08 Jul 5 THINGS TO LOOK OUT FOR BEFORE INVESTING IN REAL ESTATES IN NIGERIA
Investing in real estate in Nigeria can be a lucrative venture if done properly. Real estate investment in Nigeria has become a popular way for individuals and businesses to build wealth and secure their financial future. With a growing population, the demand for housing and commercial properties continues to rise. However, it is important to be aware of potential pitfalls before making a financial commitment. Investing in real estate can be a complex and risky endeavour, requiring extensive research, due diligence, and adherence to legal requirements. In this write-up, I will outline five things to look out for before investing in real estate in Nigeria, including legal considerations and best practices.
DEFINITION OF THE SUBJECT MATTER
Investopedia defines Real estate investment to involve the purchase, ownership, management, rental, and/or sale of real estate for profit. Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development.
According to the balance, Real estate investment is the purchase of a future income stream from property and can offer several advantages over other types of investments, including potentially higher returns, stability, inflation hedging, and diversification
Motley Fool says as follows: The business of real estate investing involves purchasing, owning, managing, renting, or selling real estate for profit
According to bigger pockets, Real estate investment is the act of purchasing and owning real estate with the intention of earning a profit through rental income, appreciation, or both. This includes everything from owning a single-family home to investing in commercial real estate properties
Merriam-Webster states that Real estate investment involves the acquisition, development, management, and sale of real estate for a profit, including the rental of property and the purchase of land for future development
From all definitions given above from various real estate investment platforms, I would proceed to state that, Real estate investment involves the purchase, ownership, management, rental, or sale of property for the purpose of generating income, appreciation, or both. In Nigeria, real estate investment is a significant sector of the economy, with opportunities for both domestic and foreign investors. Real estate investments can include residential or commercial properties, such as single-family homes, apartment complexes, office buildings, shopping centres, and hotels.
COMPARISON WITH OTHER SIMILAR TOPICS
Investing in real estate is similar to investing in other types of assets, such as stocks, bonds, or mutual funds. However, real estate investment involves unique risks and rewards that differ from other types of investments. Unlike stocks or bonds, real estate is a physical asset that can be seen and touched, providing a tangible form of investment. Additionally, real estate investments can offer tax benefits, such as deductions for mortgage interest, property taxes, and depreciation. However, real estate investment also requires significant capital, due diligence, and expertise in property management and development.
LAWS GUIDING INVESTMENT IN REAL ESTATE IN NIGERIA
Real estate investment in Nigeria is governed by various laws and regulations. This includes but is not limited to:
- The Nigerian 1999 Constitution (as amended): Specifically, section 43 states that, “… every citizen of Nigeria shall have the right to acquire and own immovable property anywhere in Nigeria.”
This section provides a solid foundation for real estate investment in Nigeria by guaranteeing the property rights of Nigerian citizens and ensuring that they can acquire and own immovable property anywhere in the country. Furthermore, this section provides legal protection for individuals who wish to invest in real estate by acquiring and owning property.
Real estate investment in Nigeria can take various forms, such as buying land, building properties, or purchasing existing buildings. Section 43 of the Nigerian 1999 constitution (as amended) ensures that Nigerian citizens have the right to undertake any of these activities without any discriminatory restrictions based on their place of origin or residence.
- The Land Use Act: This is the primary law governing land ownership and use in Nigeria. It vests all land in a state in the hands of the state governor, who holds it in trust for the people of the state. The Act also provides for the grant of statutory rights of occupancy and the regulation of land transactions.
- The Lagos State Real Estate Regulatory Authority Law: This law regulates the practice of real estate agency and brokerage in Lagos State, including the registration and licensing of real estate agents and brokers. Note that real estate laws are not limited to Lagos only. Each state has laws enacted for the purpose of regulating real estate investments and activities. Examples of some states’ laws are: Kaduna State Facilities Management Agency Law, Kaduna State Landlord and Tenant Law, Cross Rivers State Law of Property Law, etc.
- The Nigerian Investment Promotion Commission Act: This law regulates foreign investment in Nigeria and provides for the registration of foreign investors with the Nigerian Investment Promotion Commission. This law would apply whenever a foreigner is involved in real estate investment.
- The Companies and Allied Matters Act: This law regulates the formation and operation of companies in Nigeria, including real estate investment companies.
- The Federal Housing Authority Act: This law establishes the Federal Housing Authority, which is responsible for the development and management of affordable housing in Nigeria.
