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AN EXAMINATION OF THE EFFECT OF LOCATION ON RENTAL VALUES OF RESIDENTIAL PROPERTIES

CHAPTER ONE

INTRODUCTION AND BACKGROUND

1.1   BACKGROUND TO THE STUDY

Residential properties are both consumption and investment good (Sratton, 2008). As consumption good it is acquired for owner occupation. Also, the investment (property) may be to maximize optimum return from outright sale or letting. If this is the case, the price of the residential property becomes very important to the landlord and the occupants. Hence investment in this type of property is regarded as a considerable source of wealth for many individuals.  The physical characteristics of the property such as number of bedrooms, age, size, various amenities and services have been noted to help determine the rental price for landlords as they set rental prices for residential properties.

In addition, external factors such as population, income, traffic congestion, proximity to work, access to public transportation, proximity to higher institution and environmental characteristics may have significant impacts on rent (Oni, 2007). Therefore, any serious investigation into the nature and behavior of residential property price should recognize that property as a commodity is not a single good, but a complex bundle of services or potential services which operate in many dimensions (Oyebanji, 2003). Nigeria has a large real estate market that is untapped due to limited circulation of information about property characteristics, their actual value and their impact on market values, organizations, available properties and professional services available in various locations nationwide. As real estate consultants and practitioners market their properties, they recognize that in order to generate success, their information must be well circulated and this information should be available, accessible, reliable and affordable to the property buyers, sellers and investors with speed, precision, accuracy and at the magic moment when the client needs the information.

The impact of location in housing market is very significant. Since housing units are fixed in location, they differ in terms of their surroundings, the kind of community in which they are located, and their nearness to employment and shopping places. Location also means that a dwelling's surrounding is possibly of great importance in affecting its value. For decades, real estate property was generally seen as a legacy a parent bequeaths to the offspring. However, with the realization that real estate is a major source of capital appreciation and a good hedge against inflation, the real estate market is coming close in popularity and importance to the money and capital markets. Today, real estate property constitutes a significant index in man’s wealth. As economic activities have achieved more sophistication over time, real estate has continued to play a central role in their development.

In Lagos State ,  the  rental  values  of  residential  properties  has shown an upward pattern over the years. This is because Lagos is the largest city in Nigeria, located along the West African coast. The entire Lagos metropolis has 9,197 roads consisting of carriageways, cul-de-sac, lanes, streets, avenue, ways, and crescents (Lagos Street, Map, 2008). Besides, the huge financial transactions  involved, high property demand, the ever increasing population and the limited supply mainly in major cities  such as Lagos, Ibadan, Abuja and Port Harcourt has made the real estate sector susceptible to abuse by many dishonest  property developers, greedy landlords, unregistered agents and swindlers who engage in several illegal practices to the detriment of the practitioners, citizens, foreigners, stakeholders and the noble profession (Agunbiade, 2013).

In recent past, investors have diverted their funds into real property development because of the security of returns and the profitability of the market (Kauko, 2003). In addition, because of the high competition in the residential property market, there has been expansion and improvement in the quality of residential properties provided by the investors to meet demand. A number of factors affect residential property values in Nigeria. These include location, demand and supply, accessibility, institutional, economic factor among others. Nevertheless, there is still a short fall in the market leading to increase in rent and capital values (Eriki & Udegbunam, 2008). Regardless of these advantages, real estate practitioners, financiers and investors in residential properties are faced with dearth of data on the effect of location on the value of residential properties and what level of rental income a development project could reasonably be expected to realize in a transaction involving willing and able parties.

