”
Okosun said the property market mirrors the experience of the general economy and follows a predictive pattern – unfortunately, the current economic challenges (within and globally) might have given rise to the consideration of many property owners to liquidate their real estate assets with a view of getting some funds to meet some immediate needs.
“And you can also imagine a situation where market rent is chasing an unbridled inflationary trend in the general economy, such experience may result in property owners to jettison their real estate investment for other alternative investments with more attractive returns in the short-term.
“The quest for a second passport by some residential property owners cannot be ruled out; this journey for many is quite a capital-intensive experience and because urgency some within this category result in selling off their properties on a distressed basis.”
He explained that distress sales are double-edged swords, as much as they present opportunities to purchase properties at reduced prices for savvy investors, they also come with risks such as potential legal issues, as cheap prices may lure potential buyers from carrying proper due diligence that can be facilitated through their real estate broker.
“They may end up becoming yard sticks for negotiating other market transactions that are not distressed sales. By effect, it makes it difficult for ideal investors to set new prices that reflect market realities in terms of inflation which is driven upwards by building cost and rising cost of acquiring land for development.”
The Director, School of Environmental Studies, Moshood Abiola Polytechnic, Ogun State, Dr. Samson Agbato, attributed the rise in distressed properties in Lagos to structural issues, lack of maintenance, non-compliance with enforcement notices, safety concerns and the government’s focus on ensuring public safety and regulatory compliance.
He said properties are generally declared distressed when they encounter financial difficulties, legal issues, or are in a state of disrepair. “Some common reasons for declaring a property distressed include the inability to pay mortgage loans, outstanding debts, legal disputes, or abandonment. Distress properties can be noticed in various segments of the real estate market, including residential, commercial and office properties,” he said.
Agbato, an estate surveyor and valuer, said the rise of distressed properties in the real estate sector may indicate an economic downturn or instability in the country, which can affect property values and overall market sentiment, “distressed properties often sell at discounted prices, which can have a downward impact on property values in the surrounding areas.
“Additionally, the presence of distressed properties can lead to a lack of confidence among potential buyers and investors, affecting market liquidity and slowing down overall market activity”.
The Chairman, Association of Capital Market Valuers (ACMV), Chudi Ubosi and Chairman, Nigerian Institution of Estate Surveyors and Valuers (NIESV), Abuja branch, Adebanjo Adeleke, don’t believe there has been a rise in distressed properties.
Ubosi, an estate surveyor and valuer said: “I do not believe there is any segment of the market that has a preponderance for distressed buildings, but as we have seen a lot of them have occurred in developments under construction both low- and high-rise ones,”
He added that more attention has been focused on rooting out any distressed buildings in the system so as to prevent collapse. According to him, the number of distressed buildings is minimal, less than two per cent.
Ubosi, who is Senior Partner, Ubosi Eleh and Company, said if there is an increase in the number of distressed buildings, “it raises a huge red flag for the market and properties available for sale or lease. There will be a loss of confidence and likely slow down considerable transaction times, as prospective clients undertake more detailed due diligence on any real estate they desire to lease or buy.
“A lot of construction companies will have to show more capacity for projects and hopefully one of the positive implications would be the increased use of professionals in developments.”
Adeleke said: “ There is no rise of distress properties. People are looking for property to buy or lease, as we have shortage of properties, especially in Abuja, Lagos and Port Harcourt, as well as in most of the state capitals”.
On precautions to be taken before buying such properties, Okosun advised buyers to seek appropriate counsel from real estate brokers, get a valuation done before negotiating and visit the property at least twice before signing the deal, as well as getting an attorney involved.
To mitigate potential risks, Agbato urged buyers to investigate the property’s history, legal status and potential encumbrances. “Hire professionals such as lawyers, surveyors and valuers to assess the property, as well as ensure a clear understanding of property conditions and associated risks.
“Evaluate the costs involved in restoring the property to a desirable condition and factor in any legal or financial obligations that may come with the property. Assess your financial capacity to undertake the necessary renovations or repairs, as well as engage services of experienced real estate agents or consultants, who specialise in distressed properties. They can provide guidance and help navigate the complexities associated with such properties,” he added.
Agbato said: “Due to the distressed nature of the property, there may be room for negotiation on the purchase price. Consider the property’s condition, market conditions and investment goals when determining an appropriate offer, as well as be aware of the potential risks associated with distressed properties, such as structural issues, legal complications, or unforeseen expenses. Take these factors into account when assessing the viability of the investment”.