These laws regulate land ownership, property development, and transactions, and impose various obligations and requirements on property owners and investors.
5 THINGS TO CONSIDER WHEN INVESTING IN REAL ESTATE IN NIGERIA
- Location: Location is a crucial factor to consider when investing in real estate in Nigeria for several reasons. Firstly, the location of a property plays a significant role in determining its value, rental income potential, and liquidity. Properties located in prime areas such as the Central Business Districts (CBDs) or high-end residential areas tend to have higher values and generate more income compared to those in less desirable locations. Furthermore, investing in areas with high demand and potential for growth tends to be highly rewarding. Some factors to consider when evaluating the location include the proximity to transportation, schools, shopping centers, hospitals, and other amenities. Secondly, the location of a property is important when it comes to legal and regulatory considerations. Different states in Nigeria have different laws and regulations governing the ownership, transfer, and use of land and property.
Therefore, it is essential to research and understand the specific laws and regulations that apply to a particular location before investing in real estate there. For example, under the Land Use Act of 1978, all lands in Nigeria are vested in the government, and individuals or entities can only obtain rights to use and occupy the land through a Certificate of Occupancy (C of O) issued by the state governor. The Act also provides for the compulsory acquisition of land by the government for public purposes, such as roads, hospitals, and schools. Therefore, investors need to be aware of the procedures and requirements for obtaining a C of O and the potential risks associated with the government acquisition of land in a particular location.
In addition, the location of a property also affects the taxes and levies payable by the property owner. For instance, some states may impose additional taxes and levies on properties located in designated commercial or industrial areas. Overall, it is important to carefully consider location before investing in real estate in Nigeria.
- Market Conditions: Another key factor to consider when investing in real estate in Nigeria is the current market conditions. Market conditions refer to the current state of the real estate market, including supply and demand for properties in the area, interest rates, economic indicators, and other factors that can affect property values and rental income.
One of the relevant Nigerian laws that highlight the importance of market conditions when investing in real estate is the Investment and Securities Act (ISA) of 2007. According to Section 76 of the ISA, every person who intends to engage in the business of buying and selling securities, including real estate, must be registered with the Securities and Exchange Commission (SEC). The SEC is responsible for regulating and supervising the securities market, including real estate investments.
The SEC requires all registered market operators to provide adequate disclosure of information to investors, including information about market conditions that can affect the value of their investments. Therefore, investors in the Nigerian real estate market must consider the current market conditions and the potential impact on their investments.
For instance, if there is a high demand for housing in a particular area, rental income and property values are likely to increase, making it an attractive location for real estate investment. On the other hand, if there is an oversupply of properties in an area, rental income and property values may decrease, making it a less attractive location for investment.
Furthermore, market conditions can also affect the financing options available to investors. For example, if interest rates are high, borrowing costs for real estate investments may be expensive, reducing the profitability of the investment. Conversely, if interest rates are low, investors may be able to access cheaper financing, making real estate investments more attractive.
In conclusion, it is important for investors to stay informed about the current state of the real estate market and the potential impact on their investments to make informed decisions and maximize returns.
- Financing Options: Real estate investment often requires significant capital, and it is important to consider the various financing options available. This includes traditional bank loans, private lenders, or partnerships with other investors. It is important to evaluate the terms and conditions of each financing option and choose the one that best meets your needs and goals.
For example, one of the relevant Nigerian laws that highlight the importance of financing options when investing in real estate is the Mortgage Institutions Act. The Act provides for the establishment and regulation of mortgage institutions that provide long-term financing for real estate investments.
Mortgage institutions, such as banks and other financial institutions, offer various financing options, such as mortgages and loans, to individuals and entities for real estate investments. These financing options come with different terms and conditions, such as interest rates, repayment periods, and collateral requirements.
Investors must consider these terms and conditions when evaluating financing options to determine the best fit for their investment goals and financial capabilities. For example, if an investor intends to hold a property for a long time, a mortgage with a more extended repayment period may be more suitable than a short-term loan.
Furthermore, the availability of financing options can also affect the demand and supply of real estate investments. If financing options are scarce, investors may find it challenging to acquire or develop properties, reducing the supply of available properties. Conversely, if financing options are readily available, investors may be more inclined to invest in real estate, increasing the demand for properties.
In conclusion, financing options are a critical factor to consider when investing in real estate in Nigeria. Investors must evaluate the available financing options and their terms and conditions to make informed decisions and maximize returns.