1.2   STATEMENT OF PROBLEM

Real estate has contributed to the growth and development of the Nigerian economy despite that the sector has continued to face challenges such as poor funding, poor infrastructure, high cost of building materials, lack of government policies and unethical standards. The problem this study seeks to solve is to analyse and determine the relative roles of location and neighborhood characteristics in the determination of residential properties value in Ikeja L.G.A in Lagos State. Another problem is to determine the practical model for the valuation of residential housing units in Nigeria property market. Also, this study will identify the property features that have significant influence on property market values using primary and secondary sources. In addition, this study will determine if location is a major factor in residential property valuation in Nigeria and the cumbersome bureaucratic delay associated with obtaining land and government approval in relation to property development. These will be achieved through the measurement of primary and secondary data with the aim of providing professionals, investors and stakeholders with valuable information.

1.3   AIM OF STUDY

The aim of this study is to analyze and examine the effect of location on the rental value of residential properties in Ikeja L.G.A in Lagos State.

1.4   RESEARCH QUESTIONS

The following research questions were asked in order to provide scientific framework for this study:

1. What are the factors that affect residential properties in Ikeja?

2 What role does location play in the determination of rent of residential properties in Ikeja?

3. What is the correlation between property market values and location?

4. What are the implications of these determinants and policy maker on investor’s decision?

1.5  OBJECTIVES OF STUDY

The objectives of this study are:

1. To determine various location factors affecting residential properties in the study area.

2. Examine rental values determinants of residential properties in the study area.

3.   Examine relationship between location and residential property values in the study area.

4. Suggest how the real estate investors and policy makers can reap optimally from locational advantages.

1.6  SIGNIFICANCE OF STUDY

This study will contribute to the body of knowledge that are available in both print and broadcast media. Also, it will serve as a reference material for students, scholars and other researchers on the effect of location on rental values of residential properties. In addition, it will help individuals, professionals, investors, communities, change agents, media professionals and the society at large on how to identify residential property characteristics and how they affect property values in Nigeria. Also, this study will help researchers, scholars and investors to identify various residential property characteristics that have relatively strong impact on market values (prices) and to an extent influence the sales and purchase decisions of sellers and buyers in Nigeria. This study should enable real estate professionals and investors to make fair estimates of the market values of residential real estate properties given the features of such housing units. This would aid rapid valuation, help to improve housing quality and make possible mass evaluation of properties.

1.7   SCOPE OF STUDY

The study focus on residential properties in Ikeja L.G.A, Lagos State. Ikeja is home to a large number of residential housing units. The study centered on Ikeja as a location, to examine its effect on rental values of residential properties. So many attributes constitutes a location like accessibility, facilities provision, environmental aesthetics, security, business opportunities. Preliminary study revealed that there are different types of residential properties in the study area. These are Terrace building, Maisonette, Bungalow, Block of flats, Tenement.

Due to the magnitude, terrain and complex nature of Lagos State, the study will focus on residential properties in Ikeja intra-city. Ikeja is the predominant component of Ikeja Local Government, which itself is one of four zones identified within the larger Lagos metropolis. The four zones (Lagos Island, Apapa, Lagos Mainland, and Ikeja) represent commercial hubs of Lagos metropolis, which as revealed by preliminary observation, shows activity areas where employment, commercial, transportation terminals, and other businesses are concentrated (Oni, 2008).

1.8  OPERATIONAL DEFINITIONS

PROPERTY: anything, tangible or intangible whereby legal relationship exist between a person and the State enforces a possessory interest or legal title in that thing (Famuyiwa 2012)

RESIDENTIAL PROPERTY: The classes of dwelling units which provide shelter. It is also the building used substantially as living accommodation.

RENTAL VALUE: This is the monetary returns an investment is expected to command in a year (Babawale 2013)

 PROPERTY MARKET: This is a medium where bundles and cluster of rights and interests that exist in property (land and landed properties) are being exchanged.

LOCATION: This is an economic characteristic of real estate composed of immobility, constant change and element of special distribution (Wikipedia 2015)

VALUE: The present value or worth of future benefits. It is also the money obtainable from a person willing and able to purchase an article when offered for sale by a willing seller during a reasonable time of negotiation (Babawale 2013)

LAND: This can be defined as the uppermost layer of the earth crust, things attached to it either temporary or permanently beneath or above that can be developed to generate income and interests.