- Legal Considerations: Legal considerations are an essential factor to consider when investing in real estate in Nigeria. Real estate transactions involve significant legal procedures and requirements that must be complied with to ensure the validity and enforceability of the transaction. Real estate investment in Nigeria is subject to various laws and regulations, including land ownership, property taxes, and environmental regulations. It is important to understand these laws and comply with all legal requirements to avoid any legal consequences or liability. This may include obtaining necessary permits, paying taxes and fees, and adhering to zoning and building codes.
One of the relevant Nigerian laws that highlight the importance of legal considerations when investing in real estate is the Land Use Act of 1978. The Act provides for the control and management of land and its resources, vesting all land in the state governors, who hold them in trust for the people.
The Act also provides for the registration of titles to land and the establishment of land registries to ensure that all transactions involving land are recorded and recognized under the law. Therefore, investors must comply with the provisions of the Land Use Act when acquiring or developing real estate in Nigeria.
Apart from the Land Use Act, other laws and regulations govern real estate transactions in Nigeria, such as the Land Instrument Registration Law, and the Nigerian Investment Promotion Commission Act. These laws provide for various legal requirements, such as obtaining approvals and permits, registering title documents, and complying with environmental and building regulations.
Investors must also consider the legal implications of their investment decisions, such as tax obligations, liability for environmental damage, and disputes with tenants or other stakeholders. Failure to comply with legal requirements or to address legal risks adequately can lead to legal disputes, financial losses, and reputational damage
- Property Management: Finally, it is important to consider the ongoing management of the property, including maintenance, repairs, and tenant relations. This is a crucial factor to consider when investing in real estate in Nigeria. It also involves overseeing and maintaining real estate properties to ensure they are attractive to tenants, generate rental income, and appreciate in value over time. Therefore, understanding the requirements and challenges of property management is essential for investors to make informed investment decisions.
One of the relevant Nigerian laws that highlight the importance of property management when investing in real estate is the Tenancy Law of Lagos State 2011. The law provides for the rights and obligations of landlords and tenants, including provisions for the maintenance and repair of properties.
Under the law, landlords have a duty to ensure that their properties are in good condition and fit for habitation, and tenants have the right to request repairs and maintenance when necessary. Failure to comply with these provisions can lead to legal disputes and financial losses for investors.
Investors must also consider the cost and availability of property management services when evaluating real estate investments. Property management services include property maintenance, tenant screening, rent collection, and eviction services, among others. These services require significant expertise and resources, and investors must assess their financial capabilities and the cost of these services to ensure profitability.
Investors must also ensure that their property managers comply with applicable laws and regulations, such as the Tenancy Law and other relevant building and environmental regulations. Failure to comply with these regulations can lead to legal disputes and reputational damage, affecting the value of the property and the investor’s returns
In conclusion, investors must understand the requirements and challenges of property management, comply with applicable laws and regulations, and assess the cost and availability of property management services to ensure profitability.
To mitigate the risks associated with real estate investment in Nigeria, it is recommended that investors seek the advice and assistance of legal professionals. A reputable law firm with expertise in real estate law can help investors navigate the legal landscape and ensure compliance with all relevant laws and regulations. This can help to mitigate legal liability and ensure that the investment is made in a legally sound manner.
Here at Livingspring Solicitors we can help and mitigate legal liability when it comes to investing in real estate in Nigeria by conducting due diligence to ensure that it is free from any legal encumbrances, drafting and reviewing contracts including sale agreements, lease agreements, and other relevant documents, to ensure that they are legally binding, enforceable, and protect the investor’s interests, obtaining necessary permits and approvals form the government and necessary bodies, ensuring compliance with applicable laws by giving advice on the legal requirements for investing in real estate in Nigeria and ensure that the investor is in compliance with applicable laws, such as tax laws, land use laws, and zoning regulations, and resolving disputes that may arise.
Investing in real estate in Nigeria can be a profitable and rewarding endeavor, but it requires extensive research, due diligence, and adherence to legal requirements. By considering the location, market conditions, financing options, legal considerations, and property management, investors can make informed decisions and minimize risks. It is important to seek legal guidance and comply with all legal requirements to avoid legal consequences and protect your investment.
WRITTEN BY AHMAD A ADEDIGBA, ESQ. AICMC
Associate at Livingspring Solicitors